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They involve risks and uncertainty, and actual results may differ materially.
Our comments also include non-GAAP measures.
On a U.S. GAAP basis, for the third quarter of 2021, NOV reported revenues of $1.34 billion and a net loss of $69 million.
Later in the call, we will host a question-and-answer session.
For the third quarter ended September 30, 2021, NOV once again posted strong orders with consolidated book-to-bill of over 150%, reflective of steadily strengthening commodity prices and oilfield activity.
However, NOV's reported consolidated revenue declined 5% sequentially, and EBITDA fell to $56 million during the third quarter.
I'll start by reminding everyone that our second quarter financials included credits related to a project cancellation settlement within Rig Technologies, which contributed $74 million in revenue and $57 million in EBITDA.
We excluded those credits from our discussion on our last call and excluding these credits again from the sequential comparison today, points to consolidated third quarter revenues that were essentially flat, down only $2 million sequentially and EBITDA that was up with EBITDA margins on this basis, rising from 3.5% to 4.2%.
Through the quarter, we continued to face logistical and supply chain challenges, which our teams are managing pretty effectively day-to-day.
Nevertheless, these weighed on certain results in certain areas, most notably in Southeast Asia.
We recognized a $12 million charge stemming from a combination of COVID disruptions and execution challenges on a large offshore project within our Completion & Production Solutions segment, which I'll describe more fully in a moment.
If we look beneath the surface, the trajectory of our business is somewhat more positive in our view than the headline numbers suggest, and our outlook for 2022 and beyond continues to strengthen.
In fact, given: one, stronger oil and natural gas prices lately; two, the emergence of many of our key offshore drilling customers from bankruptcy; three, the significant reduction in costs that NOV has achieved through the past two years; four, our third quarter in a row of sequential double-digit top line growth and solid flow-throughs for our Wellbore Technology segment; and five, book-to-bill is in excess of 100% for the second quarter in a row for both the Completion & Production Solutions and Rig Technologies segments.
I'm decidedly more positive about the outlook for the coming year.
Nevertheless, global supply chain issues are making business challenging in the short run, which leads me back to the project for which we took charges.
Our Completion & Production Solutions segment has been working on a large project in Southeast Asian shipyard that ran into COVID-related operational disruptions, specifically a combination of shipyard shutdowns, labor quarantines and shortages of critical components.
Additionally, our subsuppliers in the region have faced similar disruptions, which also affect project execution.
Our team is working closely with our customer to figure out how to get this vessel built in online as efficiently and as safely as possible, while recognizing the need to be resilient as challenges shift and change daily.
Across the company, we are intently focused on executing effectively in the face of persistent supply chain challenges globally.
Most COVID operational disruptions have been in Southeast Asia and continued to disproportionately affect the Completion & Production Solutions segment, owing to its large base of operations there.
Similar to other industrial manufacturers that you read about in the financial press, we are facing inflation in labor, raw materials and components that we buy from subcontractors.
But our teams have been diligent in pursuing alternate supplies, and we are generally able to offset most of the cost inflation with higher pricing to customers.
Supplies of resin, epoxy and fiberglass integral to our composite pipe and Tuboscope tubular coating businesses remain critically low and, in some instances, have nearly doubled in cost.
Lead times for forgings have extended out from six weeks to 18 weeks.
And while prices for plate steel and coiled steel are now up more than 240% year-over-year, at least we appear to be seeing some stability in steel pricing as iron ore prices have declined.
We are hopeful that the worst of the steel inflation is behind us.
Outside of steel, epoxy, fiberglass and other raw materials, I'd say we have generally seen low double-digit cost increases on other finished or semifinished components that we buy.
Semiconductor boards, chips, electric motors, gearboxes and other subassemblies remain in very tight supply.
Freight has also been challenging.
Spot container shipping rates from Asia to the U.S. are now five times what they were this time last year, 14 times what they were in 2019.
Additionally, ocean freight reliability is down to 38% and about half of where it was historically, which has led to more use of expensive airfreight.
It's more reliable than ocean freight, but it drives costs up.
One NOV business unit went two months without steel deliveries because our European steel mill supplier could not secure a vessel into port without guaranteeing you a full load.
In North America, trucks and drivers can be tough to secure and hotshot drivers are dropping book shipments to take higher-priced jobs, making even domestic land deliveries less reliable.
Labor availability, particularly in the U.S., is very tight in certain areas, and we have stepped up recruiting and are redeploying some workers into new assignments.
Our customers are also encountering these challenges.
In fact, we are hearing of many instances of crew availability delaying planned equipment reactivations in West Texas and elsewhere.
These challenges are affecting our customer behavior in other ways, too.
NOV products like fuel handling pipes and tanks, pumps and mixers, etc, that go into large construction projects are facing headwinds in certain instances because our customers can't secure other complementary components or can't secure construction crew to install them.
So they are delaying project launch and delaying orders to us.
I want to stress.
Thus far, NOV's team has done a good job covering inflationary cost pressures in the form of price increases.
As market leader in many categories of equipment, we benefit from scale with our suppliers vis-a-vis our competition.
And we have moved raw material across our manufacturing plants to maximize value.
Some of our businesses are achieving price-driven margin expansion as they recover discounts given during the downturn of 2020.
And while a few products with longer production cycles like drill pipe have struggled to stay up with raw material cost increases on orders taken in early 2021, resulting in some margin compression, most are at least able to hold margins through pricing, but all are intently focused on managing inflation risks that continue to mount.
Our businesses are reducing costs.
Completion & Production Solutions identified another $50 million of annual cost reductions, including shuttering another half dozen facilities over the next few quarters.
While volumes and margins are clearly not where they need to be to generate sufficient returns, the organization's intent focused on downsizing over the past several years, together with higher orders and oil fleet activity on the horizon, give us confidence that we are moving in the right direction.
We share the view expressed by others that the world is moving into a multiyear up-cycle in commodity prices.
The combination of significant money supply growth, economies emerging out of pandemic lockdowns, under investment in oil and gas exploration and development over several years, higher cost of capital for E&Ps and flattening efficiency gains for North American shale producers will lead to tightening petroleum supply and demand in our view.
In its current shape, the oilfield will struggle initially to respond to calls for increasing production.
So far, incremental drilling activity has been cautious and measured.
Our land drilling customers tell us that they find it very difficult to crew rigs, even though the rig count is still well below pre-pandemic levels and the green crews that they hire cost more and are less productive.
The industry will have to pay more to get back the expertise that it has lost.
The industry is also paying more for the capital employees.
This is made possible by two things: the resourcefulness technology and efficiencies of the U.S. oil and gas industry as well as large, easily accessible pools of low-cost capital in the form of both equity and debt from Wall Street.
However, poor returns on capital investments came into increased focus by 2019, and this, coupled with a widespread move to decarbonize investments by many capital providers, led to sharply higher cost of capital for the very capital-intensive oil and gas industry.
Consequently, the U.S. operator base has necessarily embraced capital discipline as its new ethos.
Going forward, it seems to reason that the U.S. unconventional market will be more challenged to fulfill its role as the world's quick cycle oil supplier, now that its constituents are more focused on returning capital to shareholders and reducing reinvestment rates.
Further, we believe rising utilization of oilfield service assets, depletion of consumables and higher labor costs will drive up pricing by oilfield service providers.
We're hearing stories from the field of drilling contractors not willing to reactivate incremental rigs unless they can secure contracts at higher day rates and a pressure pumper is not adding incremental crews unless they can achieve a certain degree of net pricing improvement, which is required to get pay back on incremental cost of equipment reactivation.
Higher well construction costs made worse by overall diminishment of efficiency as green crews man incremental units going to work will impact returns on shale wells, which will reduce the industry's responsiveness to higher commodity prices in our view.
As economies and demand recover, OPEC spare capacity trickles back into the market and oil supply demand gap becomes more evident.
We think the industry response will be more broad-based than just U.S. shale ramping up activity.
Much of the world's international offshore oilfield equipment has been stacked and neglected for some time and will require significant investment to bring it back to working order.
One of the most interesting trends that we observed in the third quarter was a rising number of inquiries around potential offshore rig reactivations.
Despite the level of contracted offshore rigs declining sequentially and I'll add a low level of actual offshore equipment orders for us, outside of the 20,000-psi pressure control equipment order for Transocean, we are being quietly asked to quote on several stacked rigs that are looking at coming back to the market.
This is being driven by high rig tenders currently being floated by NOCs and others who are also looking at higher levels of activity onshore in certain international markets.
So to sum up where the industry is now, E&P operators worldwide are enjoying newfound prosperity as their existing production commands higher prices, but they will certainly pay more for constructing new wellbores and bringing on more production in the near future.
Oilfield service providers, which are NOV's primary customer base are just now starting to claw back discounts given last year while simultaneously facing higher labor and component costs and constraints.
We see them raising their prices materially over, say, the next 18 months as prosperity trickles down to this level in the food chain.
NOV's late cycle manufacturing businesses will follow suit as prosperity continues to trickle down.
As a reminder, all three of our segments are engaged in manufacturing, which blossoms a bit later in the oilfield up cycles given the trickle down nature of our ecosystem.
Rig Technologies has benefited strongly from its exposure to offshore wind development, which has helped offset some of the weakness that has seen in demand for traditional drilling equipment.
Completion & Production Solutions has felt the brunt of the oilfield downturn, but it's recent additions to backlog point to a brighter future.
And although Wellbore Technologies manufacture some capital equipment like drill pipe, it tends to behave more like a traditional oilfield service provider, and it is clearly recovering quickly.
Throughout the downturn, NOV has continued to invest in technologies that improve efficiency, reduce labor and optimize operations.
Whether it's through automated drilling processes, through its NOVOS operating system accompanied by our new drill floor robotics, delivering downhole data in real time through our wired drill pipe, reducing the emissions profile of a completion site with our Ideal eFrac fleet, NOV's oilfield product portfolio continues to evolve to enable our customers to achieve better operational performance.
Concurrently, we are also developing offerings that will help our customers in their pursuit of a low-carbon future.
Our offshore wind installation vessel business won two packages from Cadeler and remains on track to achieve revenue run rate of $400 million a year by Q4 of next year.
In addition, we were awarded our first FEED study for a carbon capture system aboard an FPSO in Asia, utilizing our extensive gas processing expertise.
And as our other efforts in onshore and offshore wind, solar, geothermal biogas and carbon capture utilization and storage continue, NOV is positioning itself as a leading technology provider to the energy transition just as it is to traditional oil and gas.
On the whole, we are increasingly confident that NOV is approaching an inflection point with the hard work our team has put in over the past several years will bear fruit in a big way.
Your hard work, creativity and dedication has set us up for success and the opportunities that are coming our way.
NOV's consolidated revenue in the third quarter of 2021 was $1.34 billion, a 5% decrease compared to the second quarter.
Adjusted EBITDA was $56 million or 4.2% of sales.
Excluding the credits from the rig cancellation in the second quarter, revenues were essentially flat with cost reductions more than offsetting charges taken for our project in Southeast Asia.
During the third quarter, we generated $105 million from cash flow from operations and $66 million of free cash flow.
We ended Q3 with net debt of $36 million, comprised of long-term debt of $1.70 billion and cash and cash equivalents of $1.67 billion.
Moving to segment results.
Our Wellbore Technologies segment generated $507 million in revenue during the third quarter, an increase of $44 million or 10% sequentially.
Revenue improved 6% in North America and 13% in international markets as the momentum of the global recovery continued to build in all major geographical regions.
EBITDA improved $14 million to $77 million or 15.2% of sales as inflationary pressures and a less favorable mix limited incremental margins to 32%.
Our ReedHycalog drill bit business posted another quarter of double-digit revenue growth, primarily driven by strong performance across the Western Hemisphere and Middle East.
Our leading-edge cutter designs and bit technologies continue to drive revenue growth that exceeds the rate of improving global drilling activity.
While this business faces many of the supply chain issues faced by all global manufacturing businesses, and at times has been forced to substitute higher cost materials to meet delivery schedules, management has been successful in raising prices to offset cost with minimal customer pushback as the efficiencies gained by ReedHycalog's technology more than justify higher pricing.
Our downhole tools business realized a 5% improvement in revenue during the third quarter.
Top line growth was constrained by shortages of key materials and therefore, did not fully reflect the demand we are seeing for our downhole technologies, which continue to enable record-setting drilling performance.
Our Agitator system was recently used to help a customer establish a new rate of penetration benchmark in Colombia, delivering a field record rate of penetration of 201 feet per hour.
Our SelectShift Downhole Adjustable Motor was used by a large operator in the Northeast U.S. during a 12-well drilling campaign and drove a 30% reduction in average drill times due to the tool's ability to change bend settings downhole saving trips out of the hole.
Our WellSite Services business posted double-digit revenue growth, primarily driven by growing demand for solid control services and equipment sales in international markets.
While the business unit saw improvements in all regions, the North Sea and Latin America were particularly strong and offshore job counts improved by 17% sequentially, despite the impact of hurricanes in the Gulf of Mexico during the quarter.
Recent tendering activity points to continued improvement in the outlook for our Wellsite services business unit.
Our M/D Totco business realized double-digit sequential revenue growth with strong incremental margins, higher global drilling activity levels drove demand for sales and rentals of our surface sensor data acquisition systems, and we saw a sizable pickup in revenue from our digital solutions.
We were recently awarded an additional three year contract from a customer in the North Sea for our eVolve Digital Drilling Optimization Services, which leverage high-speed telemetry from our IntelliServ Wired Drill Pipe.
We also secured several international contracts for our WellData Remote Drilling Monitor Solution, which allows operators to easily analyze well performance against offset wells, identify potential upcoming trouble spots and oversee drilling efficiency across all wells from any location.
Looking forward, we anticipate our legacy data acquisition offering will continue to benefit from rising activity levels and market share gains, and we expect our digital offerings will continue to gain greater market adoption by operators looking to extract additional operational efficiencies to offset inflationary pressures.
Our Tuboscope business experienced a mid-single-digit sequential increase in revenue, driven by improving demand for our coating and inspection services.
While demand is strong and our backlog of inspection and coating projects has grown, revenue growth was hindered in the third quarter by operational disruptions related to Hurricanes Ida and Nicholas and a COVID outbreak at a key coating facility.
Additionally, constrained supplies of raw materials limited our ability to capitalize on our backlog and resulted in higher costs as we were required to airfreight resin from Asia to the U.S. to meet certain customer delivery requirements.
In the fourth quarter, we expect operational challenges to subside, aligning for the business unit to capitalize on its growing backlog and improved pricing to drive better results.
Our Grant Prideco drill pipe business posted solid top line growth on higher volumes.
EBITDA flow-through was restrained due to a less favorable sales mix and inflationary pressures.
New orders remain solid with a notable improvement in demand for larger diameter premium pipe.
U.S. operators are showing an increasing preference for 5.5-inch drill pipe, which unlike smaller diameter pipe sizes is in limited supply.
Additionally, operators are specifying specific grades of drill pipe and recent offshore rig tenders driving additional demand for premium pipe.
While fourth quarter results will be muted by ongoing supply chain challenges and cost inflation, recent orders, growing global drilling activity and improved pricing have us increasingly optimistic regarding 2022.
For our Wellbore Technologies segment, improving global activity levels, partially offset by lingering supply chain challenges, should allow for sequential revenue growth between 3% to 6% in the fourth quarter.
We expect improving absorption in our manufacturing facilities and better pricing to be partially offset by supply chain challenges and continued inflationary pressures, limiting incremental margins to around 20% in the fourth quarter.
Our Completion & Production Solutions segment generated $478 million in revenue during the third quarter, a decrease of $19 million or 4% sequentially.
EBITDA for the quarter was a loss of $5 million or 1% of sales.
Orders during the third quarter were $384 million, yielding a book-to-bill of 144% with all but one business realizing a book-to-bill greater than 1.
Backlog for the segment ended at approximately $100 million higher sequentially to end the quarter at $1.1 billion.
A second consecutive quarter of strong order intake along with constructive ongoing customer dialogue, give us growing confidence in the sustainability of this higher level of orders as we head into 2022.
Our Intervention & Stimulation Equipment business experienced a double-digit sequential decline in revenue on lower capital equipment sales.
Impact to EBITDA was limited primarily due to an improved sales mix resulting from steady global aftermarket sales activity.
New capital equipment orders remained light but improved sequentially.
In North America, we're seeing higher quoting activity, particularly around dual fuel conversions, reactivations and rebuilds, with the average size of quotes increasing as the industry is now preparing to take its last mile of inventory off the fence line.
We're also seeing more inquiries on bulk cementing and pumping equipment to support increasing drilling activity levels.
Prospects for the international markets are equally, if not more, compelling.
As one of our customers described on its conference call, lower spending by service companies in international markets for more than a half decade and improving activity is resulting in tightening supply of equipment.
Although orders remain light, we're seeing growing inquiries for pressure control equipment in many regions around the world and greater inquiries around next-generation coiled tubing equipment, particularly for the Middle East and in the former Soviet bloc countries.
Our Fiber Glass business unit saw relatively flat sequential results as improving demand across the businesses end markets was offset by continued supplier disruptions.
Global supplies of key raw materials such as resin and glass remain extremely tight, a condition we expect to extend over the next few quarters.
Additionally, while we are experiencing fewer direct effects of COVID, such as government-mandated lockdowns, we're now working through derivative effects in the form of ongoing logistical challenges and even power shortages, which are occasionally shutting down our operations in China.
Despite these headwinds, the outlook for the business is strengthening, driven by increasing oil and gas activity in the Middle East, improving marine and offshore activity in Southeast Asia and continued strong demand for our fuel handling products.
Our Process and Flow Technologies business realized a high single-digit sequential decrease in revenue.
Clay described the significant operational challenges this business faced during the quarter.
And while operational challenges will linger into the fourth quarter, we remain optimistic regarding the longer-term outlook for this business.
We're seeing growing demand for chokes and pumps, for gas processing equipment and for FPSO process modules.
And as Clay highlighted, we anticipate additional opportunities to showcase the carbon capture usage and storage skill set we've been cultivating within this business unit.
Our subsea flexible pipe business realized a low double-digit percentage sequential increase in revenue with strong EBITDA flow-through due to solid execution and a better sales mix.
Indicative of the improving outlook for offshore activity, orders improved sequentially, achieving their highest levels since 2019, resulting in a book-to-bill that exceeded 140% for the second straight quarter.
Outlook for orders remain solid, and we expect to continue replenishing the business's backlog and move prices higher.
For the fourth quarter of 2021, we anticipate our Completion & Production Solutions segment will continue to face COVID and supply chain challenges, but improved backlogs and growing aftermarket activity should allow for segment revenues to improve 10% to 15% with incremental margins in the mid-30% range.
Our Rig Technologies segment generated revenues of $390 million in the third quarter, a decrease of $97 million or 20% sequentially.
Excluding the $74 million in revenue recognized in the second quarter from the settlement of the offshore rig project cancellation, revenues declined $23 million sequentially, primarily due to the timing of certain projects nearing completion during the third quarter.
Adjusting for the impact of the offshore rig project cancellation, EBITDA increased $7 million on an improved sales mix and cost savings.
Orders for the segment increased to $300 million, yielding a book-to-bill of 190%.
Once again, wind installation vessel equipment orders comprised over half of our bookings as we continue to establish ourselves as the most trusted provider of vessel designs, jacking systems and heavy lift equipment to the offshore wind industry.
As Clay mentioned, we remain on track to achieve an annualized revenue run rate of $200 million by the end of this year and a run rate of approximately $400 million by the end of 2022.
Additionally, we remain optimistic that the number of offshore wind installation vessel projects will continue to grow.
Rig capital equipment orders improved for the second straight quarter, highlighted by an award for our third 20,000-psi BOP project.
Last quarter, we noted a growing sense of optimism from our offshore driller customer base, which we believe continues to build.
The global offshore rig count is trending higher and rig tendering activity is growing more active in Brazil, West Africa, the Middle East and Southeast Asia.
One of our customers recently indicated that it expects to have the entirety of its fleet under contract by the end of 2021, a remarkable feat considering where the industry was just 12 months ago.
With fleets of hot rigs approaching full utilization and operators unwilling to accept rigs that are not in near-perfect condition, a number of our customers have approached us about rig recertifications, upgrades and potential reactivation projects.
Most of the upgrade conversions have centered around BOP equipment, automation and emissions reducing technology like our PowerBlade offering.
We expect most near-term reactivations to be centered around rigs that are in relatively good shape and will only require modest overhauls.
But as we get deeper into the stack, the scope of these rig reactivation projects will grow significantly and, in turn, so will the revenue opportunity for NOV.
Demand for land drilling equipment remains low, but we are seeing positive developments in land markets.
As the rig count recovers in the U.S., there is a clear preference for rigs that have leading-edge torque flow rate and pressure capabilities along with larger setbacks to efficiently handle larger diameter drill pipe.
Operators are also demanding the latest control systems and automation capabilities with interest in our NOVOS and multi-machine controls growing stronger by the day.
The domestic rig fleet is quickly approaching full utilization of rigs meeting the desired specifications and day rates are rising, leading to increasing inquiries for land rig upgrades that will bring currently idle rigs into this ultra-premium rig class.
In our aftermarket business, we realized our third straight quarter of improved spare part bookings.
And based on what we've seen to date, we expect this trend to continue into the fourth quarter.
After more than a half a decade of rationed maintenance, spending is beginning to normalize as offshore drilling customers gain more confidence in their capital structures and business outlook.
We also saw a 30% sequential increase in the number of quotations by our field engineering group, predominantly driven by the customers I described earlier, who would like help from our engineers in determining the requirements to reactivate their stacked rigs.
Looking ahead, we find ourselves becoming increasingly optimistic around the prospect of improved financial results from our Rig Technologies segment in 2022, due to several specific segment tailwinds: one, improving maintenance spend from our contract drilling customer base; two, a growing pipeline of potential rig activation projects; three, ramping production from our rig manufacturing operations in Saudi; and four, an increasing rate of converting wind installation vessel backlog into revenue.
Near term, our Rig Technologies segment must contend with the same headwinds currently faced by all global manufacturers, primarily supply chain and labor shortage issues, which will likely blunt incremental operating leverage.
For the fourth quarter, we expect revenues for this segment to grow 8% to 12% with incremental margins in the mid-teens.
With that, we'll now open the call to questions. | compname reports q3 revenues of $1.34 billion.
nov - q3 2021 revenues of $1.34 billion, a decrease of 5 percent compared to the second quarter of 2021 and a decrease of 3 percent compared to q3 of 2020.
nov - completion & production solutions generated revenues of $478 million in q3 2021, a decrease of 20 percent from the third quarter of 2020.
for rig technologies new orders booked during quarter totaled $300 million.
for completion & production solutions new orders booked during quarter totaled $384 million.
rig technologies generated revenue of $390 million in q3, a decrease of 20% from q2 and a decrease of 13% from q3 2020.
rising economic activity and higher backlogs continue to underpin our improving outlook for 2022. | 1 |
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or applied in these communications.
In addition, we may use certain non-GAAP financial measures on this conference call.
These discussions will be followed by a Q&A period.
We expect the call to last about 60 minutes.
We had another beat and raise quarter to have a lot of important things to talk about today.
Today, I'll be reviewing our first quarter results as well as providing my outlook for the markets we serve.
I'd like to start today by highlighting how proud I am of the men and women of MasTec.
Their sacrifices, resilience, creativity and commitment during this pandemic have been inspiring.
Millions of families throughout the U.S. relied on the power, communications, entertainment and other services we help our customers provide.
Our team has again safely delivered.
Before getting to quarterly results, this week, we announced the acquisition of INTREN.
INTREN is one of the largest private electrical utility contractors in the United States.
We believe the changes in electrical distribution needs, led by grid modernizations and hardening, coupled with the transition toward increased electrical vehicle usage, will have an enormous impact on the last-mile distribution of electricity.
With over 2,000 team members, INTREN significantly expands our electric distribution and transmission capabilities and footprint.
With a strong presence in both the Midwest and the West Coast, areas traditionally underserved by MasTec, this combination will enhance INTREN's capabilities as it continues to expand and allows MasTec to sell its full suite of services, including renewable power generation, substation construction and gas distribution to a relatively new customer base.
With trailing 12-month revenues of approximately $550 million, and strong opportunities for future growth, we are very excited about our future opportunities.
The purchase price of approximately $420 million represents a purchase price multiple of roughly seven times without taking into account tax benefits that on a net present value basis, represent over a full multiple turn.
We believe, based on their prospects, the potential synergies and the cross-sell opportunities that while it's on the higher end of historical multiples for MasTec, we got very good value.
On our year-end call, we announced two other acquisitions that closed during the first quarter.
In addition to INTREN, we've acquired two other companies during the second quarter.
The first Phoenix Industrial is a heavy industrial contractor that enhances our concrete piping and electrical capabilities with a strong West Coast presence.
And the other is Buyers Engineering, one of the largest outside plant telecommunication engineering firms in the country.
With approximately 900 employees across 31 states, Buyers brings new capabilities to MasTec that we've typically outsourced.
With significant investments in fiber construction, supported by both private and public investments, including the Rural Digital Opportunity Fund, smart city funds, the 5G fund for rural America, and potential further telecom infrastructure spend, we expect engineering services to be a critical path to success.
Being able to control schedule and resources will not only allow us to enjoy the engineering growth opportunities, but it will also allow us to bundle construction services along with engineering and hopefully, significantly expand our market share.
Now some first quarter highlights.
Revenue for the quarter was $1.775 billion.
Adjusted EBITDA was $204 million.
Adjusted earnings per share was $1.10.
Cash flow from operations was $257 million.
And backlog at quarter end was $7.9 billion.
In summary, we had another excellent quarter, and are on track for another great year.
Over the last few quarters, we've talked about our strategic long-term goals and our future business mix.
Considering the pandemic challenges on the oil and gas industries, we laid out a path to achieving an annual revenue target of $10 billion with double-digit margins.
One of our key highlights of 2020 was our ability to grow non-Oil and Gas revenues and EBITDA.
Our guidance that we provided today, including our most recent acquisition, reflects continued diversification as we expect, our non-Oil and Gas business to grow approximately 27% in revenues and over 40% in EBITDA in 2021, with significant acceleration in the second half of 2021.
We are encouraged by the size and scale of the growth opportunities in front of us.
Now I'd like to cover some industry specifics.
Our communication revenue for the quarter was $568 million, and margins improved 70 basis points year-over-year.
Highlights for the quarter include our growth with T-Mobile, whose revenues increased fourfold over last year's first quarter, and for the first time, broke into our top 10 customer list.
Comcast revenues were also very strong in the quarter, increasing 61% from last year's first quarter.
That growth was offset with expected declines in both our Verizon and AT&T business, which were both down approximately 35%.
Both AT&T and Verizon were vocal about the importance of the 5G spectrum auctions in their business.
We expect revenues for these two customers, especially AT&T, to accelerate in the second half of the year with significant growth opportunities heading into 2022.
We're also very excited with recent developments around the planned increased investments in the telecommunications wireline networks.
The Rural Digital Opportunity Fund, or RDOF, which is a follow-up to the Connect America Fund, will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas.
Additionally, in October of 2020, the FCC established the 5G run -- fund for rural America, which will provide up to an additional $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America.
In addition, the early drafts of the infrastructure bill included additional direct investments in enhancing telecommunications networks, including 5G.
I believe we are entering one of the most exciting periods in the history of telecommunications.
And that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers, and for MasTec.
Moving to our Electrical Transmission segment.
Revenue was $134 million versus $128 million in last year's first quarter.
We have now begun one of the larger projects we had been previously awarded, and expect a much better margin profile for the balance of 2021.
We also expect backlog to improve as we've been awarded new MSA agreements, and are in late stages of negotiations on a number of larger projects.
We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening.
Moving to our Oil and Gas pipeline segment, revenue was $726 million.
We had a strong start to the year as we were working on projects that had been delayed in 2020.
Based on our current backlog levels, we expect a strong 2021, and our guidance assumes some project activity will be pushed into 2022 because of regulatory delays.
Last year, we forecasted a longer-term recurring revenue target of $1.5 to $2 billion a year, assuming a continued depressed oil and gas market.
As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas.
We continue to see strong demand for integrity service, gas distribution and line replacement activity.
We are focused on continuing to diversify our revenues in this segment.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $350 million for the first quarter versus $286 million in the prior year, a 22% year-over-year increase.
We expect full year's revenues to approximate $2.1 billion, a 37% increase over 2020.
Backlog was up sequentially by nearly $360 million.
And more importantly, subsequent to quarter end, we've already been awarded approximately $550 million of new projects.
While backlog was already at record levels in Q1 in this segment.
We expect backlog to continue to increase over the coming quarters.
We have made significant investments in this segment to profitably grow our business through organic opportunities in addition to our smaller tuck-in acquisitions.
We continue to add talent and resources to meet the increasing demand for our services.
We added nearly 2,000 new team members in this segment from the end of the first quarter in 2020 to the end of the first quarter in 2021.
With the new administration and a clear focus on clean energy, we have seen a significant increase in planned clean energy investments from both traditional customers as well as oil and gas companies that are trying to improve their carbon footprint.
As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments.
I'd like to highlight the diversification within our Clean Energy and Infrastructure segment.
While we got our start, and win, today, we are capable of meeting any of our customers' demands.
We are actively working on baseload gas generation projects, renewable biofuel projects, and are seeing significant demand as we continue to quickly expand our solar capabilities and footprint.
To recap, we had an excellent first quarter and are very excited about the opportunities in the markets we serve.
We are encouraged with the recent developments related to an infrastructure bill.
With a significant presence in the telecommunications market, which includes significant 5G build out capabilities, coupled with our exposure to the clean energy market including wind, solar, biofuels, hydrogen and storage, and our recent expansion into heavy infrastructure, including road and heavy civil, we feel we are uniquely positioned to benefit from this anticipated infrastructure spend.
We are confident we can hit our growth targets with solely private investments in infrastructure, but do recognize the potential acceleration in our markets with significant government spend.
I'm honored and privileged to lead such a great group.
The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great quality project at the best value.
These traits have been recognized by our customers.
And it's because of our people's great work that we've been able to deliver these outstanding financial results in a challenging environment, and position ourselves for continued growth and success.
Today, I'll cover our first quarter financial results and our updated annual 2021 guidance expectation, inclusive of the recently announced INTREN acquisition.
As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, we had strong first quarter results with record revenue of approximately $1.8 billion, a 25% increase over last year; record adjusted EBITDA of approximately $204 million, a 73% increase over last year; and record cash flow from operations of approximately $257 million, a 27% increase over last year.
First quarter results exceeded our expectation, with revenue exceeding expectation by approximately $125 million, adjusted EBITDA exceeding our expectation by approximately $32 million and adjusted diluted earnings per share exceeding expectation by $0.30.
We expect that $70 million of revenue and $20 million in adjusted EBITDA related to our first quarter beat, represents an increase to our annual 2021 view with the balance representing accelerated quarterly project timing within 2021.
We continued our strong cash flow performance during the first quarter, reducing our net debt levels by approximately $65 million to approximately $815 million, despite funding approximately $90 million in acquisitions during the quarter.
This equates to a book leverage ratio of less than one times, and we ended the first quarter with a record level of liquidity of approximately $1.7 billion.
This balance sheet position, coupled with continued strong cash flow performance, allowed us to easily fund the second quarter 2021 INTREN acquisition, while maintaining ample liquidity and comfortable leverage metrics.
Now I will cover some detail regarding our first quarter segment results and guidance expectations for the balance of 2021.
First quarter Communications segment performed generally in line with our expectation, which incorporated the expected impact of lower wireless services due to the timing of recent C-band spectrum auctions.
As Jose already mentioned, recently awarded C-band spectrum is expected to begin deployment in the latter part of 2021, and is expected to drive significant revenue opportunities for multiple years.
First quarter Communications segment adjusted EBITDA margin rate was 8.6% of revenue, a 70 basis point improvement compared to the same period last year.
Our annual 2021 Communications segment expectation is that revenue will approximate $2.7 billion to $2.8 billion, with annual 2021 adjusted EBITDA margin rate improving 90 to 110 basis points over 2020 levels.
This includes the expectation that both revenue and adjusted EBITDA margin rate improvement will accelerate during the second half of 2021 as C-band spectrum deployment initiates.
First quarter Clean Energy and Infrastructure segment, or Clean Energy, performed generally as expected during a seasonally slow quarterly revenue period.
Clean Energy segment revenue was $350 million, and adjusted EBITDA was approximately $11 million or 3.1% of revenue.
Looking forward toward the balance of 2021, we expect continuation of a very active bidding market in both the Clean Energy and Infrastructure markets.
We continue to expect annual 2021 Clean Energy segment revenue will grow in the high 30% range and approach $2.1 billion, with annual 2021 adjusted EBITDA margin rate improvement in the 70 to 110 basis point improvement over the prior year.
First quarter Oil and Gas segment revenue exceeded our expectation, with revenue at $726 million and adjusted EBITDA at $168 million.
As expected, we initiated activity on selective large projects during the quarter, and we exceeded our estimated production.
As I previously mentioned, a portion of this first quarter beat represents an expected improvement to annual 2021 results, while another portion represents an acceleration of expected project activity within the year.
We currently expect annual 2021 Oil and Gas segment revenue will range between $2.4 billion to $2.5 billion, with the continued expectation that annual 2021 adjusted EBITDA margin rate for this segment will be in the high teens range.
This expectation includes the assumption that selected large project activity over the last half of 2021 will move into 2022 due to permitting approval delays, and thus, second half 2021 Oil and Gas segment revenue is expected to approximate second half 2020 levels with a greater level of project activity expected during the third quarter and a lesser level during the fourth quarter due to the expected timing of project Winter Breakup activity.
First quarter Electrical Transmission segment generally performed as expected, with revenue at $134 million and adjusted EBITDA margin rate at 2.7%, reflecting a seasonally slow quarterly revenue period, coupled with the continued impact of project inefficiencies discussed last quarter as we move toward project completion.
Looking forward to the balance of 2021, including the expected partial year operations of the INTREN acquisition, we expect annual 2021 revenue for the Electrical Transmission segment to approximate $950 million, and annual 2021 adjusted EBITDA margin rate to approximate 7.5% of revenue.
And this guidance includes approximately $330 million of revenue at a double-digit adjusted EBITDA margin rate for the recent acquisition of INTREN, which became effective in May 2021.
Now I'll discuss a summary of our top 10 largest customers for the first quarter period as a percentage of revenue.
Enbridge revenue was approximately 25%, comprised of Canadian Station and other project activity as well as a large project initiated during the first quarter that will resume in the latter part of the second quarter, once road frost bands are lifted.
AT&T revenue derived from wireless and wireline fiber services was approximately 8%, and install-to-the-home services was approximately 3%.
The on a combined basis, these three separate service offerings totaled approximately 11% of our total revenue.
As previously indicated, this revenue level includes lower wireless services revenue due to the temporary impact of the C-band spectrum auction.
Also, as a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within that organization giving us diversification within that corporate universe.
NextEra Energy was 7%.
WhiteWater Midstream was 6%.
Verizon and Energy Transfer were each at 3%.
Nuke Energy, T-Mobile and Pattern Energy were each at 2% of revenue.
Individual construction projects comprised 72% of our first quarter revenue with master service agreements comprising 28%.
With the combination of expected resurgence in wireless MSA work, coupled with the INTREN acquisition, whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis.
At March 31, 2021, our backlog was approximately $7.9 billion, essentially flat to $7.9 billion as of year-end 2020.
For the sake of clarity, reported first quarter backlog does not include any amounts for the recently announced INTREN acquisition.
Lastly, as we've indicated for years, backlog can be lumpy as large projects burn off each quarter, and new large contract awards only come into backlog at a single point in time.
Now I will discuss our cash flow, liquidity, working capital usage and capital investments.
During the first quarter, we generated a record level, $257 million in cash flow from operations, and ended the quarter with net debt of $815 million, which equates to a book leverage ratio of 0.9 times adjusted EBITDA.
We ended the first quarter with DSOs at 80, just below our expected DSO range in the mid- to high 80s.
We are proud of our continued strong cash flow from operations and believe this performance highlights the strength resiliency and consistency of MasTec's cash flow profile.
We ended the first quarter with $512 million in cash on hand as well as record liquidity defined as cash plus borrowing availability of approximately $1.7 billion.
During the first quarter, we reduced our net debt by $64 million despite approximately $90 million in first quarter acquisition funding.
During the second quarter of 2021, given the working capital associated with an expected $320 million increase in sequential quarterly revenue, coupled with the cash outflow for the INTREN acquisition, we expect that our leverage will temporarily increase during the quarter, while still maintaining substantial liquidity of approximately $1 billion, and comfortable leverage metrics within our target range.
As we look forward, past the second quarter to the balance of 2021, we expect continued strong cash flow generation despite the working capital associated with our planned 2021 revenue growth, with net debt at year-end, expected to reduce from second quarter levels and approximate $1.1 billion, leaving us with ample liquidity, and an expected book leverage ratio slightly over one times adjusted EBITDA.
In summary, our long-term capital structure is extremely solid, with low interest rates, no significant near-term maturities and ample liquidity.
This combination gives us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value.
We are pleased to significantly increase our annual 2021 guidance.
We now project annual 2021 revenue of $8.2 billion with adjusted EBITDA of $930 million or 11.3% of revenue and adjusted diluted earnings of $5.40 per share.
This represents a $400 million increase in revenue guidance, a $55 million increase in adjusted EBITDA and a $0.40 increase in adjusted diluted earnings per share, comprised of the combination of our strong first quarter performance and the benefit of the INTREN acquisition.
As we have previously provided some color as to our annual 2021 segment expectations, I will briefly cover other guidance expectations.
We anticipate lower levels of net cash capex spending in 2021 at approximately $100 million with an additional $180 million to $200 million to be incurred under finance leases, and this expectation is inclusive of expected capital additions for first and second quarter acquisitions.
As we have previously indicated, as our end market operations shift with non-Oil and Gas segments, becoming a larger portion of our overall revenue, our capital spending profile should reduce as the Oil and Gas segment has historically required the largest level of capital investment.
We continue to expect annual 2021 interest expense levels to approximate $58 million with this level, including over $500 million in first and second quarter 2021 M&A activity.
We expect to maintain a strong cash flow profile with annual 2021 free cash flow, once again exceeding adjusted net income, despite the working capital requirements related to our projected $1.9 billion increase in annual 2021 revenue.
For modeling purposes, our estimate for 2021 share count continues at 74 million shares.
We expect annual 2021 depreciation expense to approximate 4.1% of revenue inclusive of first and second quarter M&A activity.
As we have previously indicated, this expectation incorporates an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we are utilizing conservative depreciation-wise and salvage values on previous capital additions to protect against potential market uncertainties.
Given these trends, we anticipate that next year, annual 2022 depreciation expense as a percentage of revenue will decrease when compared to 2021 levels and approximate 3.5% of revenue.
We expect annual 2021 Corporate segment adjusted EBITDA to be a net cost of approximately 1% of overall revenue.
Lastly, we expect that annual 2021 adjusted income tax rate will approximate 25%.
Our second quarter revenue expectation is $2.1 billion, with adjusted EBITDA of $229 million or 10.9% of revenue and earnings guidance at $1.25 per adjusted diluted share.
In terms of some additional color on the expected timing of second half 2021 revenue performance, we expect third quarter consolidated revenue growth in the mid- to high 30% range over the prior year, with third quarter 2021 consolidated adjusted EBITDA margin rate approximating 12% of revenue.
That concludes our remarks. | compname reports fourth quarter 2021 earnings of $1.23 per share, or $1.25 per share, excluding special items.
q4 earnings per share $1.25 excluding items.
q4 revenue $477 million. | 0 |
They will provide their perspective on Xylem's first-quarter results and our outlook.
A replay of today's call will be available until midnight on June 2.
Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events.
All references will be on an organic or adjusted basis, unless otherwise indicated.
These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and in subsequent reports filed with the SEC, including in our Form 10-Q to report results for the ended -- the period ending March 31, 2021.
In the appendix, we have also provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics.
The quarter's growth was broad-based, reflecting increasing demand across all of our segments, our end markets and geographies.
Our momentum coming into the year accelerated through the quarter with the team taking full advantage of economic recovery and pent-up demand in our markets.
Orders were up double digits in all three of our business segments, and backlog was up 23% organically.
Both Western Europe and emerging markets delivered exceptional organic revenue growth, with Western Europe up 11% and emerging markets up 33% year on year and with momentum up strong sequentially.
demand also continued to recover with orders up 18%.
Alongside top-line growth, our results reflect considerable margin expansion.
I credit the team's discipline, building on the benefit of volume effects and positive impact from the cost actions we took in 2020.
Our financial position, which was robust coming into the quarter, strengthened even further on the combination of revenue growth and margin expansion.
Looking forward, we are confident about the remainder of 2021 and beyond.
Therefore, we are raising our full-year guidance on the top line, margin and EPS.
I'll talk a bit more shortly about trends and focus areas for the team.
But first, let me hand it over to Sandy to provide more detail on performance in the quarter.
The first quarter was clearly a meaningful step forward.
The team delivered exceptional performance, capitalizing on demand recovery in the majority of our markets.
Revenue grew 8% organically versus the same period last year with performance better than our expectations across the board.
Strong double-digit revenue growth in wastewater utilities was paired with broad-based industrial demand recovery.
Geographically, emerging markets in Western Europe both grew double digits, while the U.S. was down 1%.
I'll touch on revenue performance in more detail covering each of the segments.
But in short, utilities were up 3%; industrial was up 14%; commercial, up 5%; and residential was up 31%.
Organic orders grew 19% in the quarter as all three business segments contributed double-digit order gains.
Importantly, it was also the third consecutive quarter of sequential orders improvement.
Looking at the key financial metrics.
Margins were above our forecasted range with EBITDA margin coming in at 17.1% and operating margin at 11.4%.
The 480 basis points of EBITDA expansion came largely from volume and productivity, partially offset by inflation.
Earnings per share in the quarter was $0.56, which is up 143%.
Water infrastructure orders in the first quarter were up 14% organically versus last year with revenues up 11%.
Geographically, Western Europe grew on healthy demand, while emerging markets delivered strong performance, recovering from a COVID-impacted quarter last year.
The U.S. was flattish as double-digit growth in wastewater transport was offset by soft industrial performance.
EBITDA margin and operating margin for the segment were up 430 and 490 basis points, respectively, as strong productivity and volume leverage offset inflation.
In the applied water segment, orders were up 25% organically in the quarter, driven by recovery in demand in North America and strength in Western Europe.
Revenue was up 13% in the quarter with growth in all end markets and geographies.
Residential and industrial grew 31% and 15%, respectively, while commercial grew 5%.
Geographically, the U.S. was up modestly as residential and industrial gains were offset by lagging commercial end markets.
By contrast, improving commercial demand in Western Europe contributed 15% growth with additional strength in residential.
Emerging markets were up 51% due to the timing of prior-year COVID shutdowns, as well as commercial recovery in Middle East and Africa.
Segment EBITDA margin and operating margins grew 250 and 280 basis points, respectively.
The expansion came from volume, absorption and productivity.
In M&CS, orders were up 19% organically in the quarter with double-digit growth across both water and energy applications, driven by large metrology projects.
Segment backlog is up 29%.
As anticipated, organic revenue growth showed solid quarter sequential improvement but finished flat year on year.
Water applications grew in the mid-single digits with strong demand in the test business.
In energy applications, revenue was down mid-teens as certain large deployments were completed in the same period last year.
Geographically, the U.S. was down mid-single digits, but we anticipate project deployments will ramp through Q2 on loosening site access restrictions and then accelerate through the second half.
Emerging markets were up 8%, and Western Europe grew 9% from metrology project deployments and demand in the test business.
Segment EBITDA margin and operating margins in the quarter were up 770 and 600 basis points, respectively.
Modest price realization and strong productivity savings, as well as a prior year warranty charge, more than offset inflation.
Our balance sheet continues to be very strong.
We closed the quarter with $1.7 billion in cash.
Free cash flow was in line with our expectations, as well as our historical seasonality patterns.
Managing working capital remains an enterprisewide priority, and we are especially pleased with our accounts receivable performance.
Net debt-to-EBITDA leverage was 1.6 times at the end of the quarter.
I'd like to revisit the three focus areas we highlighted coming into the year: the performance of our growth platforms, the team's operational discipline and our progress on sustainability.
Turning first to our growth platforms.
You've already heard about our emerging markets team's exceptional first-quarter performance with revenue and orders up 33% and 21%, respectively.
Up until now, China and India have taken the spotlight.
In both countries, our investments in capabilities and localization have created strong engines for sustainable growth.
But of course, other areas of the emerging markets also represent great opportunity for us.
Many countries in Eastern Europe, for example, continue to modernize their economies and represent a long runway of investment in water infrastructure.
And in Africa, there are clearly big water challenges to solve as the higher-growth nations continue to urbanize.
We expect emerging markets, overall, will continue to be a source of healthy, sustainable growth for the foreseeable future.
The second platform that continues to underpin sustainable growth is our digital strategy.
Our broad portfolio enables us to combine multiple digital technologies into integrated offers, including AI-enabled software platforms, advanced communications networks and automated end points.
Those capabilities have been key to our commercial momentum over the last several quarters with customer adoption of digital solutions accelerating through the pandemic.
We've spoken previously about our headline wins in Texas and Ohio.
In Q1, we added a large transformation project in Greensboro, North Carolina, and we have just signed another exciting deal to be announced in the next few weeks.
All of these projects deliver network as a service, software as a service and advanced analytics.
In each case, Xylem's ability to bring a suite of transformational capabilities distinguished us and was essential to winning.
And just last week, we further extended the digital capabilities we can offer our customers by partnering with Esri.
Esri is the global leader in geographic information systems, GIS for short.
These systems are an essential component of utility's operating environment.
By integrating their technology with our advanced digital solutions, water operators achieved unprecedented network visibility and a clear path to increased operational efficiency and sustainability.
And with last week's agreement, Xylem and Esri are bringing that powerful combination to the water sector together.
Our partnership includes developing joint solution road maps and joint selling to water utilities around the world.
We are very excited about this partnership and about the value we can deliver to customers together.
Turning next to operating discipline.
Our operational capabilities were absolutely key to coming through 2020 on strong foundations.
As you know, last year, we made difficult but essential decisions on structural cost.
And we're now clearly seeing the benefit of those actions.
In addition, the team drove strong productivity gains in the first quarter, which offset the early impact of rising inflation.
The result was solid margin expansion with incremental margins coming in at 55%.
Over the last year, we've learned that we can do more with less, and we will remain absolutely vigilant on cost as economies reopen and demand continues to recover.
That said, we are expecting some impact from the broad-based inflation and component supply challenges that are affecting the industrial and tech sectors.
Now we've already taken action by strategically investing in inventory to support areas of strong demand, and we will continue driving productivity and pricing to mitigate inflation.
Still, the supply environment is likely to remain challenging for some time.
The third focus area we highlighted coming into the year was sustainability.
I think many of us worried that the cause of sustainability might suffer setbacks through the economic hardships of 2020.
However, instead of a retreat, we've actually seen a broad and energetic global embrace of sustainability.
As an enterprise over the last year, we've taken several meaningful steps toward our signature 2025 sustainability goals.
We'll be highlighting those in our annual sustainability report to be published in June.
We'll be reporting, for example, that, in 2020, we helped our customers prevent 1.4 billion cubic meters of polluted water from entering local waterways.
Now the report is largely retrospective, but, of course, we continue to move forward.
In 2021, we've deepened and broadened the link between compensation and sustainability performance.
It is now a component in the long-term incentive program for a range of key executives.
Our commitment and our action has put us in a leadership position, which is both gratifying and a tribute to the team.
That said, we all know we have a lot more work ahead of us to deliver on our goals and on our mission and purpose.
With that, I'll now hand it back over to Sandy to provide the forward view of our end markets, along with guidance for the remainder of the year.
The outlook for our end markets remains mostly consistent with our view from last quarter with a couple of notable changes.
First, in utilities, we continue to see strong commercial momentum in both wastewater and clean water, and anticipate our utility business will grow in the mid to high single digits.
On the wastewater side, operators remain focused on mission-critical applications and opex needs in the developed markets of Europe and North America.
Capital spending outlook and bid activity in China and India remains robust, although we expect some lumpiness in India due to high COVID case rates there.
On the clean water side, we are encouraged to see large project deployments beginning to ramp again.
We're clearly positive about the prospect of investment in modernizing the country's water infrastructure.
More broadly, the plan could represent an opportunity for communities across the U.S. to invest in greater resilience in several infrastructure categories, which would have the effect of reducing pressure on municipal budgets.
We are encouraged by those possibilities.
But to be clear, it's too early to know whether and in what form the plan may emerge from Congress, who have not built specific upside into our expectations.
The second notable change in our outlook is in the industrial end market.
We have seen a rebound in global industrial activity and sentiment across all three of our business segments.
We expect healthy growth in emerging markets in Western Europe to continue in the first half, while North America will deliver modest growth.
And then we anticipate those relative market performances will flip in the second half, primarily because of the compares.
Importantly, the industrial dewatering business is recovering, driven by demand in construction, mining and other verticals.
And we now expect the industrial end market to grow in the mid-single digits for the year.
Our outlook in the commercial segment remains unchanged.
We continue to expect our commercial end market to be up low single digits.
replacement business is stable, although new commercial building is expected to be soft for most of 2021.
In residential, we now anticipate high single digit to low double-digit growth for the full year, which is up modestly from our previous expectation of mid to high single digits.
We do expect growth will moderate through the second half, due largely to prior-year comparisons.
As you can see, we are raising our previous annual guidance.
For Xylem overall, we now see full-year 2021 organic revenue growth in the range of 5% to 7%, up from our previous guidance of 3% to 5%.
This breaks down by segment as follows: mid- to high single-digit growth in water infrastructure, up from low to mid-single-digit growth previously; mid- to high single-digit growth in applied water, up from low single-digit growth; and in measurement and control solutions, we expect -- we continue to expect mid-single-digit growth.
While we anticipate delivering a number of large project deployments, growth may be somewhat constrained by component supply challenges.
For 2021, we expect adjusted EBITDA margin to be at 90 to 140 basis points to a range of 17.2% to 17.7%.
For your convenience, we are also providing the equivalent adjusted operating margin here, which we now expect to be in the range of 12% to 12.5%, up 120 to 170 basis points.
This higher range reflects our expectation that volume, price and productivity gains will more than offset inflation.
Benefits from restructuring savings remain unchanged, and this yields an adjusted earnings per share range of $2.50 to $2.70, an increase of 21% to 31% over last year.
We continue to expect free cash flow conversion of between 80% to 90%, as previously guided, putting our three-year average right around 130%.
And we expect to continue delivering cash conversion of greater than 100% going forward.
Our balance sheet will remain very strong even after $600 million of senior notes are retired in the fourth quarter, which clearly offers considerable room for capital deployment.
We are continually assessing inorganic opportunities to strengthen our strategic position, differentiate our portfolio and enhance market access.
We have provided you with a number of other full-year assumptions to supplement your models.
Those assumptions are unchanged from our original guidance, including our euro to dollar conversion rate of 1.22.
And as you know, foreign exchange can be volatile and, therefore, we have included a foreign exchange sensitivity table in the appendix.
Now drilling down on the second quarter.
We anticipate total company organic revenues will grow in the range of 8% to 10%.
This includes high single-digit growth in water infrastructure, low teens growth in applied water and mid-single-digits growth in M&CS.
We expect second-quarter adjusted EBITDA margin to be in the range of 16.7% to 17.2%, representing 140 to 190 basis points of expansion versus the prior year.
Xylem is clearly in a strong position coming out of Q1, and we expect this momentum to continue throughout the rest of the year and beyond.
Demand recovery and strong commercial performance will drive organic growth.
Operating discipline will deliver margin expansion and strong cash conversion, and a robust balance sheet will continue to underpin our strategy.
More broadly, our business and mission have never been more relevant than they are today.
The economic and social value of critical infrastructure is more apparent than ever.
Not only is it critical in times of crisis, but also as a driver of economic recovery, and it's a prerequisite for broader prosperity.
From the shocks of the last year, the world has embraced the need for greater resilience and the imperative of a sustainable future.
In that context, our mission, our business and our values put us in a privileged position, which will enable us to continue creating both economic and social value for our stakeholders over the medium and long term.
We look forward to providing an update on our strategy and long-term plans at our next investor day, which is currently planned for September 30.
It will most likely be a combined virtual and physical format, but we do hope to host as many of you as possible, COVID restrictions permitting.
Matt and the team will follow up with more details as soon as they're pinned down, now with that, we'd be happy to take any questions you may have.
So operator, please lead us into Q&A. | sees fy adjusted earnings per share $2.50 to $2.70.
q1 adjusted earnings per share $0.56.
raising full-year organic revenue guidance to a range of 5% to 7%. | 1 |
Before we begin I would like to direct you to our website www.
To start the call I'd like to provide a brief recap of our quarterly performance and cover the highlights of both our MPC segment and the Seaport.
Our Head of Operations Dave Striph will cover the results of our operating assets segment; followed by our President Jay Cross who will provide details on our development activity and speak to the results at Ward Village.
And finally our CFO Correne Loeffler will conclude the call with a review of our financial results before we open the lines for Q&A.
Before we dive into the results of the quarter I would first like to highlight the release of Howard Hughes 2020 annual ESG report which was published just a few days ago and can be found on the Sustainability portion of our website.
This report displays the impactful ESG results we have produced so far and reflects our commitment to environmental and social best practices which are integrated throughout our communities across the country.
Now on to the highlights of the quarter.
We closed out the third quarter of 2021 with strong results across all segments as Howard Hughes continues to capitalize on the high levels of demand that exist throughout our various mixed-use communities.
To put our performance in perspective most of HHC's year-to-date results in 2021 have surpassed the year-to-date pre-COVID activity of 2019.
MPC EBT is up 29%.
Operating asset NOI is higher by 1% even with lingering impacts from the pandemic.
And Ward Village condo sales were just shy of 2019 levels despite having limited available inventory.
And this was all accomplished while reducing our G&A cost by 30%.
During the third quarter we saw healthy land sales driven by superpad sales in Summerlin.
Our operating asset NOI grew for the fourth consecutive quarter.
Condo sales in Ward Village accelerated despite a shrinking supply of available units under construction and the Seaport saw steady improvements from the return of the concert series at Pier 17 and the growing popularity of our unique restaurants.
We expect these results to grow stronger especially with the recent addition of Douglas Ranch our latest MPC spanning 37000 acres in Phoenix West Valley.
In October we announced our $600 million all-cash acquisition of this fully entitled shovel-ready MPC which further adds to our depth of opportunities.
By strategically redeploying the net proceeds from our noncore asset dispositions we now have the ability to transform this blank canvas into a leading community focused on sustainability and technology a community that is entitled for 100000 homes 300000 residents and 55 million square feet of commercial development.
Following this transaction we are still left with a healthy cash position to continue executing on our existing development pipeline to meet the growing demand within our MPCs.
While we have already had approximately two million square feet of development underway we're pleased to announce new commercial projects in the medical office and single-family for rent sectors which Jay will touch on in a moment.
But we're not stopping there.
We've long believed that Howard Hughes trades at a steep discount relative to its net asset value.
As such we are pleased to announce our recent Board-approved share buyback program amounting to $250 million.
We believe there is great value that is yet to be reflected in our stock price and view this buyback initiative as an excellent use of capital that when coupled with our development projects will help deliver meaningful value.
All of these recent announcements put a significant amount of capital to work to unlock tremendous value for our dedicated shareholders.
Now let's turn to the performance of our master planned communities.
Our MPCs had another great quarter despite encountering headwinds including supply constraints the Delta variant and weather delays particularly in Houston.
Housing supply still remains low throughout Houston and Las Vegas while demand continues to persist at elevated levels which leaves us well positioned to deliver residential land at appreciating prices.
Homebuilders are currently sitting on record low inventory and they will need to replenish their depleted landholdings in order to meet its outsized demand.
During the third quarter our MPCs recorded earnings before taxes of $54.1 million a 48% increase compared to last year largely driven by the robust superpad sales activity in Summerlin as well as the strong performance of our Summit joint venture.
In addition to these impressive results we continue to see a steady pace of new home sales.
Proving the strength of our communities remains clearly intact.
So far in 2021 there have been 2163 new homes sold in our MPCs a 6% increase over last year indicating further demand lies ahead.
Overall we're seeing a lot of positive momentum when it comes to land sales.
And looking ahead we expect our fourth quarter to be the strongest quarter yet.
As such we are raising our full year 2021 MPC EBT guidance by $60 million at the midpoint to a range of $275 million to $285 million primarily due to stronger-than-expected superpad sales in Summerlin.
This is our second time raising MPC guidance in 2021 as this segment continues to exceed our expectations.
Speaking of Summerlin this MPC drove a substantial portion of the positive results for the quarter selling 47 acres mostly made up of superpads.
This MPC generated $45.6 million in EBT a staggering 130% increase compared to the prior year period.
Additionally year-to-date new home sales have eclipsed over 1200 units and are 20% higher over the same period in 2020 which if you recall was one of the strongest years in Summerlin's history.
Another significant driver to Summerlin's results has been our joint venture at the Summit our exclusive 550-acre community in Summerlin.
The total earnings from our share of equity during the quarter totaled $8.3 million driving year-to-date earnings to $54.6 million versus only $4.4 million during the first nine months of 2020.
The activity at the Summit over the last year has been tremendous and these positive results have been primarily attributed to an influx of California buyers purchasing these custom lots and built product.
Turning over to Houston.
Our Bridgeland MPC experienced a decline in land sales as supply constraints continues to have an impact.
As we highlighted last quarter a majority of the homebuilders have extended their lead times for home deliveries due to ongoing supply disruptions that have resulted in higher material costs and delayed delivery times.
We've started to see some of these bottlenecks subside and expect a more normalized environment heading into next year.
This quarter's land sales were also impacted by inclement weather as significant rainfall in the Houston area delayed horizontal development resulting in slower lot deliveries to homebuilders.
Despite these factors demand in the area remains incredibly strong.
We view the significant imbalance between undersupply and robust demand as a strong catalyst for elevated activity as we move into 2022.
Lastly in the Woodlands Hills despite lower quarterly land sales due to the similar impacts experienced in Bridgeland the residential price per acre grew 18% over the prior year period to $353000 while new home sales were up 15% which points to future growth ahead as we accelerate activity across this MPC.
Moving over to the Seaport.
We saw heightened activity throughout the quarter as events and concerts at Pier 17 helped draw in spectators.
During the quarter NOI improved 43% compared to the same period in 2020 indicating the return to normalcy is near.
In July we launched our 11-week summer concert series on the Pier 17 rooftop.
Of the 30 concerts hosted 20 were fully sold out.
The turnout for these contracts proved to be very strong with approximately 74000 guests in attendance representing 90% of our available ticket inventory.
In addition to concerts we hosted several other major events including the SPs in July and the world tour for the Fujis who debuted at Pier 17 for their first show together in 15 years.
It's these type of special events that continue to set the Seaport apart from other destinations in Manhattan.
All of these events help drive substantial traffic to our restaurants.
We saw an uptick in activity as more and more locals and tourists experience our variety of cuisines from acclaimed New York City chefs.
As a result our restaurant saw their average monthly sales increased 65% versus last quarter.
While labor constraints have marginally improved we continue to see improvements in this space quarter after quarter.
Many of our restaurants are now closely approaching their stabilization targets as higher volume has contributed meaningfully to the growth of our bottom line.
Overall we see the Seaport heading in the right direction and the upcoming completion of the Tin Building followed by its grand opening in the first half of 2022 will help bring the Seaport closer to stabilization.
With that I'm going to stop and hand the call over to Dave Striph.
Our operating assets had a standout quarter as our portfolio delivered strong sequential and year-over-year NOI growth.
For the third quarter we reported $60.6 million of NOI.
When you layer in the activity from our three hotels that were sold in September this segment generated $62.9 million.
This marks the fourth consecutive increase in quarterly NOI as our portfolio of income-producing assets continues to expand.
As the economy continues to reopen and activity within our regions improves we have seen a corresponding increase in our retail NOI.
These assets generated $16.1 million of NOI during the third quarter the highest level since the first quarter of 2019.
This is in large part due to a stronger tenant base coming out of the pandemic in addition to consistent increases in collections.
For the third quarter we collected 83% of our retail rents with Summerlin leading the charge for the highest collections in our portfolio.
As we have highlighted previously our retail at Ward Village has been materially impacted over the last several quarters due to sharp declines in tourism as a result of the pandemic.
However as travel restrictions to Oahu have been recently eased we've seen a corresponding improvement in our retail performance.
In fact Ward was the largest contributor to the sequential increase in retail NOI partly as a result of a onetime payment of deferred rent of approximately $1.4 million.
We expect our retail portfolio to continue on this path of growth as collections work back to pre-pandemic levels coupled with the continuous lease-up of our remaining space to creditworthy tenants.
At the Las Vegas Ballpark we were able to host the remainder of the aviator season at 100% capacity.
This resulted in $5.4 million of NOI a 74% increase over the last quarter where the beginning of the season was limited to 50% capacity to comply with COVID-19 protocols.
This is a stark comparison to the same period in 2020 where the ballpark lost nearly $1 million as the season was canceled entirely due to the pandemic.
Our multifamily assets produced $9.2 million of NOI during the third quarter a 24% sequential increase almost exclusively attributable to strong leasing momentum at our most recent developments.
In 2020 we completed construction on three multifamily projects between the Woodlands and Columbia.
And during the third quarter these new developments made up 2/3 of the increase in sequential NOI growth.
In addition to this robust leasing velocity we've been able to push rents higher and are currently commanding some of the highest rents compared to our surrounding metro areas.
In addition to our existing product we have three more multifamily developments underway in Downtown Columbia Bridgeland and Summerlin to meet this ongoing demand which will drive our NOI even higher.
Our office assets have experienced steady increases in NOI over the past few quarters despite a sluggish recovery in the return to office environment.
For the third quarter we generated $27.8 million in NOI a 6% increase sequentially and a 17% increase compared to the same period last year.
The bulk of this increase was driven by the roll-off of free rent at select assets including 6100 Merriweather our latest office building in Downtown Columbia.
Overall we are seeing a noticeable increase in leasing activity and expect our pipeline of opportunities to accelerate into 2022 as tenants look for additional space and folks continue to return to an office setting.
To build on the momentum we are seeing within our operating asset portfolio we are pleased to announce some new product types in addition to our traditional mix.
Recently we have expanded into the medical office space to continue to provide residents with the highest quality convenient medical care.
We have noticed a growing need for this type of asset as the volume of residents in our communities continues to grow.
With that we are pleased to announce the launch of two medical facilities spanning 106000 square feet throughout Downtown Columbia and the Woodlands.
In Downtown Columbia we will launch our first medical office building on the shoreline of Lake Kittamaqundi.
This new development will sit adjacent to our successful Whole Foods in the former Rouse headquarters building helping to establish Downtown Columbia as a prominent health and wellness destination.
Encompassing approximately 86000 square feet we have already secured an anchor tenant for roughly 20% of the entire space.
We expect to break ground on this project during the first half of 2022 and this will kick start our major development pipeline in the Lakefront District.
In The Woodlands we will launch development on a 20000 square foot build-to-suit medical office building for Memorial Hermann.
This project will serve as a primary local facility to cater to the medical needs of nearby residents and is expected to break ground by the end of this year.
Lastly in Bridgeland we will be constructing our first single-family for rent community which will commence in the first half of 2022.
These 263 homes will span a combined 328000 square feet and offer a unique hybrid between single-family homes for sale and multifamily for rent adding yet another new product to our operating asset portfolio.
Given this is an extension of multifamily we plan to leverage the expertise of the property managers who oversee our existing portfolio in Houston to assist in managing this build-to-rent community.
In total these three projects represent over 430000 square feet and $114 million of development as we continue to put our capital to work and enhance our stream of recurring income.
We have already had a number of developments under construction in Summerlin Columbia and Bridgeland so the announcement of these additional developments demonstrates the immense demand we are seeing throughout all our regions.
Moving to the Seaport.
Construction of the Tin Building is now in the final stages and will be substantially complete by the end of the year.
The launch of the Tin Building has been highly anticipated and our team has been working in close partnership with the Jean Georges team to prepare for the grand opening of this 53000 square foot food hall in the first half of 2022.
Lastly we continue to make great strides through New York City's ULURP process to obtain the necessary approvals for the development of a 26-story mixed-use building at 250 Water Street.
In October the City Planning Commission granted us approval for this project another hurdle passed through this rigorous land use process.
We are nearing the end of our review which we expect to conclude before the end of the year at the New York City Council.
The prospective development would replace the one acre parking lot with market rate and affordable residences commercial and community space further enhancing the character and vibrancy of this neighborhood.
We look forward to updating you on our continued progress as we continue to close in on the final stages of this process.
At Ward Village the pace of condo sales continues to exceed all expectations.
Despite having less inventory under construction the number of condos contracted during the quarter has only grown.
Across our three recent towers 'A'ali'i Koula and Victoria Place we were 90% presold as of the end of the quarter with Koula and Victoria Place still under construction.
This robust velocity has led to the presales launch of our eighth tower The Park.
Presales activity at The Park began in July.
And as of the end of October we have already contracted 64% of the total units.
The sales activity across these four towers just in the third quarter translates to 316 contracted units secured by hard deposits during a period of time when travel to the island of Oahu was discouraged surrounding Delta variant concerns.
The pace of these sales is truly remarkable.
We've been able to establish a mark on this community where residents want to live and our historical sales pace has reflected increasingly faster sellouts with the launch of each new tower.
Subsequent to the end of the quarter we completed construction on 'A'ali'i and began welcoming residents to their new homes in October.
As of November two we closed on 495 units totaling $332 million in net revenue revenue that will be recognized on our fourth quarter income statement and will contribute meaningly to our bottom line.
With that I'd like to now hand the call over to our CFO Correne Loeffler who will review our third quarter financial performance.
The results of the third quarter clearly demonstrates the strength of our business as we continue to benefit from the strong demand throughout our communities across the country.
In summary our MPCs produced $54.1 million of earnings before tax or EBT during the third quarter a 22% decrease compared to the last quarter and a 48% increase compared to the prior year period.
It's important to note that while EBT decreased from the last quarter it was largely attributed to nonrecurring costs such as the early extinguishment of debt upon the retirement of our Woodlands and Bridgeland credit facility.
In addition the top line only declined slightly due to the lack of commercial land sales in Summerlin compared to the last quarter.
Our operating assets recorded a $62.9 million of NOI when including the contribution from the three Woodlands-based hotels which represented a 9% increase compared to the last quarter and a 65% increase compared to the prior year period.
As Dave touched on earlier the strong performance was due to a continued improvement across our retail portfolio a strong Minor League season at our ballpark robust lease-up activity at our multifamily assets and the roll-off of free rent at select office assets.
At Ward Village we contracted 316 condo units which were made up of 61 units from our three towers under construction and 255 units at the park which launched presales during the quarter.
Combined sales at 'A'ali'i Koula and Victoria Place were up 36% compared to the prior quarter and increased 154% compared to the prior year period.
Finally at the Seaport we recorded a $3.6 million loss in NOI resulting in a 19% improvement over the last quarter and a 43% improvement compared to the prior year period.
Taking a look at GAAP earnings for the third quarter.
We reported net income of $4.1 million or $0.07 per diluted share compared to net income of $139.7 million or $2.51 per diluted share in the prior year period.
The decrease in net income from the prior year was attributed to a onetime noncash gain of $267.5 million for the third quarter of 2020 which was related to the deconsolidation of our 110 North Wacker office tower in Chicago.
If we remove this onetime gain our quarterly earnings were substantially higher than our prior year period due to strong activity to play throughout the entire business.
With only one quarter remaining to finish out the full year we remain on track to meet or exceed all previously disclosed guidance targets for 2021.
As David mentioned earlier our MPC segment has done particularly well which has led us to raise our EBT target for the second time this year.
Our previous guidance range for 2021 was $210 million to $230 million.
We are now raising our guidance by $60 million at the midpoint thus revising our range to $275 million to $285 million as we are expecting a strong end to the year.
Given the recovery we are experiencing in our operating assets we are raising our full year NOI guidance by $5 million to a range of $200 million to $210 million.
We are raising this segment's guidance despite the fact that we will not receive any hospitality-related NOI during the fourth quarter as we just sold our Woodlands hotels in September for $252 million.
The sale of these assets generated $120 million of net proceeds and brings our total net proceeds from noncore asset sales to $376 million since the announcement of our strategic transformation plan in late 2019.
We are also revising our full year condo profit guidance at Ward Village by $7.5 million at the midpoint.
Our previous guidance range for 2021 was $100 million to $125 million.
With elevated condo sales following the completion of 'A'ali'i in October we are expecting condo profits to range between $115 million to $125 million.
Please note that this target excludes the $20 million repair cost incurred at Waiea during the first quarter which we fully expect to be reimbursed for.
Lastly we remain on track to meet our previously disclosed G&A guidance of $80 million to $85 million for 2021.
Now let's take a look at our balance sheet for the quarter.
We ended the third quarter with $1 billion of cash on hand leaving us plenty of runway to execute on the recent capital initiatives we discussed earlier.
Additionally we closed on several financings at attractive rates while at the same time extending our maturity profile.
A couple of our recent financings include two construction loans for our latest project in Downtown Summerlin a $75 million loan for our 1700 Pavilion office development and a $59.5 million loan for our Tanager Echo multifamily development.
In addition we refinanced The Woodlands and Bridgeland credit facility into a new $275 million loan secured by Bridgeland notes receivables and land to support future horizontal development.
Lastly subsequent to quarter end we closed on a $250 million loan for 1201 Lake Robbins resulting in net proceeds of $248 million which helps elevate our overall cash position.
Additional activity following the close of the quarter include the repayment of 'A'ali'i construction loan upon the completion of the project.
We continue to push out our near-term maturities and remain focused on executing new financings to support our latest development projects as well as securing long-term funding for our stabilized assets.
We're going to open up the lines for Q&A.
But before we do I just want to hit on a few key points.
First we remain committed to driving our net asset value higher on a per share basis and are laser-focused on closing the gap between our stock price and the true inherent value of Howard Hughes.
And the actions taken over the last quarter to deploy capital into projects that we believe will achieve outsized risk-adjusted returns reflects that strategy.
We acquired a new fully entitled shovel-ready MPC.
We announced the launch of three new development projects and we announced the $250 million share buyback.
All of these initiatives will unlock tremendous value for our shareholders in the near medium and long term.
Second our balance sheet remains strong even after allocating capital to the various projects I just mentioned.
Our disciplined capital allocation approach has allowed us to conserve capital and leaves us with sufficient excess liquidity to evaluate additional opportunities to further expedite growth.
In addition the cash flow generated by future land sales condo sales and recurring NOI combined with the proceeds from our remaining noncore asset sales will only drive our cash position higher.
Third our financial results through 2021 represents the strength of our business as we are now exceeding pre-COVID levels and the guidance targets we have established for the full year points to an even stronger fourth quarter ahead.
With that we'd now like to begin the Q&A section of the call.
We will answer the first few questions that have been generated by Say Technology and will be read by John Saxon.
John can you please read the first question? | compname reports q3 earnings per share $0.07.
q3 earnings per share $0.07.
qtrly earnings per share $0.07. | 1 |
Going to Slide two.
Today we have on the call, Drew DeFerrari, our Chief Financial Officer and Ryan Urness, our General Counsel.
Now moving to Slide four, and a review of our third quarter results.
As we review our results, please note that in our comments today and in the accompanying slides we reference certain non-GAAP measures, we refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.
Now for the quarter, revenue was $854 million, an organic increase of 6.6%.
As we deployed 1-gigabit wireline networks wireless/wireline converged networks and wireless networks, this quarter reflected an increase in demand from two of our top five customers.
Gross margins were 17.34% of revenue, reflecting the continued impacts of the complexity of a large customer program.
Revenue declined year-over-year with other large customers and fuel costs.
General and administrative expenses were 7.8% of revenue and all of these factors produced adjusted EBITDA of $83.1 million or 9.7% of revenue and adjusted earnings per share of $0.95, compared to earnings per share of $1.6 in the year ago quarter, included in adjusted earnings per share our incremental tax benefits of $0.10 per share for credits related to tax filings for prior periods.
Liquidity was solid at $314.7 million and operating cash flow was strong at $104.3 million, reflecting a sequential DSO decline of 12 days.
During the quarter we repaid our remaining 2021 convertible notes in full and subsequent to the end of the third quarter, we received three-year awards for construction services in a number of states valued in excess of $500 million in total.
Now going to Slide five.
Today, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country.
These wireline networks are generally designed to provision 1-gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies.
Industry participants have stated their belief that a single high capacity fiber network can most cost-effectively deliver services to vote consumers and businesses, enabling multiple revenue streams from a single investment.
This view is increasing the appetite for fiber deployments and we believe that the industry effort to deploy high capacity fiber networks continues to meaningfully broaden our industry set of opportunities.
Increasing access to high capacity telecommunications continues to be crucial to society, especially in rural America.
The recently enacted infrastructure investment and Jobs Act includes over $40 billion for the construction of rural communications networks in unserved and underserved areas across the country.
This represents an unprecedented level of support.
In addition, an increasing number of states are commencing initiatives that will provide funding for telecommunications networks even prior to the initiation of funding under the Infrastructure Act.
We are providing program management, planning, engineering and design, aerial underground, and wireless construction and fulfillment services for 1-gigabit deployments.
These services are being provided across the country in numerous geographic areas to multiple customers.
These deployments include networks consisting entirely of wired network elements, as well as converged wireless/wireline multi-use networks.
Fiber network deployment opportunities are increasing in rural America as new industry participants respond to emerging societal initiatives.
We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants.
Macroeconomic effects and potential supply constraints may influence the near-term execution of some customer plans.
Broad increases in demand for fiber optic cable and related equipment may impact delivery lead times in the short to intermediate term.
In addition, the market for labor continues to tighten and regions around the country.
It remains to be seen how extensive these conditions will be and how long they may persist.
Furthermore, the automotive supply chain is currently challenge, particularly for the large truck chassis required for specialty equipment.
As we contend with these factors, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.
Moving to Slide six.
During the quarter, organic revenue increased 6.6%, our top five customers combined produced 65.4% of revenue, decreasing 3.5% organically, demand increased for two of our top five customers all other customers increased 32.5% organically.
AT&T was our largest customer at 23.4% of total revenue or $199.5 million.
AT&T grew 68% organically this was our third consecutive quarter of organic growth with AT&T.
Revenue from Comcast was $121 million or 14.2% of revenue, Comcast was Dycom's second largest customer.
Lumen was our third largest customer at 12.1% of revenue or $103 million.
Verizon was our fourth largest customer at $93.4 million or 10.9% of revenue.
And finally revenue from Frontier was $41.3 million or 4.8% of revenue.
Frontier grew 118.6% organically.
This is the 11th consecutive quarter where all of our other customers in aggregate, excluding the top five customers have grown organically.
Of note, fiber construction revenue from electric utilities was $53.7 million in the quarter and increased organically 75.3% year-over-year.
We have extended our geographic reach and expanded our program management network planning services.
In fact, over the last several years, we believe we have meaningfully increased the long-term value of our maintenance and operations business a trend, which we believe will parallel our deployment of 1-gigabit wireline direct and wireless/wireline converged networks.
As those deployments dramatically increase the amount of outside plant network that must be extended and maintained.
Now going to Slide seven.
Backlog at the end of the third quarter was $5.896 billion versus $5.895 billion at the end of the July '21 quarter, essentially flat.
Of this backlog approximately $2.938 billion is expected to be completed in the next 12 months.
We continue to anticipate substantial future opportunities across a broad array of our customers.
During the quarter, we received from Frontier fiber construction agreements in California, Texas, Indiana, New York, Connecticut and Florida, for Consolidated Communications, a construction and maintenance agreement for New Hampshire.
From Windstream construction agreements for Ohio, Pennsylvania and New York, Kentucky and Alabama.
From Lumen construction and maintenance agreements in Oregon, Minnesota and Iowa and various rural fiber deployments in Arizona, Colorado, Missouri, Indiana, Arkansas, Mississippi, Tennessee and Georgia.
Headcount increased during the quarter to 14,905.
Going to Slide eight.
Contract revenues were $854 million and organic revenue increased 6.6% for the quarter.
Storm work performed in Q3 of last year was $8.9 million, compared to none in Q3 '22.
Adjusted EBITDA was $83.1 million or 9.7% of revenue, gross margins of 17.3%, decreased 140 basis points from the year ago period.
As expected this decrease reflected higher fuel costs of approximately 50 basis points, as well as the impact from revenue declines from several large customers.
G&A expense was at 7.8% of revenue and came in approximately 40 basis points better than our expectations from improved operating leverage.
Non-GAAP adjusted net income was $0.95 per share, compared to $1.6 per share in the year ago period.
Q3 '22, included approximately $3 million or $0.10 per share of incremental tax benefits for credits related to tax filings for prior periods.
The total variance in net income resulted from the after-tax decline in adjusted EBITDA, higher interest expense and lower gains on asset sales, offset by lower stock-based compensation, depreciation and amortization and income taxes.
Now going to Slide nine.
Our financial position and balance sheet remain strong.
In September, we repaid the final balance of $58.3 million of the convertible notes at maturity.
We ended the quarter with $500 million of senior notes, $350 million of term loan and no revolver borrowings.
Cash and equivalents were $263.7 million and liquidity was solid at $314.7 million.
Our capital allocation prioritizes organic growth followed by opportunistic share repurchases and M&A within the context of our historical range of net leverage.
Going to Slide 10.
Operating cash flows were strong at $104.3 million in the quarter, capital expenditures were $44.1 million net of disposal proceeds and gross capex was $45.1 million.
For the full-year of fiscal 2022, capital expenditures, net of disposals are now expected to range from $135 million to $150 million, an increase of $10 million to $25 million, compared to the high end of approximately $125 million in the prior outlook provided in Q2 '22.
The combined DSOs of accounts receivable and net contract assets were at 113 days, an improvement of 12 days sequentially from Q2 '22, as we made substantial progress on a large customer program.
Now going to Slide 11.
Each year our January quarterly results are impacted by seasonality, including inclement weather, fewer available work days due to the holidays, reduced daylight work hours and the restart of calendar payroll taxes.
These and other factors may have a pronounced impact on our actual results for the January quarter, compared to our expectations.
Q4 of last fiscal year included 14-weeks of operations, due to the company's 52, 53-week fiscal year and also included $5.7 million of revenues from storm restoration services.
Non-GAAP contract revenues adjusted for these amounts in Q4 '21 was $691.8 million.
For Q4 of fiscal '22, there will be 13-weeks of operations and the Company expects contract revenues to increase modestly, as compared to the non-GAAP organic contract revenues of $691.8 million in Q4 '21.
The Company expects non-GAAP adjusted EBITDA to range from in-line to modestly higher, as a percentage of contract revenues, as compared to Q4 '21.
Total interest expense is expected at approximately $8.8 million during Q4, and we expect a non-GAAP effective income tax rate of approximately 27%.
Moving to Slide 12.
Within a recovering economy, we experienced solid activity and capitalized on our significant strengths.
First and foremost, we maintained significant customer presence throughout our markets.
We are encouraged by the breadth in our business.
Our extensive market presence has allowed us to be at the forefront of the evolving industry opportunities.
Telephone companies are deploying fiber-to-the-home to enable 1-gigabit high speed connections, increasingly rural electric utilities are doing the same, dramatically increased speeds to consumers are being provisioned and consumer data usage is growing particularly upstream.
Wireless construction activity in support of newly available spectrum bands is beginning and expected to increase next year.
Federal and state support for rural deployments of communications networks is dramatically increasing in scale and duration.
Cable operators are deploying fiber to small and medium businesses and enterprises, a portion of these deployments are in anticipation of the customer sales process.
Deployments to expand capacity, as well as new build opportunities are underway.
Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business.
As our nation and industry continue to contend with the COVID-19 pandemic, we remain encouraged that a growing number of our customers are committed to multi-year capital spending initiatives.
We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team. | q1 adjusted non-gaap loss per share $0.04.
for quarter ending july 31, 2021, expects contract revenues to range from in-line to modestly lower versus last year.
for quarter ending july 31, sees non-gaap adjusted ebitda as a percentage of contract revenues to decrease versus last year. | 0 |
As usual, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives.
During our call, management may discuss certain items, which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business, and believes will provide insight into the company's ongoing operations.
Looking broadly at the quarter, we're encouraged by the continued improvement in the environment, the consumers increasing engagement with the category, and we hope to see those trends continue.
We know there are still challenges out there, especially with independents, yet Brinker continues its strong recovery, posting a better-than-expected first quarter and also delivering earnings of $0.28 a share.
Both brands increased their progression from last quarter with Chili's reporting comp sales of negative 7.2% and Maggiano's negative 38.6%.
And both brands delivered solid sequential improvement throughout the quarter, with Chili's ending September down just 1.4% and Maggiano's down 32.5%.
Plus casual is obviously a more challenged segment that's facing greater headwinds, but the Maggiano's team is doing a great job managing their cost structure and flow through.
We feel good about where Maggiano's is from a very relative perspective, and we're excited about the bold strategy Steve Provost and the team are putting in place to build the business.
The Chili's brand continues to exceed expectations from both a relative and an absolute perspective.
The month of September marked our return to positive traffic, and that's pretty impressive given there are still major states like California and New Jersey, not yet near full dining room capacity.
This brand continued its nearly three-year streak of outperforming other casual dining chains in KNAPP-TRACK, driving a 16-point gap in sales and 23 points in traffic this quarter.
When we broaden our view of the category to include independents, our GAAP widened significantly.
Current credit card data shows a whole category down 30%, which reflects our ongoing impact of this pandemic and the reality of what is likely to be a meaningful shift in the competitive landscape.
In this tough environment, I couldn't be prouder of the resilience and agility of our operations team.
For the quarter, they improved restaurant operating margin 60 basis points year over year.
When the pandemic hit back in March, the market really drove us all to dramatically cut costs.
Since then, we've judiciously evaluated every cost within our P&L, and we've been diligent about reestablishing our media -- our spending levels.
In many cases, we're comfortable maintaining a level of spend below pre-pandemic levels.
One of the biggest changes we made was to rethink our marketing spend.
We significantly reduced traditional television advertising so we could invest more aggressively in digital and direct channels that work harder for us, like My Chili's Rewards.
And with the increased desire for convenience, we're shifting to support all our brands more aggressively with delivery resulting in higher third-party delivery fees and promotional expenses.
Based on where we're tracking with sales and the efficiency of our P&L, we feel really good about these decisions.
Our top priority has been and remains the safety of our team members and guests.
We're committed to supporting our team that's working so hard to take care of our guests.
We've now brought back most of our hourly team members, and that we've been able to help them maintain their hourly wage levels.
We've also kept our management structure intact.
We know how critical their leadership is to our guests and our business and we're proud that we've been able to bonus our managers close to target.
Instead, we leaned into the same strategies that have been helping us take share from the last three years, and they've been even more effective since the pandemic.
But even before that, our challenge was to prove to ourselves and to you that we could create a growth model out of a legacy business in a category that's seen meaningful declines in traffic over the years.
We have always believed growth is available in this category if you do the right things.
By delivering a better guest experience, a strong value proposition and more effective marketing, we unlocked sustainable organic growth within our base business.
Our results demonstrate we're doing the right things.
Our improvements to the base enables us to introduce our first virtual brand, It's Just Wings, an incremental growth vehicle that offers convenience and value in a way no one else is positioned to do.
Now there's been a lot of discussion about what a virtual brand is.
It's Just Wings is not a disposable vehicle.
We're committed to this brand for the long haul.
There are barriers to entry in doing virtual brands well, and Brinker is uniquely positioned to do it right.
We have the scale, the asset ownership that's available capacity in our well-equipped kitchens, the right technology and unbelievably strong operators who can focus and deliver consistently.
When we rolled out It's Just Wings overnight to more than 1,000 restaurants.
Now that's easy to say, but tremendously hard to do.
So I know everyone is curious about how it's going so far.
We're excited with how the brand is already performing, and we're well on track to meet our first year target of more than $150 million in sales.
We're encouraged by what DoorDash sees with regard to our consumer data.
The brand is really generating high satisfaction scores and strong repeat usage.
It's really resonating with consumers, which we know is critical to the health and long-term success of any brand.
Going forward, our focus is to ensure we're executing at the highest level possible, and we're maximizing the brand's growth potential.
It's Just Wings started as a virtual brand, but as we wire in the execution and accelerate growth, it may take different trajectories.
We're evaluating internal and external opportunities to increase awareness levels and expand access to consumers.
This is just phase I for It's Just Wings.
We also believe we have capacity to expand our virtual brand portfolio.
We're testing a few ideas to better understand consumer demand and ensure that we can execute at a high level.
We'll have more to say on that in the not-too-distant future.
Obviously, we see a lot of upside for virtual brands.
Listen, with the uncertainty surrounding COVID and the economy, we anticipate some volatility ahead.
And like the rest of our country and the world, we are hoping and planning for a vaccine and an end to the sickness and deaths from this virus.
We are hoping and planning for economic stability and continued recovery in the post-election environment.
But despite the things no one can know, here's what we do know.
We will keep running our own race and working our strategy.
We will stay flexible and agile, and we'll take care of each other and our guests.
We will also continue to manage our P&L and our balance sheet with discipline to create an even more stable model for our shareholders.
And we will boldly grow these brands so we can continue to be a great place for our team members to work and our shareholders to invest.
And with that, I'll turn now it over to Joe.
As you just heard, we begin our fiscal year 2021 with momentum on the top and bottom line.
We continued our recovery by delivering adjusted diluted earnings per share of positive $0.28, marking the return to profitability after just a one quarter hiatus.
Now for the quarter, Brinker's total revenues were $740 million and consolidated reported net comp sales were negative 10.9%.
Importantly, comp sales materially improved as the quarter progressed, with September consolidated comp sales down only 5.2%.
Chili's has continued to lead the casual dining sector, ranking as the #1 brand in the KNAPP-TRACK index each month in this quarter.
And as Wyman indicated, beat by significant margins in both sales and traffic.
In September, Chili's achieved another important milestone in its recovery, posting positive traffic for the brand of 2.2%.
Another way to see Chili's impressive progression is to look at our net comp sales results, excluding those restaurants and markets not fully open for our indoor dining during the quarter, such as California and New Jersey.
These restaurants represent approximately 86% of the Chili's system, and they were only negative 1.3% for the quarter and positive 3.6% for September.
Now turning to margins.
Restaurant operating margin for the first quarter was 11.6%, a noteworthy 60 basis points improvement versus prior year.
Food and beverage expenses were favorable 10 basis points versus prior year due to the favorable menu mix, offset by low level of commodity inflation.
Labor was also favorable 120 basis points versus prior year.
Now several items contributed to this improved performance.
First, labor expense relative to prior year benefited from the shift in sales from dine-in to off-premise in the quarter.
Second, favorability was also buoyed by the fact some of our higher labor cost states reopened at a slower pace during the recovery, a benefit that will diminish as we move forward.
Of course, naturally, we'll take the sales that go with adding that labor back into the equation.
And finally, labor expense benefited from the ability to seamlessly integrate our It's Just Wings brand into the existing labor model, a point of leverage and we plan to sustain.
The labor favorability was partially offset by the increase in restaurant expenses, which was up 70 basis points for the first quarter versus prior year.
Sales to leverage, higher delivery related fees and packaging expense were the primary increases, while lower advertising and repairs and maintenance expenses helped mitigate the overall increase.
Generating positive cash flow is an important part of our recovery process.
With the business improving, we generated operating cash flow of $83 million.
After capital expenditures of the approximately $14 million, our free cash flow for the quarter totaled more than $69 million.
Our first priority for cash generation is to invest back in the business.
And as such, we have resumed both restaurant reimages and new restaurant development.
We have increased our capex budget for the year and now expect to spend approximately $100 million during this fiscal year.
As Wyman reiterated, strengthening the balance sheet is also a key area of focus for us.
As such, our second cash priority is to pay down debt, and we executed against this strategy during the quarter, reducing our long-term debt by approximately $50 million.
We will continue to lower leverage as we move forward from here targeting an adjusted debt level of about 3.5 times EBITDAR.
Now turning to our current second quarter.
Let me provide some color as to our expectations for the quarter and then some specific guidance metrics for the quarter.
Today marks the end of our October period, and it appears we will continue the positive progression of comp sales established during the first quarter.
We expect Chili's to further build its positive traffic performance this period, getting the second quarter off to a very fine start.
While we anticipate year over year improvements in Chile's operating performance in the second quarter, our consolidated performance will likely reflect a more difficult holiday environment for the Maggiano's brand.
With that being said, let me provide some specifics for Brinker's performance in the second quarter.
We expect consolidated comp store sales to be down in the mid single-digit range.
We believe Brinker's restaurant operating margins will be relatively similar to prior year.
Adjusted earnings per diluted share are estimated to be in the range of $0.40 to $0.60 and weighted average diluted shares are estimated to be in the 45 million to 46 million share range.
I would also note we have the holiday flip in the second quarter with Christmas Eve and Christmas Day moving into the third quarter.
This holiday shift will have a positive impact to second quarter comp sales that will be offset in the first period of Q3.
Despite the ongoing challenges in our operating environment, we continue to demonstrate strength and resilience.
So, our first quarter performance is a testament to our ability to deliver results.
While operating in a pandemic environment comes with some uncertainties, there is no doubt we will continue to execute our share gaining strategy, take care of our guests and team members and be a leader in the restaurant industry for the short and long term. | brinker international inc - qtrly net income per diluted share, excluding special items $0.28.
brinker international inc - chilis total comparable restaurant sales decreased 7.2% in q1 21.
brinker international inc - maggiano's total comparable restaurant sales decreased 38.6% in q1 21.
brinker international inc - for q2 21 net income per diluted share, excluding special items, expected to be $0.40 to $0.60. | 1 |
Second quarter adjusted income from continuing operations per diluted share increased to $0.82, up nearly 37% from the year ago quarter.
We generated significant operating leverage with adjusted EBITDA improving 17% year-over-year to $106.6 million and adjusted EBITDA margin increasing 100 basis points to 7.1% on slightly higher revenues.
We are pleased to note that for the first time in five quarters, growth in four of our key segments, B&I, T&M, Education and Technical Solutions more than offset the softness in Aviation which, while improved on a sequential basis, continue to reflect the impact of the pandemic.
In short, our second quarter performance reflected a consistently high level of operational execution by our team amid gradually improving business conditions, in sync with the reopening of the economy.
This strong showing and our current visibility have enabled us to increase our full-year guidance for adjusted earnings per share, while we continue to invest to support future growth.
Consistent with what we have discussed over the past several quarters, our customers continue to prioritize protecting their people and spaces, driving strong demand for our higher-margin virus disinfection work orders.
EnhancedClean, our proprietary and trusted protocols for cleaning and disinfecting spaces was an important contributor to our second quarter results as well.
We also continue to benefit from efficient labor management as our flexible labor model enabled us to identify and capitalize on staffing efficiencies arising from the adoption of remote and hybrid work environments, particularly within our B&I segment where office occupancy in large metropolitan areas remain relatively low.
As employees transition back to the office, we anticipate some easing in our labor efficiency, but we expect revenue growth in the second half of the year and increased work orders to mitigate that effect.
With our scale, capabilities, end market diversity and breadth of services, ABM remains well positioned for continued revenue and earnings growth as the reopening momentum continues.
There are several key trends that support our outlook for continued strong performance in the coming quarters.
First, our clients in both the office and manufacturing markets indicate they plan to continue to incorporate disinfection into their cleaning protocols as they prepare for the return of staff and workers to their offices and industrial facilities.
In fact, given the heightened concerns around pandemic risks and greater awareness of public health issues in general, we expect these specialized services to remain in demand and to become part of our client contracts.
ABM has been an essential partner in helping our customers navigate through the challenges of the past year and our 90%-plus retention rate, which ticked up in the second quarter speaks to the confidence our customers have in our services and capabilities.
Second, we expect continued sequential improvement in our Aviation segment, as pent-up demand for travel translates into higher demand for aviation services.
As Earl will discuss in his comments, we are transitioning our Aviation business mix to favor higher-margin contracts with airports and adjacent facilities, with less of a focus on airline services.
This strategic shift has created attractive growth opportunities for ABM outside of the airport, such as parking services and provides for a more consistent and more profitable business mix in our Aviation segment.
Additionally, we expect to see increased demand for disinfection and cleaning services in line with the pickup in travel activity.
Early signs of return to leisure travel have been encouraging and increased business travel is projected to follow later in the year and into next year.
Third, school districts have accelerated the return to in-person learning.
Our conversations with school district professionals and educational institutions indicate that with the full-time return to school expected this fall, cleaning and disinfecting will be a priority throughout the school year.
We expect these services to become part of the broader scope of services for new contracts and rebids, providing ABM with revenue and growth opportunities.
Finally, the energy efficiency and retrofit solutions that we offer in our Technical Services segment, our highest margin business, provide significant operating cost savings for our customers and enable them to reduce their environmental impact.
Now that we have greater access to client sites, we expect to increasingly work through our Technical Services backlog, which was at a record level at the end of the second quarter.
Additionally, this segment is well positioned to benefit from the new administration's priorities around decarbonization and energy efficiency.
As we look toward the second half of the fiscal year, we are confident that we can leverage our significant competitive advantages to achieve continued progress.
You may recall that at the very outset of the pandemic, we established 19 operational task forces or pods as we call them, to marshal our tremendous internal resources on the issues at hand, to focus on our virus disinfection offerings; our field operations; as well as finance, legal, liquidity, cash flow and human resources.
This task force model proved to be a fast and effective way of identifying potential business issues and utilizing cross-functional expertise to develop and implement solutions.
Given the success of these initiatives, we will continue to use this model to address emerging situations.
In fact, our human resources task force is now focused on recruiting and retention and will be instrumental in helping us manage utilization as additional staffing is required to accommodate increased occupancy levels.
Additionally, our strong balance sheet and robust cash flow provide us with substantial resources to fund investments to support future growth.
We invested in information technology initiatives during the first half of fiscal 2021 and we anticipate investing further during the second half of the year.
These investments in technology, data analytics and strategic initiatives are designed to strengthen our client relationships and further empower our employees.
While we will speak about these initiatives later in the year, I can share that we are currently piloting client-facing solutions using sensors to generate real-time occupancy data that inform our janitorial programs and allow us to share service delivery details with our clients via digital displays.
Additionally, we are expanding our use of technology to workforce management with a digital test management solution that records work performed and facilitates dynamic route changes to accommodate shifting client demand.
Lastly, the ABM brand is recognized worldwide, and our recent advertising campaign has served to reinforce the scale, scope and capabilities of our organization.
These attributes enabled us to step in immediately to provide our branded services to clients needing a safe environment for their employees and consumers.
The ABM brand is synonymous with this tremendous commitment to customer service, which is supported by our ability to deliver.
As we enter a post-pandemic environment, we believe the ABM brand will provide us with considerable competitive advantages across our business segments.
Turning now to the specifics of our outlook.
Given our strong performance in the first half and our expectations for continued year-over-year growth in the second half, we are maintaining our guidance for full-year fiscal 2021 GAAP income from continuing operations of $2.85 to $3.10 per diluted share, inclusive of a second quarter litigation reserve of $0.32.
At the same time, we are increasing our guidance for full-year 2021 adjusted income from continuing operations to $3.30 to $3.50 per diluted share, up from $3.00 to $3.25 previously.
This includes additional investments in client-facing technology and workforce management.
We're also increasing our outlook for adjusted EBITDA margin to a range of 7% to 7.3% from 6.6% to 7% previously.
We also ended the first half with robust new sales of $727 million, including $100 million associated with our EnhancedClean offerings, another first half record.
This supports our confidence in the Company's organic second half performance.
Additionally, we continue to explore acquisition opportunities where, as a strategic buyer, we would be able to drive meaningful revenue and operating synergies.
Over the past year, we have made tremendous operational progress and have proven our value as an essential partner to our clients during these dynamic and challenging times.
I've never been more inspired by our purpose, our team and our organization.
As we emerge from this difficult period, I am so pleased with our performance and are more confident than ever in our future potential.
Second quarter revenue was $1.5 billion, up 0.1% from last year.
As Scott mentioned, revenue in four of our segments grew on a year-over-year basis, offsetting the continued pandemic-related softness we've experienced in the Aviation segment.
Key revenue growth drivers in the quarter included higher disinfection related work orders and continued strong demand for our EnhancedClean services.
On a GAAP basis, income from continuing operations was $31.1 million or $0.46 per diluted share.
By comparison, in last year's second quarter, we reported GAAP income from continuing operations of negative $136.8 million or negative $2.05 per diluted share.
As Scott mentioned, GAAP income from continuing operations in this year's second quarter includes a non-cash $30 million reserve for an ongoing litigation equivalent to $0.32 per diluted share.
This non-cash reserve relates to litigation dating back 15 years, primarily relating to a legacy timekeeping system that was phased out in full by 2013.
You will find additional information in our Form 10-Q, which will be filed later today.
The recorded reserve is based on a host of factors, considerations and judgments and the ultimate resolution of this matter could be significantly different.
As this litigation remains ongoing, we are unable to disclose further information at this time.
As a reminder, last year's GAAP loss included a $2.55 per share impairment charge.
Excluding these charges, our adjusted income from continuing operations in the second quarter of fiscal 2021 was $55.5 million, or $0.82 per diluted share compared to $40.4 million or $0.60 per diluted share in the second quarter of last year.
The increase in adjusted income from continuing operations was attributable to our strong operational performance, including growth in our higher margin services as well as efficient labor management and the recapture of bad debt.
In addition, we benefited from favorable business mix, particularly in our Technical Solutions segment where we executed on higher-margin projects.
Excluding items impacting comparability, corporate expense for the second quarter increased by $26.6 million year-over-year.
Approximately $10 million of the variation was due to increased stock-based compensation, with the remaining $16 million representing investments and other-related expenses.
Thus, information technology and other strategic investments spend in the first half of fiscal 2021 was $20 million, in line with our expectations.
Now, turning to our segment results.
Business & Industry revenue grew 1.4% year-over-year to $796.2 million, driven largely by strength in demand for higher-margin disinfection related work orders and EnhancedClean services.
As a result, operating profit in this segment increased 44.1% to $85.3 million.
Our Technology & Manufacturing segment continue to see upside from demand for COVID-19 related services.
Revenue here increased 5.4% year-over-year to $246.3 million, and operating profit margin improved to 10.9%, up from 8.4% last year.
We benefit from the recapture of roughly $2 million of bad debt in this year's second quarter.
But even adjusting for this, our profit margin still showed improvement.
The growth in revenue and margin was fueled by a higher level of work orders and new customer contract wins for our services.
Education revenue grew 7% year-over-year to $214.2 million, representing the strongest growth rate among our segments in the second quarter.
The acceleration in revenue growth primarily reflected the positive impact from the reopening of schools and other educational facilities in the second quarter and the shift toward more in-person learning.
Education operating profit totaled $13.6 million, representing a margin of 6.3%, slightly down year-over-year on an operating [Phonetic] basis as a result of labor challenges in our Southern U.S. operations.
Bad debt expense was roughly $1 million lower than last year, and this was a contributing factor to the operating profit improvement we experienced in this segment.
Although the specific labor costs I mentioned will not recur in the third quarter, we anticipate that the return of students to school on a full-time basis will lead to some reduction in labor efficiency within this segment in the second half.
Aviation revenue declined 19.7% in the second quarter to $148.3 million.
Although reduced global travel continues to weigh on this segment, revenue improved 3.6% on a sequential basis, marking the third consecutive quarter that Aviation segment revenue has improved sequentially.
With industry data points indicating a progressive recovery in global travel, we are optimistic that revenue in our Aviation segment will continue to improve over the second half of fiscal 2021.
Aviation operating profit was $5.8 million, representing a margin of 3.9%.
While our airline customers continue to request higher margin enhanced cleaning services such as electrostatic spraying, margin remain below normalized levels given reduced volumes.
As Scott mentioned, we are focused on securing more profitable overall business with airports and related facilities and have continued to de-emphasize our airline services work.
This strategic shift in our Aviation segment business mix had a positive revenue and margin impact on our second quarter results and should benefit future periods as well.
Technical Solutions revenue increased 2.6% year-over-year to $125.5 million.
Operating margin was 8.2% in the second quarter, up significantly from 5.3% in the first quarter of fiscal 2021 due to a favorable mix of higher-margin projects.
As client site access improves, we remain positive on the growth trajectory of the Technical Solutions segment.
Shifting now to our cash and liquidity.
We ended the second quarter with $435.7 million in cash and cash equivalents compared to $394.2 million at the end of fiscal 2020.
With total debt of $797.9 million as of April 30th, 2021, our total debt to pro forma adjusted EBITDA, including standby letters of credit, was 1.7 times for the second quarter of fiscal 2021.
Second quarter operating cash flow from continuing operations was $125.9 million, down from $162.3 million in the same period last year.
The decline in cash flow from continuing operations during the second quarter was primarily due to the timing of cash taxes.
For the six month period ending April 30th, 2021, operating cash flow from continuing operations totaled $171.2 million.
Free cash flow from continuing operations was $117 million in the second quarter of fiscal 2021 and $156 million for this year's first half.
As a reminder, cash flow is benefiting from payroll tax deferral related to the CARES Act.
Beginning next year, the deferral will be paid at $66 million in each of the next two years.
We were pleased to pay our 220th consecutive quarterly dividend of $0.19 per common share during the second quarter, returning an additional $12.7 million to our shareholders.
Our Board also declared our 221st consecutive quarterly dividend, which will be payable in August to shareholders of record on July 1st.
Supported by the strength of our balance sheet, we have the financial resources to support our capital allocation priority of adding additional growth by investing organically while pursuing potential acquisitions.
Now, I'll provide some additional color on our guidance and outlook.
As mentioned, our increased guidance for full year fiscal 2021 adjusted income from continuing operations is now a range of $3.30 to $3.50 per diluted share compared to $3.00 to $3.25 previously.
Our upward revised adjusted earnings forecast reflects the strength of our first half as well as our positive view for the second half.
As a reminder, our third quarter has one fewer day than last year, equivalent to about $6 million and reduced labor expense.
On a GAAP basis, we continue to expect earnings per share from continuing operations of $2.85 to $3.10, inclusive of the $0.32 litigation reserve in the second quarter.
We continue to expect a 30% tax rate for fiscal 2021, excluding discrete items such as the Work Opportunity Tax Credits and the tax impact of stock-based compensation awards.
As we noted in our first quarter conference call in March, our expectation was to achieve cash flow above our historical range of $175 million to $200 million for fiscal 2021.
Now having generated $171 million of operating cash flow in the first half alone, we are confident that we will achieve free cash flow for fiscal 2021 of $215 million to $240 million.
We are pleased with our positioning, as business across the country emerge from the pandemic and we look forward to helping our clients provide safe environment for their employees and customers.
And I am personally looking forward to meeting with each of you in person, hopefully as soon as later this year and to connecting with you virtually until then. | q2 adjusted earnings per share $0.82 from continuing operations.
q2 gaap earnings per share $0.46 from continuing operations.
raises fy adjusted earnings per share view to $3.30 to $3.50 from continuing operations.
q2 revenue $1.5 billion versus refinitiv ibes estimate of $1.48 billion.
co is maintaining its guidance for fy fiscal 2021 gaap income from continuing operations. | 1 |
I'm pleased to be here today with Granite President, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Lisa Curtis.
We begin today with an overview of the company's Safe Harbor language.
Actual results could differ materially from statements made today.
Certain non-GAAP measures may be discussed during today's call, and from time to time, by the company's executives.
These include but are not limited to adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss and adjusted earnings or loss per share.
Although it was a difficult decision, we concluded that it was in the best interest of the company, as well as our shareholders to move forward.
Following court approval, we will be able to put this litigation behind us and focus on our business and people.
Granite portion of the settlement is insurance is $66 million and we expect it to be paid from existing cash on hand.
As Lisa will explain in further detail later in the call, despite this event, our liquidity and cash position remains strong.
As I've discussed in previous calls, our core values guide us in our day-to-day operations and are serving as the foundation of our cultural reinvigoration.
On the last call, I provided an overview of our sustainability core value and the efforts that are under way to drive sustainability forward at Granite.
Today, I will touch on two more of our core values; safety and inclusion, and how we are integrating them into our day-to-day operations to drive desired behaviors.
Granite's choice to continue to include safety as a core value is embedded in our culture and reflects our belief that the safety and well-being of our people, our partners and the public is our greatest responsibility.
Every level of our organization supports our safety culture with training, planning and engagement.
We approach every task with safety built into the process, and we do not sacrifice anyone safety to get the job done.
While safety is front of mind every day at Granite, it is particularly timely to talk about our safety commitment on the heels of safety week, which is just concluding today.
Safety week is an industry wide national event, and Granite was one of the founding members almost a decade ago.
Across the country on Granite projects and in our offices, we conduct daily activities to reinforce and strengthen our commitment to safety.
This week, I had the opportunity to visit Granite project teams and take part in safety meetings across the country.
The planning and attention to detail that our teams presented in these safety meetings are impressive and demonstrate our focus on safety.
Inclusion is a core value that was added this year, but it's been an important focus since 2019.
Since it's a new core value, we want to provide additional details as to why we chose to recognize the importance of inclusion.
Inclusion is how we build value in our company by welcoming contributions from all of our employees.
Our differences enhance creativity and innovation to create a high performance culture and have a positive impact on how we achieve our business goals and objectives.
At Granite, when we know the value of inclusion, we value and respect the workforce diverse and perspective, experience, knowledge and culture, and we are committed to an inclusive environment in which everyone feels a sense of belonging and can grow.
To live this value, we must understand a couple of things.
First, we know that diversity is the mix of our employees, our clients and our community and inclusion is how we make that makes work.
We have made significant progress in our inclusive diversity journey, starting with our employee resource groups, Granite Resources and Opportunities for Women or GROW, and supporting and recognizing the veteran community for service.
GROW advocates for and supports women who're mentoring, networking in career development, service supports and recognize employees that have served, and friends and family members employees that have served, and all branches of the military.
We have also established executive inclusive diversity and multicultural councils, conducting leadership training and establishing relationships with historically black colleges and universities.
In 2020, we had over 200 interns, and more than half were diverse.
In addition, 1/3 of our executive team and nearly half of our Board of Directors are diverse.
Looking forward, we will continue to create clarity around inclusive diversity by having dialogue concerning how we can be more inclusive.
We will continue to develop talent and strengthen our talent pipeline at all levels, with a focus on women and people of color.
And we will continue to build capability to training leaders and employees to challenge ourselves to be more inclusive.
We know that having an inclusive environment doesn't happen overnight, it happens over time.
I'm proud of our inclusion efforts and I'm excited about the culture we are creating here at Granite.
Let's switch gears and talk about our business segments starting with transportation.
The first quarter is typically our slowest quarter with cold and wet weather regularly hampering work in many of our markets.
Even with the challenges of weather, I am pleased with the performance of the segment, not only on the top line, but also at the gross profit level due to good execution across our operating groups.
Some good news to share.
We continue to burn through the backlog of Heavy Civil Operating Group Old Risk portfolio with a minimal impact to gross profit during the quarter.
This was a marked improvement over the last two years.
The remainder of the segment, which is primarily comprised of vertically integrated projects also completed a solid first quarter, setting the stage for a busy remainder of the year.
The bidding environment is strong with robust opportunities in our markets, resulting in an increase in our bid volume year-over-year.
While we routinely share information about our larger project wins, we also continue to have success in winning the smaller to medium sized projects that are the foundation of our portfolio.
The first quarter of the year is historically a very competitive bid environment with contractors more aggressively bidding to build backlog early in the year.
We have seen this dynamic in the first quarter of 2021.
We've increased bid volume and strong competition.
As anticipated, transportation committed and awarded projects or CAP, decreased year-over-year with the shift in the portfolio as Heavy Civil Operating Group cap is burned and replaced with cap from our vertically integrated businesses, including best value procurement work.
The extension of the FAST Act, the $13.6 billion infusion to the Highway Trust Fund for 2021 and the enactment of Coronavirus relief bills have combined to provide direct and indirect support for transportation funding.
Funding is positive across our markets and we are hopeful that a federal infrastructure bill will be signed into law this year.
Turning to the water segment.
In the first quarter, we continue to see a recovery from the pandemic, but the deep freeze in Texas during the quarter interrupted the supply chain, resulting in a spike in resin costs.
Resin is a product used in our torrentuous, secured [Phonetic] in place pipe rehabilitation business Granite Inliner.
Although this segment was hardest hit by the pandemic, we are seeing an increase in bid opportunities, positive indication for the remainder of the year.
As a result, water segment cap remains strong as of the end of the first quarter at $339 million.
This figure does not include the recently awarded Leon Hurse Dam project in Texas for approximately $160 million, which will be included in our second quarter cap.
This award is a component of the overall Lake Ralph Hall project, which will be one to Texas newest lakes and one of the state's biggest water projects in the last 30 years.
Granite has a long history of working on complex dam projects and we are proud to continue this work on the Leon Hurse Dam.
All levels of the government recognize the critical need to repair and support water infrastructure across the country, as seen in the ongoing discussion with the federal infrastructure bill and the Senate recently passed $35 billion water infrastructure bill.
We have been successful in winning water infrastructure projects and there are multiple opportunities in the water market that Granite is currently pursuing.
We believe we are well positioned to continue to procure work in this area.
Moving on to the specialty segment.
Our team has turned in a solid quarter and ended with a record cap of over $1 billion.
In the first quarter, we added to cap a significant new $267 million tunnel project in Columbus, Ohio.
We are excited to continue our relationship with the City of Columbus, where we successfully completed a large tunnel project just a couple of years ago.
Additionally, operating groups continue to foster new relationships, as well as build upon existing relationships to expand our footprint with both public and private clients.
Recent project wins include several projects with a variety of mining clients in different geographies across our business; a project to establish a new rail yard in the Port of Stockton, California; and a federal project to expand a military facility in Guam.
Both the private and public markets within the diverse specialty segment continue to be strong, with investment driven by the overall positive economic outlook.
The segment is a growing area of our business and we look for that to continue in 2021 and beyond.
Moving on to the material segment.
The first quarter results were terrific in our seasonally slowest quarter.
We ended the quarter with significantly higher material orders compared to the prior year, which resulted in higher sales volumes in 2021 led by the California operating group.
As of the end of the quarter, materials orders continue to outpace the prior year with strong demand in both California and Northwest operating groups.
This demand is a positive indicator for the remainder of 2021; not only in the material segment, but also for our vertically integrated construction businesses.
As of the end of the first quarter, our consolidated cap is $4.5 billion, an increase during the quarter of over $170 million compared to year-end levels.
Cap in our Specialty and Water segments continues to grow as we pursue end market diversification.
The old risk portfolio, design build cap, continues to decline as our risk profile has transformed following our new project selection criteria.
And finally, our cap portfolio is more evenly distributed across operating group geographies.
As I mentioned on previous calls, we have been transforming our cap portfolio focused on reducing risk.
Our teams have made significant progress and continue to execute on our plan.
Starting with revenue and gross profit.
The first quarter delivered strong results on both measures.
First quarter consolidated revenue grew 5% year-over-year to $670 million with gross profit increasing 166% year-over-year to $63 million with a gross profit margin of just under 10%.
Within our transportation segment, revenue was up slightly year-over-year to $351 million, led by an increase from the California Operating Group, which offset a revenue decrease from the Heavy Civil Operating Group.
Transportation gross profit for the quarter increased 41% to $36 million, resulting in a gross profit margin of 10%.
The increase in gross profit was primarily due to a decrease in project losses from the Heavy Civil Operating Group Old Risk portfolio.
Losses from the Old Risk portfolio in the first quarter of 2021 under $1 million, compared to losses of $13 million in the first quarter of 2020.
The Old Risk portfolio, backlog decreased by nearly $100 million during the quarter, which is on pace to meet our estimated project burn of $425 million to $475 million during 2021 that I mentioned in our last call.
Our team's execution in the first quarter, serve to mitigate exposure in the old risk portfolio, and we are optimistic this will continue in the future.
In our water segment, first quarter revenue was down 2% year-over-year as the segment continued its recovery from the COVID-19 pandemic.
Water gross profit for the first quarter decreased to 8% to $9 million, resulting in a gross profit margin of 9%.
This decrease in gross profit was primarily due to temporarily higher resin costs and Granite Inliner associated with supply chain disruptions due to winter weather events in Texas.
Moving on to the Specialty segment.
First quarter revenue increased 17% year-over-year to $156 million.
Specialty gross profit increased 262% to $17 million with a gross profit margin of 11%.
As a reminder, there was a significant write down during the first quarter of 2020 related to a dispute on a tunneling project, which reduced gross profit in the prior year.
Finally, the Materials segment completed an exceptional first quarter with a revenue increase of 26% year-over-year to $63 million in 2021.
This increase was largely due to strong sales volumes in the West.
Materials gross profit increased to $2 million, resulting in a gross profit margin of just under 3% as compared to breakeven in the prior year.
This increase in the gross profit was also primarily related to higher volumes across the business.
Turning now to our non-GAAP financial metrics.
Adjusted EBITDA for the first quarter increased $35 million year-over-year to $17 million, resulting in an adjusted EBITDA margin of over 2% for the quarter.
The increase in adjusted EBITDA was driven in part by improvement in project execution, as we continue to burn through the Heavy Civil Operating Group Old Risk gross portfolio during the first quarter of 2021.
In addition, we also benefited from improvements in gross profit in the Specialty and Materials segments year-over-year.
Our first quarter resulted in an adjusted net loss of $5 million, which was a $27 million improvement from an adjusted net loss of $32 million in the prior year.
As a reminder, these non-GAAP financial metrics are adjusted to exclude other costs, which includes the impact of the legal settlement and legal and accounting fees, non-cash impairments of goodwill, transaction costs and amortization of debt discount.
Now turning to cash and liquidity.
We had another strong cash quarter with cash from operations of $38 million and a net increase in cash during the quarter of $17 million compared to year-end.
This was an outstanding result for the first quarter of the year.
We ended the first quarter with cash and marketable securities of over $464 million and our teams remain focused on working capital management.
Upon court approval and finalization of the securities litigation settlement, we expect to pay our portion from existing cash on hand.
While we anticipate seasonal cash trends to be consistent with prior year patterns, our 2021 cash projections for the remainder of the year remains solid.
With the completion of the first quarter, we are reiterating our guidance for the full fiscal year 2021.
There are opportunities within each of our markets and very active bid schedules across the company.
We believe we can capitalize on these opportunities to achieve low to mid-single digit revenue growth.
SG&A increased $2.5 million year-over-year to $76 million, which was 11.3% of revenue for the first quarter.
This increase was primarily attributable to a change in the fair market value of our non-qualified deferred compensation plan liability of $5 million year-over-year.
This increase is offset by corresponding investment gains and other income and expense, net.
For the full year, our guidance is unchanged with an expected SG&A expense of 8.5% to 9% of revenue.
During the first quarter, we had solid execution across all groups and segments.
We expect this execution will allow us to achieve an adjusted EBITDA margin range of 5.5% to 7.5%.
Let me close with the following points.
In what is typically a seasonally tough quarter, we are pleased with our first quarter performance across the company.
Our teams have done a great job maintaining focus on execution, particularly in the oil risk portfolio.
We believe the Securities litigation settlement is in the best interest of the company-hander shareholders.
This will allow us to focus on execution in 2021 as we work to refresh our longer-term strategic plan.
Across our markets, we are seeing a healthy bidding environment, but we have opportunities to continue the transformation of our portfolio and build quality cap.
Finally, we are optimistic about the funding environment.
The economy appears to be strong with continued investment from the private market and public funding environment.
The public funding environment has been supported by direct and indirect infrastructure legislation from several different measures and we remain hopeful the enactment of a federal infrastructure bill will occur this year and will serve to further strengthen the environment in 2021 to 2022 and beyond. | company reaffirms our guidance for 2021. | 1 |
They involve risks and uncertainty, and actual results may differ materially.
Our comments also include non-GAAP measures.
On a US GAAP basis, for the fourth quarter of 2020, NOV reported revenues of $1.33 billion and a net loss of $347 million.
Later in the call, we will host a question-and-answer session.
Please limit yourself to one question and one follow-up to permit more participation.
The fourth quarter of 2020 was an extraordinarily difficult quarter for NOV.
And unfortunately, we expect to continue to struggle through the next quarter too until the world gets past the wreckage of COVID.
Consolidated revenue declined 4% sequentially and EBITDA fell to $17 million to 1.3% of sales in the fourth quarter.
This performance was particularly disappointing in view of the massive cost-out efforts the Company enacted last year, indeed, throughout the last six years.
The COVID lockdowns we faced off and on throughout 2020 continued to hinder our operations and those of our customers.
Against weak demand for services, low and falling day rates and significantly reduced cash flows, our oilfield service customers have deferred maintenance, cannibalized equipment and drawn down stocks of consumables.
Against weak and uncertain commodity prices, OPEC+ production cuts and lower cash flows, our E&P customers have cut rigs and slow rolled project approvals.
The offshore rig count was down 37% from the fourth quarter of 2019 and the international rig count was down 40% year-over-year.
Although North America drilling has been improving since bottoming in August, it is still down 58% compared to the prior year which, by the way, wasn't exactly a robust oil and gas market either.
This continues to be a historically bad downturn in an industry that has a lot of experience weathering very, very tough times.
Against this backdrop, our equipment orders have been scarce.
While we were pleased to see Rig Technologies' reported book to bill above 1 in the fourth quarter, that is the only book to bill NOV saw above 100% throughout 2020.
Outside of North America, momentum slowed through the fourth quarter with additional COVID lockdowns, continued project approval delays by customers and slowing activity in places like Russia, the Middle East and offshore.
All three of our segments saw the majority of their revenue come from markets outside North America: 59% for Wellbore Technologies, 67% for Completion & Production Solutions, and 90% for Rig Technologies.
All three rely on capital and consumable sales which, to varying degrees, tend to be later cycle businesses.
While Wellbore Technologies tends to be a little more closely tied to real-time rig activity than the other two, it also relies on later cycle capital sales of drilling motors, fishing tools, MWD equipment, solids control equipment and other tools that are subject to destocking and restocking dynamics.
Drill pipe is a capital investment by drilling contractors, and drill pipe sales by the Wellbore Technologies segment fell sharply in the fourth quarter at very high leverage.
Our team continues to fight passionately and tirelessly to improve performance.
We continue to cut costs.
I'm proud that NOV was able to take out $700 million in fixed costs during 2020, but our poor fourth quarter results tell us that we must do more.
As we enter 2021, we've identified another $75 million in annual cost reductions that we are executing on right now, and we expect the target to grow as we progress through the year.
We continue to focus on cash flow.
Fourth quarter cash flow from operations was $186 million and free cash flow was $133 million.
For the year, NOV generated cash flow from operations of $926 million and reduced our net debt by almost $700 million.
We completed the year with a very strong balance sheet, only $142 million in net debt, with our next major maturity not due until late 2009.
Most importantly, we continued to invest in technology.
Last quarter, I spoke to you about our organic R&D efforts, which are increasing operational efficiency, improving safety and reducing the environmental impact of our customers' oil and gas operations.
We will be testing our Max digital platform with three E&P customers throughout 2021, all of whom are excited about its potential to drive improvements in their workflows.
We will be testing our new low-cost rig floor robotics offering at our research rig later this quarter.
We hope to have a commercial product available by year-end.
Our new Ideal eFrac offering will be tested this quarter by a leading North American pressure pumper with one of their customers.
They are seeing significant E&P interest in this technology's ability to reduce both costs and emissions.
These are just three of dozens of new product and technology initiatives NOV has under way to support the critical work that our oil and gas customers do.
We remain committed to developing and delivering solutions that provide the world with abundant reliable safe energy, the oil and gas, that powers the world's global food supply chain, that powers 100% of its air travel and that helps lift humanity out of poverty.
NOV is proud to support this critical industry as we've done 159 years.
Like you, though, we see powerful social, political and economic momentum driving the growth of renewable energy, which will one day enable the world to transition to a net zero carbon future.
I believe that this is perhaps the greatest economic opportunity of this century.
Capitalism will lead to the innovation required to reveal the most efficient solutions, and NOV intends to play a role.
We want to show you how we're thinking about NOV's future in a world that is growing new sources of low carbon energy.
First, we are experts in building large complex machinery with extreme precision that operates in harsh environments, and we do this at scale and remote parts of the world.
NOV employs bright, dedicated and imaginative [Phonetic] scientists and engineers who are conversant in material sciences, metallurgy, power systems, robotics and a host of other fields.
In short, we have a fantastic team with whom to prosecute the business opportunities that are emerging.
So, I asked a few to do that.
A few years ago, some of our best and brightest began to explore the renewables landscape to find opportunities where NOV can make money.
That team has been steadily growing since, and I'm pleased with the ideas they are generating and the products that they are developing.
First of all, let me offer some perspectives on the opportunities.
Most renewables technologies are not new.
You may be surprised to learn that robust serious technical economic discussions about transitioning to new forms of energy actually began more than 40 years ago, following the Iranian hostage crisis and the second big oil shock of the 1970s.
The economic vulnerability of the West during the Cold War, exposed by the 10-fold increase in oil price throughout the 1970s, led to some serious hand wringing about diversifying away from oil, particularly foreign imports.
Strikingly, the list of potential green energy sources from that era is essentially unchanged from today's list of candidates: wind, solar, geothermal, biomass, hydrogen and fusion.
In the past, for decades, all have seen their respective technologies progress incrementally and some have seen significant industrialization.
So why then haven't we transitioned to something different yet?
The reason is that all are at best imperfect substitutes for the status quo, at least for now, in all categories except greenhouse gas emissions.
Solar and wind face intermittency challenges, land use issues and not in my backyard political opposition.
Hydrogen faces storage and transportation challenges from metallurgical hydrogen embrittlement.
Biomass faces land use and efficiency challenges.
Fusion continues to face technical challenges.
And geothermal really only works in geologic hotspots with shallow magma.
All face infrastructure hurdles.
I bring these up only because we looked at these challenges and we see opportunities to develop solutions and thus competitive advantage.
Our approach to renewables is to look at customer pain points like these and solve them.
This is the framework that we are using to think about renewables opportunity.
NOV can solve bottlenecks, reduce project capital investment, improve uptime, reduce O&M costs, enable customers to access better resources, and NOV can foster the unrestrained embrace of renewables by free capitalists [Phonetic] thereby positioning itself to profit from this remarkable business opportunity in facilitating the global transition.
Our most advanced business opportunities lie in solutions that improve the economics of wind power generation.
In a few moments, I'll take you through our portfolio in this area.
Before I do, though, I want to note that we are pursuing other areas where we see potential to add value as well, including solar, carbon capture, geothermal, biomass and hydrogen.
Most of these are very early stage and years away from contributing meaningfully to our financial results, but I'm nonetheless optimistic about the potential contributions that they may one day make.
I'll add too that these have been almost entirely organic thus far, built through existing business and infrastructure that make up our core oil and gas equipment business today.
It's too early to tell which technologies will predominate and some will fail.
So we are engaging across several in a diversified portfolio approach.
Most importantly, we are doing this to make money.
Returns on capital are derived from competitive advantage.
Therefore, our efforts are focused on creating competitive advantage in this space by cultivating renewable ideas with high growth potential that can be funded from our traditional oil and gas business, where we will also continue to press better products, services and technologies.
That's the long-term plan.
So, back to NOV's wind business.
Today, our presence in the wind value chain, which stems from our roots in industrial lifting, marine vessel design and construction, is significant and growing.
At ground level, the wind is impeded by topography and vegetation.
At higher altitudes, wind tends to be more stable, more powerful and more consistent, a better quality resource that improves at higher and higher altitudes.
Taller towers access this better resource, as well as provide more space for largest area swept by the blades.
Swept area is proportional to accessible energy and it grows exponentially with blade length, increasing torque applied to the generator and the hub, which also must grow larger to facilitate the additional power production.
Therefore, taller towers, longer blades, larger turbines and bigger generators deliver significantly better economics to wind farm owners overall, at least to a point.
So not surprisingly, tower hub heights has steadily increased and contributed to the competitiveness of wind on a levelized cost and energy basis.
Taller towers are also expanding the geographic regions where wind power works beyond the so-called wind belt of the Great Plains in the United States, for instance.
More on that in a moment.
The constraint that wind farm developers begin to run into is the fact that towers become exponentially more expensive to construct and transport with height.
In 2019, NOV invested in Keystone Tower Systems, a start-up that has developed a patented tapered spiral welding process that enables the automated production of wind tower sections, which can significantly decrease production times and reduce cost by 50% or more.
Additionally, the technology has the potential to be deployed for infield manufacturing operations, effectively eliminating many of the severe logistical limitations of transporting larger diameter tower sections over the road.
Keystone is currently completing construction of its first commercial line within NOV's Pampa, Texas facility and has an order for 100 tower sections from a major wind turbine manufacturer.
Upon completion, it will have the capacity to deliver hundreds of towers annually.
Another challenge of the taller towers trend is developing cost-effective safe methods of tower erection.
Current predominant construction methods using crawler cranes are quickly reaching their limits for safe and efficient use as wind towers increase in height and weight.
NOV's system concept, which is built upon the intellectual property control systems and experience developed during the design of mobile desert and Arctic drilling rigs, utilizes a tower crane in conjunction with a unique mobility system to provide superior lifting characteristics to -- at taller heights to significantly improve the safety, reliability efficiency of tall wind tower installation techniques.
Such methods are expected to also help reduce the ongoing operating and maintenance costs associated with these assets over their 20-plus year lives, further improving project economics for wind farm operators.
The US wind belt runs from North Dakota, south to West Texas and is defined by the region of the country where the wind resource blows hardest and steadiest, allowing turbines to achieve the highest levels of utilization and electricity output.
But this picture changes as towers grow taller and the region of economically viable wind resource grows.
It is conceivable to us that the wind belt area could double or triple as NOV and Keystone technologies enable towers to grow taller, economically and consequently enable power production closer to prime power consumption markets, thereby lowering transmission costs and total capital investment.
Frankly, we are excited about the growth potential here.
However, all onshore wind farms require a lot of land and sometimes make their neighbors unhappy by spoiling the view, which leads us to offshore wind.
Generally, offshore wind has several advantages over land: higher capacity factors due to generally steadier wind regimes, the ability to use larger turbines without facing the limitations of over-the-road transportation and an abundance of locations with less not in my backyard political opposition.
This has led the Global Wind Energy Council to forecast 26% compound annual growth rate for the offshore wind space through this decade.
Considering nearly 40% of the world's population, 2.5 billion people, live and consume power within 60 miles of the coast, this makes sense.
However, similar to offshore oil and gas, offshore wind developments also carry increased complexity, higher execution risk and incremental costs that can challenge project economics.
Again, we view these challenges as opportunities to draw upon NOV's unique offshore expertise and provide value to a burgeoning customer base.
NOV has long been a leader in offshore wind construction vessels, on which we can sell as much as $80 million of equipment.
In fact, the majority of the world's 30 gigawatts of installed offshore power generation capacity was put in place with NOV-designed vessels and NOV-supplied equipment.
We are presently executing on the construction or upgrade of a half dozen wind turbine installation vessels and expect demand to continue due to the growing height of offshore towers for the same reasons that I explained moments ago.
NOV's proprietary telescoping cranes, jacking systems and deck equipment are all contributing to lower installation costs and better economics for offshore wind farm developers.
We landed a contract for the first Jones Act-compliant vessel in the fourth quarter.
And we have several conversations under way with offshore construction firms for additional capacity globally.
By year-end, I expect that our business in this area will have doubled to more than $200 million annually, and further growth prospects are excellent as the 9.6 gigawatts of offshore wind capacity to be installed in 2021 is forecast to more than double by 2025 to more than 21 gigawatts.
In order to meet these projections, the world will need to build two to three dozen more installation vessels, capable of installing the new leading-edge 12-megawatt to 15-megawatt towers with 500-foot hub heights over the next decade or so, according to forecast from Clarksons.
NOV is also pursuing opportunities in the floating offshore wind space, which will require the cranes, winches, mooring systems, cable-laid ballasting systems, chain connections and tensioners that we design and provide.
NOV has developed a patent-pending tri-floater semi-submersible floating wind foundation, designed to require less steel than competing offerings that should allow for full quayside construction in turbine installation.
We are engaged in a paid design study now utilizing this proprietary floating wind design for a customer in Asia.
With revenue potential north of $25 million per vessel and dozens of vessels required to develop a single gigawatt project, NOV's total addressable market in this area is potentially in the billions.
So, to summarize our wind initiatives, NOV is positioning itself as a value-added partner, capable of meaningfully reducing project execution risk and overall capital costs.
We have a large and growing base of installed capacity in the fixed offshore wind installation vessel market, which we expect to exceed $200 million annually in revenue for us by year-end, along with an ongoing aftermarket opportunity.
Our Keystone team secured an order for 100 towers based on its proprietary technology that we are constructing in our plant in Texas.
And NOV's proprietary floating wind technology is under consideration by multiple prospective customers globally, potentially opening up a massive new market in countries lacking expansive shallow waters available for wind development.
Suffice to say, I'm very optimistic about the opportunity set in the wind area.
Returning to our traditional oil and gas business, despite the near-term challenges we face, I'm growing more optimistic about 2021.
As COVID-19 vaccines proliferate, I expect lockdowns and economic disruptions to subside and a more normalized level of demand for oil and gas to return.
Only then will we realize the true impact of the massive dismantlement that the petroleum industry has undergone: the lack of major project FIDs, the diminishment of quick-turn shale productive capacity, increased governmental restrictions on shale development, the lack of offshore exploration, the evaporation of capital for a highly capital-intensive industry, the effect of massive amounts of stimulus and explosive growth in money supplies on commodity prices.
I don't recall a time in my professional career that saw more bullish fundamentals.
It will be interesting, despite our most noble, aggressive, aspirational energy transition scenarios, petroleum remains critical to our way of life, from air travel to feeding mankind.
The oil and gas industry will be called upon again to grow.
So, there is light at the end of the COVID tunnel.
The positive financial results reported by some of our larger customers this quarter serve as an early positive signal that conditions should improve over the course of the year for our later cycle oil and gas businesses.
We expect the back half of 2021 to begin to see improved demand and activity for NOV, which may well begin to grow just a little more frantic in 2022 and beyond.
In the meantime, NOV remains committed to supporting our customer base around the world wherever and whenever it needs us.
Our recent product introductions are evidence of that commitment.
To NOV employees that may be listening, please note that the dual challenges of supporting our oil and gas customers while advancing new and creative solutions to provide lower carbon sources of energy will continue to demand your very best.
I am proud and grateful that you've never given anything less.
Jose, Blake and I look forward to scaling new heights and new opportunities with you.
NOV's consolidated revenue fell $57 million or 4% sequentially to $1.33 billion during the fourth quarter of 2020.
Our shorter cycle businesses capitalized on improving drilling activity levels in the US to drive 4% revenue growth in North America, despite very light demand for capital equipment sales.
International revenue declined 7%, reflecting the different trajectories of rig activity between the eastern and western hemispheres during the quarter.
EBITDA for the fourth quarter was $17 million, or 1.3% of sales.
Elevated decremental margins were the result of a less favorable product mix; customer order deferrals, which compounded manufacturing absorption challenges; and higher expenses associated with pension accounting, environmental accruals and workmen's compensation.
While we exceeded our $700 million cost-out initiative target in the third quarter of 2020, our efforts to right-size and improve the efficiencies of the organization continued during the fourth quarter.
As Clay mentioned, we've identified and are executing on $75 million in additional cost savings initiatives that we expect to complete by year-end 2021, and we expect our target will grow.
During the fourth quarter, we generated $186 million in cash flow from operations and $133 million in free cash flow.
We ended the year with approximately $1.69 billion in cash and $1.83 billion in gross debt, resulting in a net debt balance of only $142 million, down $676 million year-over-year.
For the full year, cash flow from operations was $926 million and free cash flow totaled $700 million.
The organization's focus on reducing costs, improving capital efficiency and optimizing cash flow allowed us to reduce net debt by 83% during 2020, further improving what was already a rock-solid balance sheet.
For 2021, we expect to report capital expenditures of approximately $215 million with $82 million of that amount related to completing our rig manufacturing facility in Saudi Arabia.
Factoring in the 30% that will be funded by our JV partner, net capex will total $190 million.
Our Wellbore Technologies segment generated revenue of $373 million in the fourth quarter, an increase of $12 million or 3% sequentially.
Despite the top line growth, EBITDA fell to $12 million or 3.2% of sales, primarily due to an unfavorable shift in product mix and COVID-19-induced shipping cost overruns and delays.
As Clay highlighted, offerings from this segment are more short cycle than our other more capital equipment-oriented segments, but it is still a product business that is affected by the ongoing destocking of customer inventories.
Nevertheless, we believe Wellbore Technologies hit a cyclical low during the third quarter of 2020, and we expect steady improvement for the segment as 2021 progresses.
Our Grant Prideco drill pipe business realized a 24% sequential decline in revenue with very high decremental margins.
Lower volumes, a significant decrease in proportion of higher-margin large-diameter pipe and extra costs associated with shipping delays in Asia more than offset the unit's cost reduction efforts, which included reducing its workforce by approximately 25% during the first week of the quarter.
Orders improved 84% off the all-time low level realized in the third quarter but were less than half the level achieved in Q4 of 2019.
While orders remain light, slightly higher volumes and a more favorable product mix should drive improved results during the first quarter,.
Our Tuboscope pipe coating and inspection business realized a 7% sequential improvement in revenue, led by a 28% increase in our activity from the OCTG market.
The revenue growth was partially offset by declines in higher-margin drill pipe coating and Thru-Kote sleeve sales, resulting in a decrease in EBITDA.
We expect higher volumes from improving backlogs and cost controls to drive improved performance from Tuboscope in the first quarter.
Our downhole tools business saw a 5% sequential increase in revenue, driven by the improving North American rig count, which was partially offset by lower activity in the eastern hemisphere.
The business realized strong incremental margins from improved absorption and increasing adoption of our proprietary technologies that meaningfully improve operational efficiencies and lower costs for our customers.
During the fourth quarter, we saw a significant increase in the number of runs completed by our SelectShift downhole adjustable motor, which now incorporates our latest ERT power section, allowing for up to 1,000 horsepower to be delivered to the drill bit, further enhancing the motor's ability to drill single run horizontal wells.
We're also seeing greater customer adoption of our Agitator friction reduction tools in the international markets and in operations using rotary steerable systems.
A major national oil company in the Middle East recently completed a 12.25 inch directional section using our Agitator tool, resulting in a 38% improvement in the rate of penetration relative to nearby offsets.
Also, a US operator made our Agitator a standard component in their rotary steerable bottom hole assemblies after recognizing the clear performance improvements in curve and lateral sections within their wells in the Haynesville Shale.
Our ReedHycalog drill bit business posted a modest sequential improvement in results with strong growth in North America that was partially offset by declines in international markets.
While the international rig count continued to search for bottom during the fourth quarter and projects continued to push to the right, recent customer dialog has us more optimistic that tenders will advance during the first quarter, creating better prospects for our international operations as we advance through 2021.
Our Wellsite Services business generated 17% sequential growth in revenue during the fourth quarter on the meaningful improvement of drilling activity levels across the western hemisphere.
EBITDA flow-through was limited by declines in higher-margin work in the Middle East and offshore markets; price competition; and COVID-19-related logistical and supply chain challenges, which impacted personnel movement and deliveries of capital equipment.
Despite these headwinds, we're seeing international tenders advance and increasing absorption of excess industry capacity, which we expect will drive improving market conditions in the second half of 2021.
Lastly, our M/D Totco business realized high-teens revenue growth during the fourth quarter due to improving demand for the business unit's rig instrumentation and data acquisition systems and increasing adoption of M/D Totco's KAIZEN artificial intelligence drilling optimization application and eVolve closed-loop automated drilling systems.
Based on dialog with our customers, we expect the pace of North American activity growth to moderate in the first quarter, then level off around mid-year.
Activity in eastern hemisphere should stabilize but remain sluggish through the first half of the year, as operators finalize budgets and work to complete project tenders, which will set the stage for improved international activity in the second half.
For the first quarter of 2021, we expect revenue in our Wellbore Technologies segment will increase in the upper single-digit percentage range.
We also expect an improved mix in product sales and cost controls to result in EBITDA margins expanding approximately 200 basis points to 400 basis points.
Our Completion & Production Solutions segment generated $546 million in revenue during the fourth quarter, a decrease of $55 million or 9% sequentially.
On our last call, we mentioned that then-current customer conversations and early Q4 bookings gave us confidence that orders would likely improve from the low levels witnessed in the third quarter.
While orders did improve 27% sequentially to $15 million, the resurgence of COVID-19 through the quarter reduced customer conviction, slowed order intake and led to the segment's fourth straight quarter with a book to bill below 1.
Further deterioration of the segment's backlog created additional absorption challenges and a less favorable product mix, resulting in an EBITDA that declined $35 million to $28 million or 5.1% of sales.
While we expect order intake to remain sluggish in the early part of 2021, customer conversations have resumed with improved pace and tone, giving us optimism for a much improved order outlook starting mid-2021.
Our subsea flexible pipe business saw revenue decline of 11% sequentially with high decremental margins.
Low utilization levels across the industry's manufacturing capacity have resulted in absorption challenges and pricing pressure.
While we expect orders to remain light in the first quarter, we believe a number of significant project FIDs will move forward in the first half of 2021, creating opportunities for sizable bookings in the second half of the year.
Our Process and Flow Technologies business experienced a 4% sequential revenue decline, primarily due to deterioration in the backlog of our APL turret loading offerings, which is facing similar challenges to what I just described in our subsea business.
Our more land-oriented production and midstream operation saw small improvements in demand off of very low levels in North America, Argentina and the Middle East.
While demand for our production and midstream offerings appears to have bottomed in Q3, some customers continue to work through excess stocks of inventory, which should run its course in the first half of 2021 and lead to a more constructive operating environment in the second half of the year.
Or fiberglass systems business saw revenue decline approximately 19% sequentially due to customers that continue to defer deliveries for offshore scrubbers and limited demand from midstream infrastructure, which has depleted our backlog for large diameter, high pressure pipe.
The unit realized outsized EBITDA decrementals due in part to ongoing COVID-19-related disruptions in the Southeast Asia and an increase in epoxy and glass prices from suppliers who were extracting better economics before agreeing to reopen plants that were shuttered in the early phase of the pandemic.
We expect oilfield orders in North America to remain limited for much of 2021 but see projects in the Middle East that should advanced by mid-year, and we continue to see growing demand for our fuel handling offerings.
As a result, we expect our fiberglass business will bottom in the first quarter and realize stronger demand in the second half of 2021.
Or Intervention and Stimulation Equipment business realized a 9% sequential decline in the four quarter.
An increase in deliveries of coiled tubing equipment in international markets was more than offset by limited demand for completion equipment in North America.
While we anticipate that demand for new-build completions equipment in North America will remain limited over the next several quarters, we're beginning to see green shoots in our aftermarket-related offerings.
In Q4, we realized our second quarter in a row of improving demand for replacement coiled tubing strings, and we are engaging in a steadily increasing number of conversations with customers looking to refurbish or upgrade pressure pumping equipment from Tier 2 to Tier 4 motors with dual fuel capabilities.
We recently received an order from a customer to refurbish 35 pressure pumping units.
Additionally, as Clay mentioned, we are seeing growing interest in our recently introduced Ideal eFrac fleet and for our FracMaxx articulating flowline and quick latch systems, which increase efficiencies and reduce costs of pressure pumping operations.
Lastly, we remain encouraged by the future potential demand for our completion equipment in international markets as the use of multi-stage stimulation services continues to grow outside North America.
For the first quarter of 2021, we anticipate revenue from our Completion & Production Solutions segment will decline 6% to 10% sequentially with decremental margins in the mid-30% range.
Our Rig Technologies segment generated revenues of $437 million in the fourth quarter, a decrease of $12 million or 3% sequentially.
Revenue from capital equipment sales declined 7%, partially offset by an increase in aftermarket services.
EBITDA declined to $19 million or 4.3% of sales.
Outsized decremental margins were the result of a less favorable sales mix from both capital equipment and aftermarket operations where sales of higher-margin spare parts declined and revenues from lower-margin service work increased.
Additionally, the segment incurred extra expenses associated with the logistical challenges of moving 200 service technicians and associated equipment across numerous international borders during a second round of pandemic-related restrictions.
Orders for the segment increased $133 million sequentially off the all-time low realized in the third quarter to $190 million, yielding a book to bill of 105%.
Orders from the offshore wind market dominated the order book, which included an award for the design and jacking system for the first US-built Jones Act-compliant offshore wind turbine installation vessel and an order to upgrade existing -- an existing vessel to enable it to handle the heavier weights of the next generation of offshore wind turbines.
Additionally, subsequent to quarter-end, we received another order for the design, jacking system and cranes for a Europe-based wind turbine installation vessel.
As Clay highlighted, opportunity for our wind business is meaningful and the outlook is promising.
While orders for rig equipment remains sluggish and capital availability remains constrained among our drilling contractor customers, they're still eager to upgrade the capabilities of their fleets.
We continue to have discussions regarding new-build rigs with customers in the Middle East, Latin America and Asia.
And in Q4, we received an order from a customer in the Middle East for two 1,000 horsepower land rigs, fully equipped with automated pipe handling systems, NOVOS drilling automation and our Maestro Power Management system.
In North America, we do not see near-term opportunities for new-build rigs outside of niche applications.
However, we continue to have active dialog with customers regarding upgrades to both hardware and digital solutions.
We see strong interest in the rig floor robotics that we have under development, and we're seeing hold-outs that up until now have resisted upgrading to our NOVOS process automation platform come to us saying that their customers are demanding the capabilities that NOVOS provides.
Similarly in the offshore space, we do not expect many new-builds, but we continue to see an increasing rate of adoption for our digital subscription solutions, including the NOVOS platform, condition monitoring, remote support and automation lifecycle management.
More importantly, our offshore drilling contractor customers, several of whom are emerging from the restructuring process with cleaner balance sheets, are growing more optimistic that offshore activity is at or near a bottom.
And we're actively working with them to prepare for reactivations and upgrades.
While customer inquiries have increased since year-end and we are optimistic that offshore activity will improve in the second half of the year, for the first quarter of 2021, we expect results for Rig Technologies to be in line with the fourth quarter.
With that, we'll now open the call up to questions. | national oilwell varco q4 2020 revenues of $1.33 billion.
q4 2020 revenues of $1.33 billion, a decrease of four percent compared to q3 of 2020.
completion & production solutions generated revenues of $546 million in q4 of 2020.
qtrly new orders booked improved 27 percent sequentially to $215 million.
new rig technologies orders booked during quarter totaled $190 million.
as of december 31, 2020, company had total debt of $1.83 billion. | 1 |
They will be joined by Scott Oaksmith, Senior Vice President, Real Estate and Finance.
We appreciate you taking the time to join us.
I'm pleased to report that Choice Hotels continued to deliver strong RevPAR growth in the third quarter that once again significantly outperformed the industry.
We also continue to gain share across all segments in which we compete.
As a result of these performance trends, we expect to surpass 2019 RevPAR and adjusted EBITDA levels for full year 2021.
By continuing to implement our long-term strategy, we have positioned Choice Hotels to further benefit from post-pandemic trends that favor leisure travel, limited service hotels and longer stays.
Additionally, our business traveler demand has returned to levels similar to the third quarter of 2019.
The third quarter was exceptional, our strongest quarter of the year.
Our RevPAR increased 11.4% compared to the third quarter of 2019, surpassing our prior quarterly RevPAR guidance.
In fact, RevPAR has now exceeded 2019 levels for five consecutive months, with trends continuing into the fourth quarter.
For over 1.5 years, we've maintained significantly higher RevPAR index share gains against the competition compared to 2019.
We continued this trend in the third quarter, increasing RevPAR index versus our local competitors by nearly four percentage points as compared to 2019, reflecting continued growth in both weekday and weekend RevPAR index as reported by STR.
Choice's ability to continue to gain share even as the broader industry recovers, demonstrates that our strategic investments are paying off and gives us further confidence in our future revenue trajectory.
Because of our strategic investments, both before and during the pandemic, we are in a stronger position today to capitalize on outsized growth opportunities over the long term, which we expect will create value and drive our performance to new levels.
What's most impressive is that we continue to drive strong performance through both rate improvement and occupancy share gains.
Choice's average daily rate growth has been stronger than the industry in the third quarter due to our new revenue management tool and broader capabilities.
In addition, our robust merchandising strategy has allowed us to drive occupancy share gains versus our local competitors.
We continue to make major investments that are enhancing our owners' performance and contributing to our brand's outperformance.
Earlier this year, we launched our new revenue management capability designed to improve the ability of our franchise owners to effectively drive top line revenue.
This tool marks a step change improvement that we were able to put in the hands of our franchisees at a critical juncture in the recovery.
As the first mobile-enabled revenue management app, it allows our franchisees to more effectively manage their channels rates and inventory by adapting to local market trends in real time through repricing and competitive rate shopping multiple times during the day, and they can do this from virtually anywhere.
This enhanced capability has contributed to choice taking significant RevPAR index share specifically driving average daily rate index gains versus local competitors, and we expect this trend to continue.
The acceptance of rate recommendations by our franchisees has been significantly higher than our prior tool, demonstrating our owners' confidence in the solutions that we are providing.
This tool, combined with expert advice from our experienced revenue management consultants is helping our franchise owners to swiftly execute the right pricing strategy, which is particularly important in an inflationary environment.
At the same time, we continue to improve the unit economics for our franchisees, concentrating on investments like housekeeping upon request that lower their cost of ownership while driving continued performance improvements.
Recently, we deployed a new digital registration capability, which is integrated with our property management system.
This cost-effective cloud-based solution is designed to simplify the hotel registration process for front desk staff, save on labor, speed up check-in and improve our guests' overall experience.
Moreover, our recent brand investments are designed to appeal to the guest of tomorrow while providing a compelling return on investment for our franchisees.
Just a few weeks ago, we introduced a new Cambria hotel prototype option designed for secondary and leisure markets.
We're excited about the future growth opportunity for Cambria as we expect this prototype will allow developers the flexibility to build at a reduced cost, expanding the markets available for growth while retaining our design forward experience.
I will now provide a brief update on our key segments, where 11 out of our 12 brands achieved RevPAR index gains versus their local competitors in the third quarter as compared to 2019.
Our strategic investments in the extended-stay segment allowed us to quadruple the size of the portfolio over the past five years to reach 467 domestic units with a domestic pipeline of nearly 310 hotels.
This segment, a significant growth engine for the company, expanded by over 45 hotels in the third quarter year-over-year and now represents over 10% of our total domestic rooms.
In addition to strong unit growth, we've also driven impressive RevPAR growth across our extended stay brands.
Specifically, when compared to the third quarter of 2019, our extended-stay portfolio grew RevPAR a by over 18%, driven by occupancy levels of 82% and a 9% increase in average daily rate.
And outperformed the industry's RevPAR change by over 20 percentage points.
The WoodSpring Suites brand celebrated a key milestone with the recent opening of its 300th hotel.
The brand's pipeline expanded by over 20% year-over-year as of the end of September, reaching nearly 160 domestic hotels which further exemplifies developer demand for this brand, given its cycle resilience.
We expect that WoodSpring's robust pipeline will provide a strong platform for future growth of the brand.
Broadly speaking, we are pleased with the significant increase in developers' interest in extended stay projects.
In the third quarter, we executed two dozen extended-stay domestic franchise agreements, an 85% increase year-over-year and a 20% increase compared to 2019 levels.
In addition, the first hotel for our newest extended-stay brand, Everhome Suites is currently under construction and scheduled to open next summer, with nearly 20 additional projects already in the pipeline.
Our mid-scale brands, which represent over 2/3 of our total domestic room portfolio and approximately half of the total domestic pipeline continued to outperform the segment's RevPAR growth.
Our mid-scale and upper mid-scale portfolio grew RevPAR by nearly 10%, driven by average daily rate growth of over 9% and outpaced the industry's mid-scale and upper mid-scale segment growth by nearly seven percentage points when compared to third quarter 2019.
Our flagship brand, Comfort, recently celebrated the highest number of conversion hotel openings since 2014, while increasing new construction agreements threefold in the third quarter year-over-year.
The Comfort brand's domestic unit growth of over 2% and and RevPAR index outperformance versus local competitors demonstrate the attractiveness of this iconic brand to hotel developers and guests alike.
Our upscale portfolio achieved impressive growth in the third quarter year-over-year as we increased our domestic room count by nearly 22%, driven by both Cambria and the Ascend Hotel Collection.
The upscale portfolio also achieved a record for domestic openings in the first three quarters of the year.
The Cambria brand continued its positive momentum, growing by over 9% to 58 units year-over-year with 17 projects under active construction at the end of September, and five additional hotels planned to open this year.
In August, we celebrated the Cambria opening in the heart of one of the world's premier wine regions, Napa Valley.
Our upscale portfolio increased its RevPAR index relative to its local competitive set and outperformed the industry's RevPAR change by 15 percentage points while increasing the average daily rate by 11% when compared to the third quarter of 2019.
This progress shows the attractiveness of Choice Hotels value proposition in the upscale segment for current and prospective owners.
The strong performance across our entire brand portfolio confirms our focus on growing in our strategic segments which we believe will further fuel the long-term revenue intensity of our system.
Turning now to demand trends.
We continue to achieve gains in our weekday occupancy index share during the third quarter compared to 2019.
As discussed on our prior calls, we believe that these share gains are partially driven by long-term consumer trends, such as remote work and an increase in early retirements, which afford Americans flexibility as to when and where they travel for leisure.
In fact, we observed our guests extending their trips into shoulder days of the weekend, giving us further optimism about future travel trends following the historically busy summer travel season.
In addition, we continue to observe a greater share of revenue coming from longer stays as compared to 2019.
Similar to our broader occupancy share gains, these weekday demand gains were achieved through our merchandising capabilities and strategy with targeted promotions at the right time of the week, during the right time of the year and for the right customer.
The investments we've made have allowed us to capitalize on demand that historically propelled our core business while attracting and capturing an even larger share of leisure demand.
While our most loyal Choice Privileges members continue to spend more at our hotels during the third quarter, we were also successful in appealing to those who are new to our brands, increasing their revenue contribution as compared to 2019 levels.
We also see continuing momentum in our business travel trends, with anticipated additional runway for growth.
We've continued to witness sequential quarter-over-quarter increases in our business travel bookings in the third quarter of 2021, with overall business performance similar to 2019 levels.
As a company with a strong emphasis on a customer-first approach, Choice is always looking for innovative ways to better serve the changing needs of today's consumers and anticipate the expectations of the guest of tomorrow.
For example, we are the first lodging company to launch a collaboration with Bakkt a trusted digital asset marketplace, enabling us to cater to guests with more currency options and more ways to redeem this currency.
Our more than 50 million Choice Privileges loyalty members can now unlock new redemption opportunities by converting their rewards points to cash and then use it to buy Bitcoin, transfer their points to a friend or even redeem them online or in-store anywhere, Apple Pay or Google Pay is accepted.
Turning now to our franchisee business delivery and demand for our brands.
In addition, we drove growth as compared to 2019 and 2020 through increased revenue contribution in the third quarter from choicehotels.com and other proprietary digital channels.
Business delivery through these channels significantly improves our owners' profitability as they deliver strong rates at the lowest cost.
As a result, these channels remain a key focus area for enhancing our value proposition.
With such a powerful value proposition, it is no surprise why Choice maintains an industry-leading franchisee voluntary retention rate and our franchise owners continue to seek and develop our brands.
Aided by our strong value proposition for our current and future owners and our record outperformance, we also continue to experience demand for new franchise contracts.
In the third quarter, we awarded 89 new domestic franchise agreements, a 10% increase over the same period of 2020.
Specifically, we're very pleased to see that demand for our new construction brands in the third quarter increased by over 50% year-over-year.
And we are also excited to announce that our WoodSpring brand expanded internationally at the end of October, entering the Canadian market with a more than 15 unit commitment from a well-known developer and operator.
In addition, a team within our development and franchise service departments that is fully dedicated to driving diverse ownership of Choice franchise hotels among underrepresented and minority owners has awarded 18 franchise contracts year-to-date through September, bringing the total agreements executed to over 280 since the program began over 15 years ago.
I'm proud to say that more than half of the 18 agreements this year were awarded to women entrepreneurs.
None of these accomplishments would have been possible without the resilience and hard work of our dedicated associates.
We are committed to continuing to invest in and support our associates, and we are proud to be the hotel industry's only company to recently earn recognition as a Best Work-life Balance Employer by Comparably.
In closing, I'm confident in our continued ability to create value and deliver results for our owners and shareholders through our effective strategic investments, impressive performance and award-winning culture centered around diversity, equity and belonging.
With that, I will hand it over to our CFO.
I hope you and your families are all well.
Today, I'd like to provide some additional insights on our third quarter results, update you on our liquidity profile and capital allocation and share our thoughts on the outlook for what lies ahead.
As we discussed in the previous quarter, we are comparing our financial performance and RevPAR results to 2019, which we believe offers a more meaningful basis for analyzing trends as the prior year's quarterly results were significantly impacted by the pandemic.
For third quarter 2021 as compared to the same period of 2019, total revenues, excluding marketing and reservation system fees, were $166.5 million, an 8% increase.
Adjusted EBITDA rose 18% and to $133.2 million, driven by improving RevPAR performance, revenue intense unit growth and strong effective royalty rate growth, coupled with continued cost discipline.
Our adjusted EBITDA margin expanded to 80%, a rise of seven percentage points.
And as a result, our adjusted earnings per share were $1.51 in for the third quarter, an increase of 10% versus 2019.
Let's now turn to our three key revenue levers beginning with royalty rate.
Our effective royalty rate remains a significant source of our revenue growth.
The company's domestic effective royalty rate increased by eight basis points year-over-year to approximately 5% compared to the third quarter of 2020.
This performance reflects the continued strengthening of the value proposition we provide to our franchise owners, their continued interest in being affiliated with our proven brands and the promising prospects in our pipeline.
It also provides further validation of our long-term past, current and future investments on behalf of our franchisees.
We expect to maintain the current growth trajectory of this lever for full year 2021 and grow at our historical rate in the future as owners continue to seek Choice Hotels' proven capabilities of delivering strong top line revenues that maximize return on investment while helping them reduce their total cost of ownership.
Our domestic systemwide RevPAR outperformed the overall industry by 16 percentage points for the third quarter, increasing 11.4% over 2019.
Specifically, our average daily rate grew by nearly 9%, and our occupancy levels increased by nearly two percentage points compared to the same quarter of 2019.
Our third quarter results showed that we continue to outpace the primary chain scale segments in which we compete as reported by STR by six percentage points versus 2019.
Importantly, our strong RevPAR trends have continued into the fourth quarter.
As you know from our prior calls, we've long focused our brand strategy on driving growth across the higher value and more revenue intense, upscale, extended-stay and mid-scale segments.
The investments we've made continue to pay off as these strategic segments have enabled us to materially outperform the industry in RevPAR growth and achieve gains versus our local competitors.
Let me highlight just a few impressive performance achievements for our brands in the third quarter.
Just a reminder, we're comparing the growth figures with the same period of 2019.
Our WoodSpring brand achieved 23% RevPAR growth, reaching an average occupancy rate of nearly 86% and experiencing an 11% increase in average daily rate.
Ascend Hotels saw their growth in average daily rate of over 17% and outperformed the upscale segment's RevPAR growth by over 20 percentage points.
At the same time, the Comfort family grew RevPAR by over 8% on reflecting a 9% increase in average daily rate.
Finally, both our Cambria and MainStay Suites brands captured 12 percentage points in RevPAR index gains versus their local competitors.
More specifically, our average daily rate and occupancy improved from the prior quarter, and our average daily rate index and occupancy index continue to increase compared to 2019 as a result of our investments in revenue management tools for our franchisees and the merchandising capabilities and strategy we have put in place.
Our third revenue lever is units and rooms growth, which benefits from the absolute size of our portfolio and the revenue intensity of the totals.
To ensure the quality of our brand portfolio over the long term, we continue to terminate underperforming economy hotels at the bottom end of the portfolio as well as quality hotels that are unable to maintain the standards of a mid-scale brand.
We believe that these actions will not only ensure an even stronger brand portfolio over the long term, but we also expect these targeted terminations to be an opportunity for royalty revenue growth as we plan to replace these hotels with higher quality and more revenue-intense units.
Nevertheless, we continue to grow the overall size of our domestic franchise system.
Across our more revenue intense brands in the upscale, extended-stay and mid-scale segments, we observed stronger unit growth, increasing the number of hotels by 2% and rooms by 2.6% year-over-year.
Our developers are increasingly optimistic about the long-term fundamentals of the lodging industry.
In fact, 1/3 of total domestic franchise agreements awarded in the third quarter were for new construction contracts representing an increase of more than 50% versus the same quarter of the prior year.
At the same time, demand for our conversion brands year-to-date through September increased by 25% year-over-year.
Let me share a few highlights on specific brands.
The Ascend Hotel Collection leads the industry as the first launch and today, the largest soft brand expanding its domestic room count by 27% year-over-year.
At the same time, Clarion Point has nearly doubled its portfolio year-over-year ending the third quarter with nearly 35 hotels open in the U.S. and 15 additional hotels awaiting conversion this year.
Our MainStay Suites mid-scale extended-stay brand portfolio expanded to nearly 100 domestic hotels open, representing more than 30% unit growth year-over-year.
And finally, our suburban extended stay portfolio of 70 domestic hotels open experienced 13% year-over-year unit growth.
Now a few words about our liquidity profile and an update on capital allocation.
As a result of our strong performance, the company has an even stronger liquidity position.
More specifically, at the end of the third quarter of 2021, the company had over $1 billion in cash and available borrowing capacity through its revolving credit facility.
We are also pleased to report cash flow from operations of $142.8 million for the third quarter 2021, a 53% increase versus the third quarter 2019.
Today, our gross debt-to-EBITDA leverage levels remains at the low end of our target range of three to 4 times.
At the end of third quarter 2021, our net debt-to-EBITDA leverage level was at 1.8 times.
These impressive results combined with our strong liquidity and confidence in our ability to generate strong levels of cash, leave us well positioned to continue to grow our business and return excess cash flow to shareholders well into the future.
Year-to-date through October, we have returned over $35 million back to our shareholders in the form of cash dividends and repurchases of our common stock.
We will continue to monitor the environment for other investment opportunities and evaluate capital returns in the context of our leverage levels, market conditions and our overall capital allocation strategy.
Finally, let's turn to our expectations for what lies ahead.
We currently expect full year domestic RevPAR to surpass 2019 levels and grow at approximately 1% as compared to full year 2019.
Assuming the broader RevPAR and economy recovery trends continue, we now expect to see our 2021 adjusted EBITDA exceed 2019 levels and range between $382 million and $387 million, even with planned incremental investments in the fourth quarter.
Our view is reinforced by our third quarter results which extend our strong year-to-date financial performance, broader macro trends and our continued investments to support growth for the remainder of 2021 and beyond.
We will continue to evaluate the impact of COVID-19 across the business, and we'll provide further updates in February during our next earnings call.
In closing, we remain confident in our long-term strategic approach and resilient business model, coupled with our disciplined capital allocation strategy and strong balance sheet, we believe these strengths will allow us to further capitalize on growth opportunities and drive outsized returns for years to come. | q2 adjusted earnings per share $1.22 excluding items.
choice hotels international -not at this time providing guidance for q3 or fy given precise impact of covid-19 on co's future results is still unknown. | 0 |
Our actual results could differ materially from these statements due to many factors discussed in our latest 10-K and other periodic reports.
We believe these measures are important indicators of our operations as they exclude items that may not be indicative of results from our ongoing business operations.
We also think the adjusted measures will provide you a better baseline for analyzing trends in our ongoing business operations.
In difficult times like the ones we're living through today, it is important that we remain true to our guiding principles.
Whirlpool's 110 year history is rooted in our value-driven commitment to our shareholders, employees, consumers and communities in which we operate.
In 2020, we faced unprecedented challenges due to the ongoing COVID-19 pandemic.
Yes, we remained firm in our commitment to all of our stakeholders.
The health and well-being of our employees was and it remains our top priority.
We increased safety measures at all manufacturing plants and provided additional resources to care for families and those who fell ill.
We established business continuity plan to ensure our consumers received our products to improve life at home with their families.
And we continue to support our global communities by procuring medical supplies, making donations and engineering critical equipment for front-line workers.
In parallel, we made significant advancement toward our sustainability target, resulting in ratings improvements and external recognition.
Most notably, we received a low-risk rating from Sustainalytics, a year-over-year improvement driven by our outstanding energy and water efficiency programs and our strong global product safety systems.
And we were named to the Dow Jones Sustainability North America Index in recognition of our long-standing sustainable business practices.
2020 marked our 14th time on the list in the last 15 years.
I'm very proud of the way our employees have managed through this pandemic.
It is ultimately the agility of our organization and the resilience of our employees that allowed us to deliver record results in 2020.
Now turning to our fourth quarter 2020 highlights on Slide 4.
We delivered strong organic net sales growth of over 10% driven by solid industry demand across the globe.
Additionally, we delivered ongoing EBIT margin of over 11%, a second consecutive quarter of double-digit margins and a year-over-year expansion of 410 basis points.
Lastly, we successfully executed our go-to-market initiatives and drove strong cost takeout across the globe, leading to positive EBIT and EBIT margin expansion in all regions.
Now turning to Slide 5.
We will discuss our full-year highlights.
We took immediate and decisive action as we announced and executed our $500 million plus cost takeout program.
Further, we realigned our go-to-market strategy to effectively operate within a supply constrained environment.
And structural and sustained positive demand trends and the exceptional execution of our COVID-19 response strategy resulted in record ongoing earnings per share of $18.55, a 16% improvement compared to the prior year, above our previous guidance.
Record ongoing EBIT margin of 9.1%, a 220 basis point improvement and a 25% increase in total EBIT compared to the prior year.
And record free cash flow of approximately $1.25 billion with positive free cash flow in North America, Latin America and Europe.
Despite significant macroeconomic uncertainty, we strengthened our balance sheet and drove significant shareholder value.
We reduced our gross debt leverage to 2.3 times making progress toward our long-term target of 2 times.
We delivered a return on invested capital of approximately 11%, representing the fourth consecutive year of improvement as we realize the benefit of continued EBIT margin expansion at an optimized asset base in our Europe region.
Lastly, we returned strong levels of cash to shareholders through share repurchases and increased our dividends for eighth consecutive year.
Overall, results we delivered in 2020 reflect the structural improvements we have made, not just in 2020, but also those made during the years before.
We are a fundamentally different company with an improved margin and cash flow profile.
2020 could have been a setback for us.
Instead, we were able to significantly accelerate our progress toward our long-term financial goals.
Turning to Slide 6.
We show the drivers of our fourth quarter and full year EBIT margin.
In the fourth quarter price-mix delivered 375 basis points of margin expansion, driven by reduced promotional investment and mix benefit as consumers invest in their homes.
Additionally, we delivered on our cost takeout program positively impacting margin by 125 basis points.
Further, reduced steel and resin cost resulted in a favorable impact of 125 basis points.
These margin benefits were partially offset by continued marketing and technology investments and the unfavorable impact of currency.
For full year, very strong margin expansion from price mix and our cost takeout program were partially offset by increased brand investments and currency.
Overall, we're very pleased to be delivering on our long-term EBIT margin commitment and are confident this positive momentum will continue to drive very strong results in '21.
Turning to Slide 8, I will review our fourth quarter regional results.
In North America, we delivered 4% revenue growth driven by continued strong demand in the region.
Additionally, we delivered record EBIT driven by the flawless execution of our cost takeout and go-to-market actions.
Lastly, we continue to optimize our supply chain operations, driving weekly improvements in our production yield.
Delivering top line growth and a record EBIT performance, the region's outstanding results again demonstrate the fundamental strength of our business model.
Turning to Slide 9, I'll review our fourth quarter results for our Europe, Middle East and Africa region.
Share growth in Italy and the U.K. along with strong demand in the region drove another quarter of double-digit revenue growth.
Additionally, the region delivered year-over-year EBIT improvement of $29 million led by increased demand and strong cost takeout.
We overcame the challenges presented by COVID-19 and restored profitability to the region in line with our commitment at the start of the year.
Our 2020 results demonstrate the effectiveness of our strategic actions and the progress we have made to-date.
Turning to Slide 10, I'll review our fourth quarter results for our Latin America region.
Net sales increased 5% with organic net sales growth of 28% led by strong demand in Brazil.
The region delivered very strong EBIT margins of 12% with continued strong demand and disciplined execution of go-to-market actions, offsetting significant currency devaluation.
Overall, the region's 2020 performance serves as a proof point of the viability of our long-term financial goals highlighting our ability to deliver double-digit margins in a strong demand environment.
Turning to Slide 11, I'll review our fourth quarter results for our Asia region.
In India, we delivered strong year-over-year net sales growth, driven by demand recovery.
In China, we delivered Whirlpool branded share growth in addition to EBIT improvement led by cost productivity actions.
Overall, we are pleased to see a rebound in Asia and look forward to building on this momentum in 2021.
Turning to Slide 13, Marc and I will discuss our full-year 2021 guidance.
Needless to say some uncertainty remains as we continue to operate in a COVID environment.
However, we do believe increased disposable income, investments in the home and a favorable housing shift are here to stay and will drive strong demand.
Based on our internal model for industry and broad economy we expect global industry growth of 4%.
As we have demonstrated in 2020, we are uniquely positioned to capture the structural shift and further advance our strategic priorities.
It is with confidence that we provide our '21 guidance, which reflects our fourth consecutive year of record earnings per share and significant top line growth.
We expect to drive net sales growth of approximately 6% as we capitalize on strong demand and share gains in all regions.
Additionally, we expect to deliver above 9% ongoing EBIT margin and deliver free cash flow of $1 billion or more.
Turning to Slide 14, we show the drivers of our 9% plus ongoing EBIT margin guidance.
We expect price mix to deliver approximately 100 basis points of margin expansion through three key initiatives, one, disciplined execution of our go-to-market actions, two, recently announced cost-base price increase in Brazil, Russia, and India and, three, new product launches.
Just to give you a few examples of our legacy for innovation, in 2020, we rolled out our new global dishwasher architecture featuring the largest capacity third rack dishwasher.
In Europe, we launched a Red Dot award-winning built-in induction cooktop.
In the United States, we entered the consumables detergent business with the launch our ultra concentrated Swash detergent.
Next, we expect net cost to positively impact margin by 150 basis points.
As ongoing cost productivity efforts coupled with the carryover benefit from our 2020 cost takeout program more than offset elevated freight and labor cost.
We expect raw material inflation to negatively impact margin by 150 basis points, led by higher steel and resin cost.
Further, as we continue to invest in the future, we expect increased marketing and technology investments to drive a negative margin impact of 50 basis points, while unfavorable currency, primarily Latin America, expected to impact margin by approximately 50 basis points.
In total, we expect these actions to deliver 9% plus ongoing EBIT margin, an EBIT improvement of over $100 million compared to the prior year.
Turning to Slide 15, we show our regional guidance for the year.
Starting with industry demand, we expect a robust demand environment for North America, supported by continued strength from consumer nesting trends and increased discretionary spending.
Additionally, the impact from positive U.S. housing starts, which began to strengthen in late 2019 and strong existing home sales will translate to higher appliance demand.
In EMEA, we expect a continued recovery in the first half of the year to support strong growth, while in Latin America, we expect modest growth of 2% to 4% as the benefits from government stimulus in Brazil are lessened.
Asia industry is expected to accelerate by 6% to 8% as the region rebounds from prolonged shutdowns in 2020.
Regarding our EBIT guidance, we expect very strong margins of 15% or more in North America.
We expect the impact of favorable go-to-market initiatives and disciplined cost actions to offset cost inflation.
In EMEA, we expect the strategic actions laid out during our 2019 Investor Day to drive EBIT margin expansion of over 250 basis points and a full-year EBIT margin of over 2.5%.
In Latin America, we expect to deliver EBIT margins of 7% or higher.
A steady demand improvements and positive price mix are offset by continued currency devaluation in Argentina and Brazil.
Lastly, we expect to achieve EBIT margins of 2% or higher in Asia, driven by demand recovery.
Turning to slide 16, we will discuss the drivers of our 2021 free cash flow.
We expect another year of very strong cash earnings of approximately $2 billion, driven by sustained EBIT margins.
We plan to increase capital investments to historical levels to support the launch of innovative products around the globe.
Additionally, we will continue to invest in world-class manufacturing and our digital transformation journey.
Further, as we ended 2020 with record low inventory levels, we are planning for a moderate inventory built.
We anticipate restructuring cash outlays of approximately $225 million primarily due to the impact of COVID-19-related restructuring actions executed in 2020 and the exit of our Naples, Italy operations.
Overall, we expect to drive free cash flow of $1 billion or more as we focus on continuing to deliver record EBIT margin levels and prioritizing our capital investments.
Turning to slide 17, we provide an update on our capital allocation priorities for 2021.
We remain fully committed to funding the business driving innovation and growth, while continuing to strengthen our balance sheet and return cash to shareholders.
We expect to invest over $1 billion in capital expenditures and research and development, highlighting our commitment to driving innovation and growth in the future.
We have reinstated our share repurchase program that had been temporarily suspended during the height of the pandemic.
With a clear focus on returning increased levels of cash to shareholders, we expect to repurchase shares at moderate levels.
Lastly, we have a clear line of sight to delivering on our long-term goal of gross debt to EBITDA up 2 times.
We are extremely pleased to see that despite the enormous challenges of operating in a global pandemic, our teams were able to deliver on our long term value creation targets.
In North America, we delivered nearly 16% EBIT margins for the full year, significantly above our long-term margin goal for the region of 13% plus.
We restored the European region to profitability.
In Latin America, we capitalize on strong industry demand, demonstrating the long-term margin potential in the region.
And finally, we delivered record free cash flow of $1.25 billion or 6.4% of sales, above our long-term goal of 6% of sales.
Further, we demonstrated an unwavering commitment to our environmental, social and governance priorities, resulting in significant advancements to our targets.
Building on the momentum of our 2020 performance and the operational excellence of our global team, we are confident that we are well-positioned to deliver another record year in '21. | expect full-year 2021 net sales growth of about 13 percent.
increased fy earnings per diluted share guidance to about $27.80 on a gaap basis and about $26.25 on an ongoing basis.
fy cash provided by operating activities, adjusted free cash flow guidance remain unchanged. | 0 |
Today's presenters are Chairman and Chief Executive Officer, Chris Martin; President and Chief Operating Officer, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons.
With that, it's my pleasure to introduce Chris Martin, who will offer his perspective on our first quarter.
We appreciate your participation today.
Our first quarter earnings were vastly improved from the same period last year when the pandemic's impact was first being felt.
The economy is rebounding quickly, BMS stimulus by the government, the success of the vaccine rollout, and the tenacity and perseverance of both consumers and business owners to weather this unprecedented event.
Earnings per share were $0.63 for the quarter as compared to $0.23 for the same period in 2020.
And the primary drivers of the improvement included a negative provision due to the prospects of a strong GDP growth combined with the full impact of improved revenue from the SB One acquisition.
Annualized return on average assets was 1.51%, and annualized return on average tangible equity was 16.8%.
Loan growth was constrained as PPP loan forgiveness and prepayments offset meaningful production.
Originations were robust and we continue to support the PPP program in its second phase.
The loan pipeline is consistent with the trailing quarter and the previous year to date.
Yields on new originations are approaching portfolio yields, so stabilization in asset yields is on the horizon.
Unlike most financial institutions, we are awash with liquidity due to the proceeds from stimulus checks and PPP monies augmenting deposit growth.
This added liquidity presented the accompanying challenge of where and how to invest the balances in an accretive manner, while remaining sensitive to potential run off.
And our core deposits are now 91% of total deposits.
The result in increase in deposits alleviated the need for borrowing, which decreased during the quarter.
Our margin improved six basis points during the quarter, and we envision core margin stability in the near term.
Noninterest income improved with the new revenue sources from SB One insurance, increased wealth management income from Beacon Trust, and sadly another bank-owned life insurance claim.
Retail fees also add to these increases along with loan prepayment fees and the net gain on the sale of residential mortgage loans.
Operating expenses were $61.9 million increase from the prior year, largely due to the addition of compensation and occupancy expenses from SB One.
Non-interest expense to average assets was 1.95% versus 2.13% for 2020.
FDIC insurance costs decreased -- increased, excuse me, due to an increase in the assessment rate, an increase in total assets, and the prior year's results having benefited from a small bank assessment credit.
We exceeded the cost saves we projected when we announced the SB One acquisition and are enthusiastic about the combined company's potential to extract more costs and increase revenue.
Our efficiency ratio was 56.19%.
As for asset quality, the numbers continue to improve from the trailing quarter.
Deferrals are down to $132 million, of which $123.5 million are commercial loans.
And of that number, approximately 96% are paying interest.
And Tom will go over this in more detail.
We are optimistic that as the economy opens up further and more people are vaccinated, results will continue to improve.
At this time, I would like to ask Tony to add more color to the success of the combination, along with strategic plans for Provident.
Let me start by noting that we have achieved or exceeded our financial expectations with regard to the merger with SB One Bank.
Our focus has shifted to cultural integration that culminated in the recent company wide rollout of our new core values, which we call our guiding principles.
This successful rollout was celebrated throughout our company, and it has inspired and energized all of us about what we can accomplish together.
Presently, we are all well along in the development of our new strategic plan.
Select tenants of our plan include enhanced focus on one of our core competencies, commercial banking.
This involves building out certain segments of our commercial book and reorganizing our Group to promote better efficiency and credit administration, which will make it easier for us to expand into new markets where we can compete and win.
We also want to build on our exceptional funding base and optimize our branch network.
Of note, during the quarter, we consolidated our branch office in Clifton, New Jersey.
We are also focused on building our non-spread income.
In addition to further expanding our successful wealth management and insurance groups we, will evaluate other sources of revenue with a long-term goal of having non-spread income comprised in excess of 25% of our net income.
To remain relevant, we are concentrating on digital banking and the digital transformation of our business processes to streamline activities, reduce friction, and make our customers' journey through all of our channels simple, fast, and easy.
This will make us more efficient and improve the experience of our customers and employees.
Mergers and acquisitions will continue to be part of our growth strategy for our bank, as well as for Beacon Trust and SB One Insurance.
Scale has become increasingly more important to offset reduced margins and cover the higher cost of investing for our future.
We will remain steadfast in pursuing strategic deals and partnering with companies that have comparable cultures.
Shifting quickly to our markets, we see the light at the end of the COVID tunnel.
Many sectors largely recovered or are quickly improving as the economic shutdown loosens and we approach herd immunity.
Those sectors that continue to exhibit pressure our office space, particularly in Manhattan, and retail centers that don't have a grocery store anchor.
Fortunately, Provident does not have a concentration of note in either of these sectors.
Most banks are presently dealing with the how to best utilize the excess liquidity on their balance sheet?
As a result, we are seeing increased competition which includes more aggressive pricing and elongated interest only periods with higher leverage.
At Provident we remain firmly committed to our credit culture not sacrificing structural [Phonetic] quality for quantity.
Despite the heightened competition, we are seeing good activity within our lending team.
This quarter we originated or funded $526 million of new loans excluding line of credit advances and net PPP loan activity.
This would have been a strong quarter for us if not for the high level of unanticipated loan payoffs that offset the growth.
The payoffs were due in large part to the sale of the underlying properties associated with the loan.
At quarter end, our pipeline remains strong at approximately $1.3 billion, and we are seeing a marginal improvement in the average rate in the pipeline.
If we have a good pull-through rate in our pipeline and see a reduction in prepayments, we should experience solid growth for the remainder of the year.
As noted earlier, our net income was $48.6 million or $0.63 per diluted share compared with $40.6 million or $0.53 per diluted share for the trailing quarter.
Earnings for the current quarter were favorably impacted by $15.9 million of negative provisions for credit losses on loans and off balance sheet credit exposures while the trailing quarter reflected negative provisions of $6.2 million.
Core pre-tax pre-provision earnings, excluding provisions for credit losses on loans and commitments to extend credit were $48.9 million for a pre-tax pre-provision ROA of 1.52%.
This is consistent with $50.1 million or 1.54% in the trailing quarter which also included -- excluded merger related charges and COVID response costs.
Our net interest margin expanded six basis points versus the trailing quarter to 3.10% as benefits from PPP loan forgiveness reduced funding costs and a steeper yield curve were partially offset by lower yielding excess liquidity.
We expect to maintain a core margin of approximately 3% as we continue to deploy excess liquidity into loans and securities, while we're pricing funding downward and continuing to emphasize non-interest bearing deposit growth.
Including non-interest bearing deposits, our total cost of deposits fell to 30 basis points this quarter from 31 basis points in the trailing quarter.
Average non-interest bearing deposits were stable at $2.4 billion or 24% of total average deposits for the quarter.
Average borrowing levels decreased $196 million and the average cost of borrowed funds decreased four basis points versus the trailing quarter to 1.12%.
Average loans increased slightly for the quarter, although quarter end loan totals decreased $19 million versus the trailing quarter.
Loan originations excluding line of credit advances were strong at $539 million for the quarter, including $190 million of PPP2 loans.
Payoffs were elevated however, including $177 million of PPP one loan forgiveness.
The loan pipeline at March 31st increased $73 million from the trailing quarter to $1.3 billion.
In addition, the pipeline rate increased eight basis points since last quarter to 3.65% at March 31st.
Our provision for credit losses on loans was a benefit of $15 million for the current quarter compared with a benefit of $2.3 million in the trailing quarter.
Asset quality metrics including non-performing loan levels, early stage and total delinquencies, criticized and classified loans and the portfolio weighted average risk rating, all improved versus the trailing quarter.
We had annualized net charge-offs as a percentage of average loans of four basis points this quarter compared with ten basis points for the trailing quarter.
Non-performing assets decreased to 65 basis points of total assets from 72 basis points at December 31st.
Excluding PPP loans, the allowance represented 0.92% of loans compared with 1.09% in the trailing quarter.
Loans that have been granted short-term COVID 19 related payment deferrals further declined from their peak of $1.3 billion or 16.8% of loans to $132 million or 1.3% of loans.
This compares with $207 million or 2.1% of loans at December 31st.
This $132 million of loans consist of $300,000 that are still in their initial deferral period, $47 million in a second 90-day deferral period, and $85 million that have received a third deferral.
Included in this total are $41 million of loans secured by hotels, $33 million secured by multifamily properties, including $20 million that are student housing related, $9 million of loans secured by retail properties, $7 million secured by restaurants, and $9 million secured by residential mortgages, with the balance comprised of diverse commercial loans.
Of the $123 million of commercial loans in deferral, 96% are paying interest.
Non-interest income increased $1.2 million versus the trailing quarter to $22 million as growth in insurance agency income, loan and deposit fees, wealth management income, and bank-owned life insurance income was partially offset by reductions in net profits on loan level swaps and gains on loan sales.
Excluding provisions for credit losses on commitments to extend credit and in the trailing quarter merger-related charges and COVID related costs, non-interest expenses were an annualized 1.95% of average assets for the current quarter compared to 1.82% in the trailing quarter.
The increase in the first quarter of 2021 is primarily attributable to seasonal increases in occupancy costs, including snow removal and utilities, an increase in FDIC insurance due to our increased asset size and the change to large institution assessment rates, and the annual reset of the employer share of payroll taxes.
Our effective tax rate increased to 25.1% from 23.3% for the trailing quarter as a result of an increase in the proportion of income derived from taxable sources.
We are currently projecting an effective tax rate of approximately 25% for the remainder of 2021.
We'd be happy to respond to questions. | compname reports qtrly earnings per share $0.85.
public service enterprise group - qtrly earnings per share $0.85.
non-gaap 2021 operating earnings guidance $3.35 - $3.55 per share.
strategic alternatives review of non-nuclear generation assets on track.
has updated its 5-year capital spending forecast to $14 billion - $16 billion for 2021-2025 period.
public service enterprise group - expect that strong cash flow will enable us to fund entire $14 - $16 billion, 5-year capital spending program. | 0 |
I'll also discuss the status of reopening the West Coast economies and related factors concluding with an overview of the West Coast apartment transaction markets and investments.
Our second quarter results were ahead of our initial expectations entering the year, as the economic recovery from the pandemic occurred faster than we expected.
With a strong economy and high vaccination rates, we are now confident that the worst of the pandemic-related impacts are behind us.
As noted on previous calls, our strategy during the pandemic was to maintain high occupancy and scheduled rent, both necessary for rapid recovery.
To that end, net effective rent surged during the second quarter, along with year-over-year improvement in occupancy, other income and delinquency.
The recovery and net effective rents continued unabated in July and we are now pleased to announce that July net effective rents for the Essex portfolio have now surpassed pre-pandemic levels with our suburban markets leading the way.
While the downtowns are improving, but still generally below pre-pandemic levels.
Obviously these higher rents will be converted into revenue as leases turn and Angela will provide additional details in a moment.
Having passed the midpoint of 2021 and looking forward, we made a second set of positive revisions to our West Coast market forecast, which can be found on page S-17 of the supplemental.
Driving the changes is an increase in 2021 GDP and job growth estimates to 7% and 5%, up from 4.3% and 3.2% respectively from our initial forecast.
As a result, we now expect our average 2021 net effective rent growth to improve to minus 0.9% from minus 1.9% from the beginning of the year.
To put this into perspective, consider that our net effective rents were down about 9% year-over-year in Q1 2021.
Given our current expectation of minus 0.9% rent growth for the year, year-over-year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021.
Cash delinquencies were up modestly on a sequential basis at 2.6% of scheduled rent for the quarter and well above our 30-year average delinquency rate of 30 to 40 basis points.
The American Rescue Plan of 2021 provides funding for emergency rental assistance, which was allocated to the stage for distribution to renters for pandemic-related delinquencies.
During the second quarter, collections of delinquent rents from the American Rescue Plan were negligible as the pace of processing reimbursements has been slow, since the program launched in March.
We expect that to improve in the coming months.
We expect delinquency rates to return to normal levels over time as more workers enter the workforce and eviction protections labs on September 30 in both California and Washington.
Only about $7 million of the $55 million in delinquent rent shown on page S-16 of the supplemental has been recorded as revenue.
Given uncertainty about the timing of collections, no additional revenues are contemplated in our financial guidance.
Even with the approved job and economic outlook, the reopening process was gradual through the second quarter, with full reopening declared in mid-and late June for California and Washington respectively.
The unemployment rate was still 6.5% in the Essex markets as of May 2021 underperforming the nation.
Through Q2 we have regained about half of the jobs lost in the early months of the pandemic.
Employment in the Essex markets dropped over 15% in April 2020 and while job growth in our markets outpaced the nation in the second quarter, we are still 7.9% below pre-pandemic employment, compared to 4.4% for the U.S. overall.
We see the gap is an opportunity for growth to continue in the coming months, as we benefit from the full reopening of the West Coast economies.
We believe that many workers that exited the primary employment centers during pandemic-related shutdowns and work from home programs, will return as businesses reopen and resume expansion that was placed on hold during the pandemic.
As we proceed through the summer months, we edge closer to the targeted office reopening dates set by most large tech employers in early September.
As recent reports about Apple and Google suggest, the COVID-19 Delta variant could lead to temporary delays in this reopening process.
Our survey of job openings in the Essex markets for the largest tech companies continues to be very strong as we reported 33,000 job openings as of July, a 99% increase over last year's trough.
New venture capital investment has set a record pace this year with Essex markets once again leading with respect to funds invested providing growth capital that supports future jobs.
Generally economic sectors that sell before this during the pandemic, are now positioned for the strongest recovery and the reopening process led by restaurants, hotels, entertainment venues, travel and so many.
Return to office plans, which remain focused on hybrid approaches will continue to draw employees closer to corporate offices.
Given that many workers won't be required to be in the office on a full-time basis, we expect average new distances to increase.
As we highlight on page S-17.1 of our supplemental, this transition has already started in recent months as our hardest hit markets in the Bay Area once again experienced net positive migration from beyond the NorCal region.
In particular, since the end of Q1, the submarket surrounding San Francisco Bay have seen positive net migration that represents 18% of total move-outs over the trailing three months compared to minus 8% a year ago.
These inflows are led by residents returning from adjacent metros, such as Sacramento and the Monterey, Peninsula as well as renewed flow of recent grads -- graduates arriving from college towns across the country, a notable positive turnaround from last year.
In Seattle CBD, we've seen similar or even stronger recent inflows and we're likewise experiences -- experiencing a strong market rent recovery.
On the supply outlook, we provided our semi-annual update to our 2021 forecast on S-17 of the supplemental with slight increases to 2021 supply as COVID-related construction delays shifted incremental yields from late 2020 into 2021.
We expect modestly fewer apartment deliveries in the second half of 2021 with more significant declines in Los Angeles and Oakland.
While it is still too early to quantify recent volatility in lumber prices and shortages for building materials may impact construction starts and the timing of deliveries in subsequent years.
Multifamily permitting activity in Essex markets also continues to trend favorably, declining 200 basis points on a trailing 12 month basis as of May 2021 compared to the national average, which grew 230 basis points.
Median single family home prices in Essex markets continued upward in California and Seattle, growing 18% and 21% respectively on a trailing three-month basis.
The escalating cost of homeownership combined with greater rental affordability from the pandemic have increased the financial incentive to rent.
We suspect these trends will continue given muted single family supply and limited permitting activity and I believe these factors will be a key differentiator for our markets in the coming years compared to many U.S. markets with greater housing supply.
Turning to apartment transactions, activity is steadily accelerated since the start of the year, with the majority of apartment trades occurring in the low-to-mid 3% cap rate range based on current rents.
Generally investors anticipate a robust rate recovery, especially in markets where current rents are substantially below pre-pandemic levels.
With the recent improvement in our cost to capital, we have turned our focus once again to acquisitions and development while remaining disciplined with respect to FFO accretion targets.
With respect to our preferred equity program, we continue to see new deals, although the market is becoming more competitive.
Lower cap rates from pre-pandemic levels have produced higher-than-anticipated market valuations, which in turn has resulted in higher levels of early redemption.
That concludes my comments.
My comments today will focus on our second quarter results and current market dynamics.
With the reopening of the West Coast economy, the recovery has generated improvements in demand and thus pricing power.
Our operating strategy during COVID to favor occupancy while adjusting concessions to maintain scheduled rents enabled us to optimize rent growth concurrent with the increase in demand resulting in same-store net effective rent growth of 8.3% since January 1 and most of this growth occurred in the second quarter.
A key contributor of this accomplishment is the fantastic job by our operations team in responding quickly to this dynamic market environment.
While market conditions have improved rapidly, during our second quarter -- driving our second quarter results to exceed expectations.
I would like to provide some context for why sequential same-property revenues declined by 90 basis points compared to the first quarter.
The two major factors that drove the decline were 50 basis points of delinquency and 50 basis points in concessions.
Delinquency in the first quarter was temporarily lifted by the one-time unemployment disbursements from the stimulus funds.
As expected in the second quarter, delinquency reverted back to 2.6% of scheduled rent versus the 2.1% in the first quarter.
On concessions, the nominal amount increased from higher volume of leases in the second quarter relative to the first quarter of this year.
To declare concessions in our markets have declined substantially and are virtually none existent except for select CBD markets.
Our average concession for the stabilized portfolio is under one week in the second quarter compared to over a week in the first quarter and over two weeks in the fourth quarter.
Although concessions have generally improved in the second quarter, they remain elevated ranging from 2.5 to 3 weeks in certain CBDs such as CBD, LA, San Jose and Oakland.
Given the extraordinary pandemic-related volatility in once in concessions over the past year and a half.
I thought it would be insightful to provide an overview of the change in net effective rents compared to pre-COVID levels.
As of this June, our same-store average net effective rents compared to March of last year was down by 3.1%.
Since then, we have seen continued strength and based on preliminary July results, our average net effective [Indecipherable] are now 1.5% above pre-COVID levels.
it is notable that this 1.5% portfolio average diverged regionally with both Seattle and Southern California up 5.8% and 9.3% respectively while Northern California has yet to fully recover with net effective rents currently at 8% below pre-COVID levels.
On a sequential basis, net effective rents on new leases have improved rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to the month of June, led by CBD San Francisco and CBD Seattle, both up about 11%.
Not surprisingly, these two markets were hit hardest during the pandemic, and are now experiencing the most rent growth.
Moving on to office development activities, which we view as an indicator of future job growth and accordingly housing demand.
In general, the areas along the West Coast with the greatest amount of office developments have been San Jose and Seattle.
Currently San Jose has 8.1% of total office stock under construction and similarly Seattle has 7.7% of office stock under construction.
Notable activities include Apple leasing an additional 700,000 sqft and LinkedIn announced recent plans to upgrade our existing offices in Sunnyvale.
In the Seattle region, Facebook expanded their Bellevue footprint by 330,000 sqft and Amazon announced 1400 new web services jobs in Redmond.
We expect in the long-term areas with higher office deliveries such as San Jose and Seattle will have capacity for greater apartment supply with our impacting rental rates.
While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters.
Lastly, as the economic recovery continues to gain momentum, we have restarted both our apartment renovation programs and technology initiatives including actively enhancing the functionality of our mobile leasing platform and smart rent home automation.
I'll start with a few comments on our second quarter results, discuss changes to our full year guidance, followed by an update on our investments and the balance sheet.
I'm pleased to report core FFO for the second quarter exceeded the midpoint of the revised range we provided during the NAREIT conference by $0.08 per share.
The favorable results are primarily attributable to stronger same property revenues, higher commercial income and lower operating expenses.
Of the $0.08, the $0.03 relates to the timing of operating expenses and G&A spend, which is now forecasted to occur in the second half of the year.
As Angela discussed, we are seeing stronger rent growth in our markets than we expected just a few months ago.
As such, we are raising the full year midpoint of our same-property revenue growth by 50 basis points to minus 1.4%.
It should be noted, this was the high end of the revised range we provided in June.
In addition, we have lowered our operating expense growth by 25 basis points at the midpoint, due to lower taxes in the Seattle portfolio.
All of this resulted in an improvement in same property NOI growth by 80 basis points at the midpoint to minus 3%.
Year to date, we have revived our same-property revenue growth at the midpoint, up 110 basis points and NOI by 160 basis points.
As it relates to full year core FFO, we are raising our midpoint by $0.09 per share to $12.33.
This reflects the stronger operating results, partially offset by the impact of the early redemption of preferred equity investments, which I will discuss in a minute.
Year-to-date we, have raised core FFO by $0.17 or 1.4%.
Turning to the investment markets.
As we've discussed on previous calls, strong demand for West Coast apartments and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and subordinated loan investments resulting in several early redemptions.
During the quarter, we received $36 million from an early redemption of a subordinated loan, which included $4.7 million in prepayment fees, which have been excluded from Core FFO.
Year-to-date, we have been redeemed on approximately $150 million of investment and expect that number to grow to approximately $250 million by year-end.
This is significantly above the high end of the range we provided at the start of the year.
However, this speaks to the high valuation apartment properties are commanding today which is good for Essex and the net asset value of the company.
As for new preferred equity investments, we have a healthy pipeline of accretive deals and we are still on track to achieve our original guidance of $100 million to $150 million in the second half of the year.
As a reminder, our original guidance assumed new investment would match redemptions during the year.
However, the timing mismatch between the higher level of early redemptions coupled with funding of new investments expected later this year has led to an approximate $0.10 per share drag on our FFO for the year.
Moving to the balance sheet, we remain in a strong financial position due to refinancing over 1/3 of our debt over the past year and a half taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional two years.
We currently have only 7% of our debt maturing through the end of 2023.
Given our laddered maturity schedule, limited near term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise. | essex increases full-year 2021 guidance.
raised midpoint of full-year same-property revenues to high-end of prior guidance range. | 1 |
I hope everyone is staying healthy and safe.
Joining me on the call today is Walter Ulloa, chairman and chief executive officer; and Chris Young, chief financial officer.
We appreciate you joining us for Entravision's first-quarter 2021 earnings call.
Entravision posted strong results for the first quarter with net revenue of $148.9 million, up 132% year over year.
On a pro forma basis including Cisneros Interactive revenue in our prior-year results, revenue increased 43% over the first quarter of 2020.
Growth during the quarter was driven by our core broadcasting businesses excluding political, along with the continued strong performance of our digital segment.
We are pleased to see our underlying businesses continue on an upward course, since a pandemic-driven lows in 2020.
Each of our businesses is now firmly on the path to recovery.
And our first-quarter results give us confidence and an optimistic outlook for the balance of 2021.
Adjusted EBITDA totaled $14.2 million for the quarter, which is up 47% from the prior-year period.
On a pro forma basis, accounting for Cisneros Interactive, adjusted EBITDA increased a solid 35% year over year.
From an expense management perspective, we continue to operate as a much more efficient business.
Our lean cost structure is helping propel our company forward as macroeconomic conditions continue to improve.
Chris Young, our CFO will speak further about our first-quarter expenses later in today's call.
Now let's take a look at our segment performance for the quarter.
Our television division generated $36.1 million for the first quarter, down 8% compared to the prior year, primarily due to lack of non-returning political revenue compared to the first quarter last year, excluding $5.3 million of non-returning television political spend in the first quarter of 2020.
Core television advertising increased by 3%.
With national advertising revenues increasing by 4% and local advertising revenues up 1%.
Strength in core television revenues in the first quarter was driven by growth in services, up 13%, healthcare improved 23% and groceries and finance were up 11% compared to the prior-year period.
Auto, our largest television advertising category decreased 1% year over year.
Although the auto category did face some supply chain issues during the quarter.
With more Americans heading back on the road, we anticipate this to be a short-term disruption to our auto performance.
Approximately 16 million cars are forecasted to be sold in the United States this year, which equals an increase in cars sold off almost 10% over the last year.
Consumer demand for auto definitely remained strong.
In terms of television ratings for winter 2021 or Univision television stations finished ahead of or tied with their Telemundo competitor among adults 18 to 49 for early local news in 12 of the 17 markets where we have head-to-head competition with Telemundo.
For late local news, we finished ahead of our or tied our Telemundo competitors in 11 of the 17 markets where we have head-to-head competition.
During a full week, our Univision and UniMás television stations have a cumulative audience of 4.4 million people ages two-plus across all of our markets, compared to Telemundo 3.5 million people ages two-plus.
We have 26% more viewers in Telemundo, in our Univision and UniMás television footprint, which is 4% higher than the November 2020 range release.
Turning to our digital operations, digital revenues total $101.5 million for the first quarter, compared to $13.3 million in the prior-year period, an increase of 661%.
Digital revenues represented 68% of total revenues for the company in the first quarter.
The primary driver of this growth was our acquisition of majority interest in Cisneros Interactive in the fourth quarter of 2020.
On a pro forma basis, our digital revenues increased 90% compared to the prior-year period.
Other drivers of growth for our digital unit in the first quarter were our U.S. local advertising solutions business, up 21% and Smadex are global programmatic and performance product grew its revenue 21% compared to the first quarter of 2020.
Entravision continues to provide our clients, brands, and marketers, the best platforms, the strongest reach, and complete advertising campaign transparency.
Our highly proficient digital sales operation now serves more than 4600 clients each month in 21 countries.
Now let's turn to your audio segment.
Our audio revenues for the first-quarter 2021 totaled $11.3 million, a decrease of 4% year over year.
Local audio revenues decreased 10% year over year, while national audio revenues were up 9% year over year, excluding radio political spending $1.1 million the prior-year period, core radio revenues increased 6% versus the first quarter of 2020.
In the 12 markets where we subscribe to Miller Kaplan Data for total spot revenue, we outperformed the market by 13 points in total revenue combined.
We outperform the total market in 10 of the 12 markets to which we subscribe.
This includes exceptional performance in three of our top radio markets.
Our Los Angeles radio cluster beat the market by 23 points.
Our Phoenix radio stations outperformed the market by 15 points, and our McAllen radio cluster surpassed the market in total spot revenue by 31 points.
These three markets are all Top 10 U.S. Hispanic markets.
In terms of advertising categories, services remain our largest category representing 42% of total audio revenue.
Services improved 22% year over year.
Auto, our second-largest ad category declined 36% for the quarter as compared to the first quarter of 2020.
As with television, radio, auto ads were impacted by supply chain issues during the quarter, which had a larger impact on tier two and tier three auto dealer spending across all our radio markets.
Our audio division rates remain very strong, and as more people increase their driving time, we should see these rates improve even more.
to 7 p.m. for the winner measurement period among Hispanic adults 18 to 49 and Hispanic adults 25 to 54, including ties.
Overall, we have an outstanding 2021 first-quarter performance.
We believe that our first-quarter earnings results will provide strong momentum for renovations throughout the year.
As Walter discussed revenue for Q1 2021 totaled $148.9 million, an increase of 132% from the first quarter of 2020.
When comparing on a pro forma basis and including Cisneros Interactive's revenue in 2020.
results, revenues were increased 43% year over year.
For our TV division, total ad and spectrum-related revenue was $26.4 million, down 11% at year over year, excluding political core ad and spectrum-related revenue was up 9% year over year.
Retransmission revenue totaled $9.6 million and was up 1% year over year.
For our digital division, digital revenues totaled $101.5 million, up 661% year over year.
When comparing on a pro forma basis and including Cisneros Interactive's revenue in our 2020 results, digital revenues increased 90% year over year.
Lastly, for our audio division revenues totaled $11.3 million, down 4% over the prior-year period, excluding political core audio revenue was up 6% over Q1 of last year.
As we spoke to our last quarters call during the second half of 2020, we took strategic steps to limit our expenses due to market conditions.
Following a strong finish to the year we were pleased to fully reinstate all employee salaries to pre COVID levels.
And while salaries have been reinstated, we were able to maintain most of the remaining expense guts in 2021.
SG&A expenses were $13.9 million for the quarter, an increase of 2%, compared to the $13.6 million in the year-ago period.
Excluding the Cisneros acquisition SG&A expenses were down 19%.
Direct operating expenses totaled $26.6 million in Q1 of 2021, down slightly from $26.7 million in Q1 of 2020.
Excluding the Cisneros acquisition direct operating expenses were down 9% year over year.
Finally, corporate expenses for the quarter increased 5% to a total of $7.2 million, compared to $6.8 million in the same quarter of last year.
The primary driver of corporate expense was audit-related expense and salary expense.
During the first quarter, our share buyback remained on hold.
We also maintained a dividend at $0.250 and continue to eliminate expenses at the operating and corporate level been secondary to serving our core media businesses.
We will continue to evaluate our buyback and dividend each quarter, which will be at the discretion of our board of directors.
Looking forward, we expect that our operating expenses excluding the digital cost of goods sold and corporate will be up approximately 3% in the second quarter as compared to the first quarter of this year.
Excluding expenses related to Cisneros, operating expenses are expected to be approximately flat compared to the first quarter of this year.
Consolidated adjustment EBITDA totaled $14.2 million for the first quarter, up 47% compared to the first quarter of last year.
On a pro forma basis, accounting for the Cisneros acquisition, adjusted EBITDA was up 35% year over year.
This was a strong quarter of EBITDA generation despite the lack of political revenue.
Entravision's 51% portion of Cisneros interactive adjusted EBITDA represented a $3 million contribution to our total EBITDA in the first quarter.
Strong free cash flow has been a cornerstone of Entravision's business and supported our ability to grow both organically and through acquisitions without the need to take on leverage.
We expect this high free cash flow conversion rate to continue for the foreseeable future.
Earnings per share for the quarter in 2021 were $0.06, compared to a loss of $0.42 per share in the same quarter of last year.
Net cash interest expense was $1.4 million for the first quarter compared to $1.9 million in the same quarter of last year.
Cash capital expenditures for Q1 totaled $1.8 million compared to $2.7 million in the prior year.
Capital expenditures for the year are expected to be approximately 8 million.
Turning to our balance sheet, which remains very strong.
Cash and marketable securities as of March 31, totaled $165.7 million, total debt was $214.5 million, net of $75 million of cash and marketable securities on the books are total leverage as defined in our credit agreement was 2.15 times at the end of the first quarter.
Net of total accessible cash and marketable securities, our total net leverage was one turn of EBITDA.
Turning to our pacings for the second quarter of 2021.
As of today, our TV advertising business is pacing 44% over the prior-year period with core TV, excluding political pacing at a plus 55%.
Our digital business, including revenue from Cisneros Interactive is pacing plus 900%, factoring in Cisneros revenue generated in Q2 of last year, our digital business on a pro forma basis is pacing plus 115%.
Lastly, our audio business is pacing plus 84% with core audio, excluding political pacing plus 103%.
All-in our total revenue compared to last year is pacing at a plus 360%, pro forma on Cisneros acquisition, our total revenue is currently pacing at a plus 87%.
A majority investment in Cisneros Interactive has performed strongly since the closing of the acquisition in the fourth quarter of last year.
And we are excited to continue to expand and enhance our digital offerings.
We're also very optimistic about Entravision's continued growth given the overall improvement of macroeconomic conditions.
With a more streamlined cost structure, we will continue to operate our businesses more efficiently while at the same time delivering high-quality and dynamic services, content, and products to our customers.
We appreciate your continued support of Entravision. | q1 revenue rose 132 percent to $148.9 million.
qtrly net income per share attributable to common stockholders, basic and diluted$0.06. | 1 |
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should be -- should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide an overview of the current operating environment, while Rob will provide some details on our second quarter results as well as some shipment trends for the third quarter.
We delivered solid financial results in the second quarter as our entire Lamb Weston team continues to execute well through this challenging environment.
That's only possible because of their ongoing commitment to serving our customers, suppliers and communities.
Our second quarter results also reflect operating conditions that were generally similar to what we experienced in the first quarter.
Overall restaurant traffic in the US was resilient by holding steady at around 90% of pre-pandemic levels for much of the quarter.
However, traffic and frozen potato demand rates continued to vary widely by channel.
Traffic at large chain restaurants were essentially at prior year levels as quick service restaurants continued to leverage drive-through, takeout and delivery formats.
Traffic at full service restaurants was 70% to 80% of the prior year levels for much of the quarter.
However, traffic began to soften in November as governments reimposed social and on-premise dining restrictions in an effort to contain the resurgence of COVID and as the onset of colder weather tempered outdoor dining opportunities across many markets.
Traffic and demand at non-commercial customers, which includes lodging, hospitality, healthcare, schools and universities, sports and entertainment, and workplace environment was fairly steady at around 50% of prior year levels for the entire quarter.
In retail, consumer demand continued to be strong with weekly category volume growth between 15% and 20% versus the prior year.
Outside the US, restaurant traffic in fry demand were uneven across markets and varied within the quarter.
In Europe, which is served by our Lamb Weston Meijer joint venture, fry demand during much of the quarter was similar to last year, but softened the 75% to 85% of prior year levels during the latter part of the quarter as governments reimposed social restriction and as the weather turn colder.
As you may recall, unlike in the US, QSRs in Europe generally have only limited drive-through capabilities.
Demand in our other key international markets was mixed.
In China and Australia, demand was near prior year levels.
In our other key markets in Asia and Latin America, overall demand improved sequentially from our first quarter, but remained well below prior year levels.
Going forward, we expect many of the softer traffic and demand trends that we began to see in November to carryover into our fiscal third quarter.
The sharp resurgence in COVID in the US and Europe has led government to imposed even more rigid social restrictions, In addition, we expect outdoor restaurant dining traffic in our largest markets to fall further as we enter the coldest months of the year in the northern hemisphere.
Not surprisingly, we expect traffic at full service restaurants will continue to be disproportionately affected.
Major QSR chains in the US should be able to continue to hold up well due to their ability to serve customers via drive-through and delivery.
Retail should also benefit as consumers eat more meals at home.
And as Rob will discuss later, while still early, our shipments to those channels in December support that view.
So on one the hand in the near term, we anticipate facing even more challenging and volatile operating conditions than what we experienced in the first half of our fiscal year.
On the other hand, we believe this COVID induced shock to demand is temporary.
We're confident in the strength of the frozen potato category and do not see any structural impediments to recovery in demand and growth over the long term.
As COVID vaccines become more widely available in the coming months and as the virus is more broadly contained, we expect governments will gradually less social restrictions.
This should lead to steady growth in restaurant traffic as the year progresses.
We believe this growth will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021.
In the meantime, we're confident in our business fundamentals, the pricing capacity utilization and potato supply and our ability to manage through the pandemics impacts on our manufacturing operations.
Our recently announced increase in our quarterly dividend in the planned resumption of our share repurchase program reinforce our conviction in the strength of our business and the category, as well as our commitment to support customers and create value for our stakeholders.
In summary, we delivered solid Q2 results and are executing well in a challenging environment.
We expect frozen potato demand has softened in the near term due to reduced traffic, following government reimposed, social restrictions as well as the onset of colder weather, and we're optimistic that the increasing availability of COVID vaccines will enable restaurant traffic to gradually improve as the year progresses and that demand will approach pre-pandemic levels by the end of calendar 2021.
As Tom noted, we delivered solid financial results in the second quarter, as our teams continued to manage through an ever changing demand environment as well as COVID-related disruptions to our manufacturing and distribution networks.
For the quarter, net sales declined 12% to $896 million.
Sales volume was down 14% largely due to fry demand at restaurants and foodservice being negatively impacted following government imposed restrictions to contain the spread of COVID, as well as colder weather beginning to limit outdoor dining across many of our markets.
Overall, as Tom described earlier, restaurant traffic and our sales volumes in the US stabilized at approximately 90% of pre-pandemic levels, although performance varied widely by sales channel.
International sales were mixed but improved sequentially versus our first quarter.
Price mix increased 2% driven by improved price in our Foodservice and Retail segments as well as favorable mix in retail.
Gross profit declined $62 million as lower sales and higher manufacturing costs more than offset the benefit of favorable price mix and productivity savings.
As we discussed in our previous earnings call, we expect that our manufacturing cost to increase in the quarter.
This was partly due to processing potatoes from the 2019 crop through early September, which is a couple of months longer than usual.
We did this in order to manage finished goods inventories in light of the pandemics impact on fry demand.
Processing older crop results in increased cost due to significant -- due to higher raw material storage fees and lower recovery rates.
Since we typically carry upwards of 60 days of finished goods inventory, we realize the impact of these costs in our second quarter income statement as we sold that inventory.
We also realized higher manufacturing costs due to input cost inflation, primarily related to edible oils, raw potatoes and other raw ingredients.
Overall, our input cost inflation was in the low-single digits.
Finally, we continue to realize incremental costs and inefficiencies resulting from the pandemic's disruptive effect on our manufacturing and supply chain operations.
As a reminder, these costs largely relate to labor and other cost to shutdown, sanitize and restart manufacturing facilities impacted by COVID.
Cost associated with modifying production schedules reducing run-times and manufacturing retail products on lines primarily designed for foodservice products and cost per enhancing employee safety and sanitation protocols, as well as for incremental warehousing, transportation and supply chain costs.
Specifically in the quarter, we had notable disruptions in our facilities in Idaho, as well as lesser ones in some other facilities.
We expect to continue to incur COVID-related costs through at least the remainder of fiscal 2021.
As a result, we consider these costs and disruptions as part of our ongoing operations and are no longer disclosing these costs separately.
SG&A declined by nearly $8 million in the quarter, largely due to lower incentive compensation expense accruals and a $3.5 million reduction in advertising and promotional expense.
The decline was partially offset by investments to improve our operations and IT infrastructure, which included about $5 million of non-recurring consulting and training expenses associated with implementing Phase 1 of our new ERP system.
Equity method earnings were $19 million, which is up $4 million versus last year.
Excluding the impact of unrealized mark-to-market adjustments equity earnings increased about $2 million due to better performance by our European joint venture.
However, like in the US, our shipments softened during the latter part of the quarter reflecting the effect on restaurant traffic of governments reimposing, social restrictions, as well as colder weather on outdoor dining.
EBITDA, including joint ventures was $213 million which is down $48 million.
The decline was driven by lower income from operations and it was partially offset by higher equity method earnings.
Diluted earnings per share in the quarter was $0.66, down $0.29 largely due to lower income from operations.
EPS was also down due to higher interest expense reflecting our higher average total debt and the write-off of some debt issuance costs as we paid off the term loan, a year early.
The decline was partially offset by higher equity earnings.
Moving to our segments.
Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America were down 12% in the quarter.
Volume was down 11% due to softer demand for fries outside the home, especially in our international markets.
Shipments to large chain restaurant customers in the US of which approximately 85% are to QSRs approach prior year levels as QSRs leveraged drive-through and delivery formats.
However, some of that strength also reflected pulling forward sales of customized and limited time offering products from the third quarter.
International sales, which historically comprised about 40% of segment sales, we're at about 80% of prior year levels in the aggregate, but vary by market.
Shipments in China and Australia approached prior year levels.
Our shipments to other parts of Asia and Latin America, improved sequentially as customers and distributors in many of these markets were able to right-size inventories, however, they remained well below prior year levels.
Price mix declined 1% as a result of negative mix.
Price alone was flat.
Global's product contribution margin, which is gross profit less A&P expense declined 28% to $93 million.
Lower sales volume, higher manufacturing costs, and unfavorable mix drove the decline.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 21% in the quarter.
Segments to smaller chain and independent full service and quick service restaurants tracked around 70% to 80% of prior year levels through much of October, but slowed to 60% to 70% in November, following government's reimposing, social restrictions and as colder weather tempered restaurant traffic in some of our markets.
Shipments to non-commercial customers improved modestly since summer but remain at around 50% of prior year levels, with strength in healthcare more than offset by continued weakness in the other channels.
Price mix increased 4% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020.
Mix continued to be unfavorable with some hard hit independent restaurants looking to reduce costs by purchasing more value-added products rather than the premium Lamb Weston branded ones.
While we've regained much of this business since the pandemic first struck last spring on a year-over-year basis, it remains a mix headwind.
Foodservices product contribution margin declined 21% to $88 million.
Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline and was partially offset by favorable price.
Sales for our Retail segment increased 7% in the quarter.
Price mix increased 7%, primarily reflecting favorable mix benefit of selling more of our higher margin branded portfolio of Alexia, Grown in Idaho and licensed restaurant trademarks.
Sales of our branded products were up about 30% which is well above category growth rates, which ranged between 15% and 20%.
The increase in our branded volume was offset by the loss of certain low margin, private label volume that began late in the second quarter of fiscal 2020, as well as an additional amount that began a couple of months ago.
As a result, we expect private label losses to continue to be a headwind.
Retail's product contribution margin increased 6% to $30 million.
The increase was driven by favorable mix and lower A&P expense and was partially offset by higher manufacturing costs.
Moving to our cash flow and liquidity position.
We are comfortable with our liquidity positioned and confident in our ability to continue to generate cash.
In the first half, we generated nearly $320 million of cash from operations, which is down about $25 million versus last year, due to lower sales and earnings.
We spent $54 million in capex, including expenditures for our new ERP system.
We paid $67 million in dividends and a few weeks ago, announced a 2% increase in our quarterly dividend.
In addition, we plan to resume our share repurchase program this quarter.
As you may recall, we temporarily suspended our buyback program in late fiscal 2020 in order to help preserve our liquidity during the early days of the pandemic.
As we discussed in our previous earnings call, in September, we amended our credit agreement to put in place a new three-year $750 million revolver.
At the same time, using a portion of the more than $1 billion of cash on hand, we prepaid the approximately $270 million outstanding balance on the term loan that was due in November of 2021.
At the end of the second quarter, we had more than $760 million of cash on hand and our new revolver was undrawn.
Our total debt was $2.75 billion and our net debt to EBITDA ratio was 3.1 times.
Now turning to our shipments so far in the third quarter.
Broadly speaking, in the US, demand at QSRs and at retail are holding up well, while traffic at full service restaurants continues to soften.
Specifically, US shipments in the four weeks ending December 27, were approximately 85% of prior year levels.
In our Global segments, shipments to our large QSR and full-service chain customers in the US, were more than 95% of prior year levels.
We expect that rate will largely continue for the remainder of the third quarter.
In our Foodservice segment, shipments to our full service restaurants regional and small QSRs and non-commercial customers in aggregate were 60% to 65% of prior year levels.
That is largely in line with what we realized during the latter part of the second quarter.
We anticipate that shipments to full-service restaurants and small and regional QSRs will continue to soften as social restrictions broaden and as winter weather takes a bigger bite out of outdoor dining.
Shipments to non-commercial customers, which have historically comprised about 25% of the segment's volume were roughly half of prior year levels and will likely remain soft for the remainder of the quarter.
In our Retail segments, shipments were above prior year levels with strong volume of our branded products, partially offset by a decline in shipments of private label products.
We believe that this rate will largely continue for the remainder of the quarter.
Outside the US, overall demand has slowed, but it's varied by market.
In Europe, shipments by our Lamb Weston Meijer joint venture were approximately 85% of prior year levels, continuing the softer demand that we realized during the latter part of the second quarter.
We believe that shipments will continue to soften due to severe social restrictions and colder weather.
Shipments to our other international markets, which primarily include Asia, Oceana, Latin America were mixed.
In aggregate, international shipments so far in the quarter have been softer than what we realized during the latter half of the second quarter.
As a reminder, all of our international sales are included as part of our Global results.
In short, other than at US QSRs, which can leverage drive-through access, global demand for fries at restaurants and foodservice will be soft in the third quarter, following government's reimposing restrictions to combat the resurgence of COVID, as well as colder weather in our Northern Hemisphere markets limits outdoor dining opportunities.
With respect to contract pricing, after completing discussions for contracts that were up for renewal, we expect pricing across our domestic large chain restaurant portfolio in aggregate to be flat versus prior year.
Outside of these large chain restaurant contracts, on balance, domestic pricing is holding up well.
However, we continue to see increased competitive activity in more value-added oriented products in some international markets and to a lesser extent in some value tiered domestic market segments.
With respect to costs, the potato crop in our growing regions in the Columbia Basin, Idaho, Alberta, and the upper Midwest is consistent with historical averages in aggregate.
We don't see any notable impact on cost outside of inflation.
Crop in our growing areas in Europe is also broadly consistent with historical averages, which should help ease cost pressures there versus last year.
However, we do expect to continue to incur additional cost as a result of COVID's disruptive impact on our manufacturing and supply chain operations and we expect that we'll continue to do so until the virus is broadly contained.
Now here's Tom for some closing comments.
Let me just quickly sum up by saying while the near-term environment will be volatile.
We believe that the restaurant traffic will gradually recover to pre-pandemic levels by the end of calendar 2021.
We'll continue to focus on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for our stakeholders. | q2 earnings per share $0.66.
q2 sales $896 million versus refinitiv ibes estimate of $876.8 million.
qtrly volume declined 14 percent.
north america and europe shipments will remain soft during remainder of quarter.
expect demand will remain soft in the coming months, especially at full-service restaurants.
lamb weston - believe restaurant traffic may approach pre-pandemic levels later this calendar year if vaccines and other measures are successful.
plan to resume share repurchase program in january 2021.
announced a 2% increase in quarterly dividend. | 1 |
A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
Please note that we'll be using combined historical results for the second quarter defined as three months legacy IFF results and three months of legacy N&B results, and for the first half 2021 defined as six months of legacy IFF January to June, and five months of legacy N&B February to June in both the 2020 and '21 periods to allow comparability in light of the merger completion on February 1, 2021.
With me on the call today is our Chairman and CEO, Andreas Fibig and our Executive Vice President and CFO, Rustom Jilla.
I will begin today's call by providing an overview of our performance during the first half of 2021 followed by an update on regarding our ongoing efforts to fully integrate the N&B business following the completion of the transaction in the first quarter of the year.
Rustom will then provide a detailed review of our second quarter financials highlighting segment level business performance and the market dynamics, we saw in the quarter.
Before we jump into the question-and-answer session Rustom will also conclude with an overview of our expectations for the remainder of 2021.
Now, beginning with Slide 6, I would like to review our business highlights for the first half of the year.
I'm pleased to report that IFF has delivered a strong performance in the second quarter, which is a robust acceleration viz our combined Q1 growth and through the first half of the year.
As I've said before, execution is everything and IFF has delivered strong financial results while advancing our ongoing integration efforts following the completion of the N&B merger in February.
In the first half of 2021, IFF achieved $5.6 billion in sales representing 8% growth or 5% on a currency neutral base.
For comparable purposes and to reflect the portfolio differences between our peers, I want also to highlight that both businesses performed well with legacy IFF achieving a very strong high-single digit growth rate with nearly 100 basis points of EBITDA margin expansion, and legacy N&B growing in mid-single digits.
At the same time, we continue to operate in a challenging global environment with significant headwinds in material cost and supply chain logistics.
In the first half combined EBITDA growth was a solid 6% and a combined EBITDA margin of 22.5%.
Importantly, our strong free cash flow of $533 million enables IFF to maintain significant financial flexibility, including our efforts to delever.
We remain on track to achieve our deleveraging targets of under three times by year three post transaction close and we improved our net debt to credit adjusted EBITDA leverage on 4.3 times in the first quarter to 4.2 times in the second quarter.
Finally, we are also well on track with integrating the N&B business and continue to realize synergies in line with our expectation of the transaction.
As we sharpen the IFF portfolio, we continue to progress on the divestiture of our Food Preparation business which we expect to be completed late in the third quarter or early fourth quarter.
As I mentioned last quarter, the divestiture of this non-core business will create a more efficient IFF with an enhanced ability to grow and innovate across the key business segments.
We are committed to ongoing active portfolio management and we'll continue to seek ways to increase value equation.
Stepping back to reflect on the first half of the year.
I'm very pleased with what we have been able to accomplish.
We delivered strong sales growth, which is an acceleration versus historical performance for both legacy IFF and legacy N&B in the midst of a transformational integration as well as a global pandemic.
This is a validation of our strategy, motivates our team to continue defying industry expectations as we continue to see the benefits of our expanded product offering and capabilities.
Long-term growth prospects of our business are strong and we are making investments in capacity, R&D, and Plant Technologies as well as increasing inventory levels and incurring higher logistic costs to maintain our growth momentum in the interim, specifically in the N&B business as we maximize our growth opportunities going forward.
As we look to the third quarter and second half of 2021 our objectives are clear, build on this momentum while executing on our integration plans allowing IFF to fully leverage our new capabilities and chief -- achieve our long-term expectations.
Turning to slide 7, I would like to briefly discuss the regional sales dynamics that influence our results for the first half.
Despite persisting global challenges and varied economic recoveries, we are pleased to report growth in each of our four key operating regions.
In North America, we achieved growth in all of our business segments, led by a single-digit growth in Scent, Nourish and H&B.
Similar to the first quarter, our Asian markets continue to perform well achieving a 5% increase in sales led by double-digit growth in India and a mid single-digit performance in China.
While we had anticipated that growth would have been impacted in India due to COVID in the second quarter, the business was resilient and finished higher than we expected with strong double-digit growth in Q2.
From a segment perspective and Asia's strong increases across our Nourish, Scent, and Pharma Solutions businesses all contributed to this sustained growth in this key region.
Latin America, our strongest performing region, we achieved 12% sales growth driven by double-digit performance in nearly all of IFF's business segments and underpinned by favorable currency movements.
[Indecipherable] Brazil, Mexico and South Cone, all achieved growth in the first half.
We are particularly pleased to report that our EMEA region has impressively rebounded in the second quarter up to high-single digits.
We achieved a 2% increase in sales in the first half as COVID 19 related restrictions eased.
Our Scent and Nourish business performed particularly well in Q2, both achieving double-digit growth.
Bearing [Phonetic] any newly emerging COVID 19 challenges we expect this growth to continue through the remainder of the year as global vaccination rates increase and Western and Central Europe continue to recover.
Now turning to Slide 8.
I will provide a more detailed look at our sales performance across IFF's key business segments through the first half of 2021, particularly those that significantly contributed to our overall 8% sales growth, or 5% growth on a currency neutral basis that I mentioned earlier.
We are pleased to report solid growth across all of our four core divisions, Nourish, Health & Bioscience, Scent and Pharma Solutions.
Nourish achieved currency-neutral growth of 6% driven by a strong performance in flavors ingredients and Food design.
Similar to the first quarter, Scent remains our largest sales driver on a year-to-date basis, achieving 8% of currency-neutral growth led by a strong performance in Fine Fragrance and Consumer Fragrance.
Our Health & Bioscience business has return to solid growth in the second quarter following a challenging first quarter where sales were affected by COVID 19 pressures in microbial control and grain processing, While microbial control continues to be challenged for the first half, we saw growth in grain processing, which showed a recovery in the second quarter as well as home and personal care cultures and food enzymes and animal nutrition.
Finally, our Pharma Solutions business also delivered growth through the first half of 2021 against a strong year ago comparison.
On slide 9, I would like to discuss the underlying dynamics influencing each of our four segments in the first half.
As I mentioned, we saw broad-based growth in all Nourish categories led by robust performance in Flavors.
Despite strong volume and continued cost discipline, higher raw material costs continue to affect margin when compared to the first half of 2020.
However, on a year-over-year basis, EBITDA grew about 7%.
Our Health and Biosciences businesses delivered growth in the first half led by strong performance in Home and Personal Care and grain processing.
This growth offsets COVID 19 related pressures in microbial control and a strong year ago comparable in Health.
Higher logistic costs related to capacity and strong demand impacted our margin.
Nonetheless, we are encouraged by this performance and expect continued improvement as we move into Q3.
Our leading growth and profit -- profitability driver Scent achieved an operating EBITDA margin increase of 170 basis points and absolute EBITDA grew nearly 20%.
This was driven by a strong rebound in Fine Fragrances as retail channels continue to recover, continued strength in Consumer Fragrances and double-digit growth in Cosmetic Actives.
Scent also delivered strong profitability led by higher volumes, favorable mix and higher productivity, which we expect to continue through the remainder of the year.
Lastly, in Pharma Solutions, the segment's 1% growth was driven primarily by improvements in industrials, so our margin was significantly challenged due to higher energy costs, lower manufacturing utilization and the result in the weather related raw material shortages.
Now on slide 10 and 11, I would like to discuss our continued synergy progress in connection with our merger with N&B.
From a revenue synergy perspective, we remain on track to meet our $20 million revenue synergy target this year.
Coupled with continued demand and positive feedback from our customers, we are also confident in our ability to meet our 2024 run rate revenue synergy target of approximately $400 million.
I would like to spend a moment highlighting how we realize this significant opportunity and share additional context on some of our recent wins.
In only six months since completing the merger, we are already seeing strong affirmation in the opportunity before us.
Our Home Care segment is a perfect example of how our expanded portfolio and combined capabilities with N&B delivers creative solutions for our customers and creates new opportunities for our business.
Recently, our Health and Bioscience division saw an opportunity to collaborate with our Scent division.
A global Scent customer expressed the need for enzyme technology and IFF's capabilities across divisions allowed us to deliver an integrated solution and ultimately create a superior dishwashing detergent.
Together with IFF's leading fragrance capabilities, our enzyme technology ensures fit for purpose delivery and performance, which creates a differentiated product for our customers.
This opportunity represents more than $5 million in annual sales potential.
At the same time, we are actively working with other customers across IFF network to develop solutions that require capabilities across our four divisions.
In the Food and beverage category, we continue to see demand for plant based meat alternatives that showcase the best of our expanded portfolio.
For low sugar, low fat yogurt, we are introducing new flavor technologies with improved texture and speed to market, which are key advantages for our customers.
Lastly, in our Health category we're developing an integrated solution for fiber gummy that leverages our unmatched scientific and technical expertise combined with our best-in-class flavor offering.
These are just a few examples of the cross-selling opportunities that we are seeing customers increasingly demand and differentiator for our business over the long term.
We made significant strides in the second quarter from an integration perspective, ramping up our cost synergies from a few million dollars in the first quarter to a total of approximately $15 million on the first-half basis.
This was largely a result of the comprehensive savings program we have implemented in the second quarter which allowed us to leverage our increased scale to reduce our indirect spend, benefit from various office consolidations and renegotiations, and right-size our organization.
Additionally, because of our operational strengths and commitment to the integration process early on, we were all [Phonetic] able to accelerate exiting our various transition service agreements with DuPont.
I'm very encouraged by the continued progress on this front and we are on track to deliver at least $45 million cost synergies for the full year, and ultimately our three-year run rate cost synergy target of $300 million.
And now, I will hand it over to Rustom.
I will begin with an overview of our consolidated second quarter results on Slide 12.
In Q2, IFF generated approximately $3.1 billion in sales, representing a 13% year-over-year increase or 9% on a combined currency-neutral basis, primarily driven by double-digit growth in our Nourish and Scent divisions and a strong Health & Biosciences performance.
Though our gross margin was pressured by higher input cost, raw materials and logistics inflation and higher air freight volumes, this was partly offset by our disciplined cost management practices, administrative expense reductions and cost synergies.
This enabled us to deliver adjusted operating EBITDA growth of 7%.
We also achieved strong adjusted earnings per share, excluding amortization of $1.50 for the second quarter.
I want to provide a perspective on sales performance in Q2 versus pre-COVID.
There is no doubt that 2020 was an extraordinary year due to COVID 19, so it makes more sense to also evaluate our performance relative to 2019's levels.
And as you can see, all four divisions in the second quarter delivered strong sales growth as compared to the space period.
Total company sales were up 8% on a two-year basis with double-digit growth in Nourish and Pharma Solutions, a high single-digit increase in Scent, and mid single-digit growth in H&B.
With the exception of a handful, all of our sub categories have grown relative to their pre-COVID levels.
Most notably, we are pleased to report that those categories most impacted by COVID 19 are ahead of their respective Q2 2019 levels including Cosmetic Actives, which is up double digits, Fine Fragrance, which is up high-single digits, and grain processing which is up low-single digits.
Foodservice in microbial control while we had strong growth in the second quarter of 2021 remained below Q2 2019's levels, but we expect it will continue to improve as we move forward.
This performance underscores the strength and diversity of our portfolio as well as our position as an essential partner to our customers.
Now on the next few slides, I will dive deeper into the second quarter financials of each of our four divisions.
Beginning with Nourish on Slide 14.
Sales for the division increased by 15% year-over-year or 11% on a currency neutral basis, driven by robust double-digit growth in flavors with Frutarom contributing to growth, and a strong ingredients performance particularly from our protein solutions, cellulosic, locust bean gum, and Food Protection categories.
Nourish also saw a strong rebound in Food design including a very strong 24% growth in foodservice as pandemic related restrictions continue to ease and consumer behavior and away from home channels continue to normalize.
As I mentioned in the previous slide, higher raw material costs put relatively modest pressure on the margins of most of our individual segments.
Although we are pleased to have delivered adjusted operating EBITDA growth of 7%.
Pricing continued to accelerate in Q2 and contributed over a percent of growth in the second quarter.
As we will discuss later, we expect this will increase significantly in the third and fourth quarter as more of our pricing actions take hold.
Turning to slide 15.
Our Health & Biosciences division saw year-over-year growth of 9%, or 5% on a currency neutral basis, led by double-digit growth in Home and Personal Care.
As Andreas mentioned earlier, we are particularly encouraged by Health & Biosciences returned to growth this quarter, led by our microbial control and grain processing categories strong recoveries from the industrial and supply chain challenges related to COVID 19.
Performance in our Health category was challenged based on the particularly strong double-digit probiotics year-over-year comparison, although this did not offset the rest of the segment's growth and we remain confident in the Health category's trajectory moving forward.
Health & Biosciences also delivered adjusted operating EBITDA growth of 5%.
While you see that the division's margin was down this quarter, this was due to higher logistics costs in order to balance robust customer demand and available capacity.
We have increased capacity investments in this business to support long-term growth and invested R&D and plant technology to increase output later this year.
We are incurring significantly higher air freight costs to maintain our growth momentum in the interim, and this is impacting our EBITDA margin.
Now turning to slide 16 to discuss the results of our Scent division, which continued to be a standout growth contributor this quarter.
Our Scent division generated $550 million in total sales representing year-over-year growth of 16%, or 13% on a currency neutral basis.
Scent also achieved adjusted operating EBITDA growth of 34% with margin expansion of 300 basis points, driven by robust volume mix and productivity, which did offset some inflationary pressures.
While Consumer Fragrances was down slightly this quarter against a very strong double-digit year ago comparison, a significant rebound in Fine Fragrances which grew by approximately 85% led by new wins and improved volumes more than offset Consumer Fragrance's more modest performance due to last year's double-digit growth.
Our Ingredients category also contributed the division's strong performance growing double-digits led by strong performance in Cosmetic Actives and Fragrance ingredients.
Overall, we are extremely pleased with Scent's continued strong performance.
Lastly, turning to Slide 17 to discuss Pharma Solutions.
Currency-neutral sales were flat against a strong year ago comparison with Industrial Pharma the most significant performance driver for this division, led by Global Specialty Solutions.
Core Pharma's performance was challenged against a very strong year ago comparison.
On a two-year basis, growth was solid at about 3.5%.
Adjusted operating EBITDA was pressured this quarter with the margin decline due to higher energy costs and lower manufacturing utilization due to a couple of plant shutdowns as a result of weather related raw material shortages.
Specifically we had raw material availability issues related to the Midwest storm in the US earlier this year, which meant we were not able to run production and absorb our fixed costs.
Going forward, the supply chain is improving, which we expect will lead to stronger margins in Pharma Solutions for the balance of the year.
Now turning to Slide 18.
I'd like to review our cash flow position leverage dynamics for the first half of 2021, which remain a top priority as we continue to navigate a recovery in global markets.
As you will see in the first half IFF generated $533 million in free cash flow, with free cash flow from operations totaling $698 million, driven by an improvement in core working capital.
CapEx for the first half totaled $165 million or approximately 3% of sales as we continue to invest in growth accretive areas that we believe will ultimately prove rewarding over the long term as well as in integration-related activities.
In the first half, we also delivered $274 million in dividends to our shareholders.
As we look ahead, we are confident that our cash generation will remain robust, and have announced that we are raising our quarterly dividend marking the 12th consecutive year of dividend increases.
From a leverage perspective, our cash and cash equivalents finished at $935 million with gross debt holding steady at $12 billion.
Our trailing 12 month credit adjusted EBITDA totaled $2.61 billion, and our net debt to credit adjusted EBITDA was 4.2 times.
We are slightly better than we expect to be at this point in time and we are still expecting to delever to below three times net debt to EBITDA in the first three years post transaction close.
Now moving to Slide 19, I'd like to provide an update on our financial outlook for the full year 2021.
IFF has built a solid foundation in the first half of the year and delivered particularly strong second quarter performance, and we expect strong growth will continue through the rest of the year.
For the full year 2021, we are once again increasing our forecast for total revenues with an expectation to achieve 2021 total revenues of approximately $11.4 billion, which equates to about 7% growth.
This is up from our previous $11.25 billion or 6% growth as we have confidence in our sales momentum continuing into Q3 and through the rest of the year.
Breaking down the contributors of growth, we expect currency-neutral sales to be about 5% and FX benefits to be approximately 2%.
While pandemic related uncertainties persist, we are encouraged by the strong performance and important recoveries we are seeing across the business, which we believe position us well to capture continued strong sales growth in Q3 and Q4.
At the same time, we now see full-year 2021 adjusted EBITDA margin at about 22.5% versus approximately 23% previously.
A part of this reduction is related to our margin performance in Q2 for all the reasons I explained earlier.
We also continue to see inflationary pressures across the supply chain.
From a raw material perspective, we have seen raw material costs continue to increase over the course of the year.
In the first half we were successful in raising our prices to recover a portion of the cost increases, and continue to expect close to full cost recovery in the second half.
It should be noted that we are also seeing more broad based non-raw material inflation such as higher energy costs that we're managing through.
Our expectations for air freights has also increased significantly as rates are higher, but mostly higher volumes to balance robust customer demand and available capacity.
We are absorbing higher logistics costs to grow the business in the short term and expect this is only temporary until our capacity expansion projects are complete.
The combination of unfavorable price to raw material costs and higher logistics costs are negatively impacting operating margin in 2021 by more than 100 basis points.
However, through higher sales, strong cost discipline, and our focus on unlocking additional cost synergies, we believe we will end up only about 50 basis points lower than our previous expectations with higher revenues and a roughly similar dollar EBITDA level.
For modeling purposes, please note the depreciation and amortization, interest expense, CapEx as a percentage of sales, adjusted effective tax rate excluding amortization, and weighted average diluted share count all remain the same as what we shared in Q1.
Overall, we are confident that we are well placed to continue capturing additional growth over the next two quarters and beyond, while maintaining our focus on execution, continued financial discipline and leveraging our significantly bolstered resources and expertise as a stronger, more diversified company.
Before I wrap up today's call I would like to first recognize our thousands of employees around the world who continue to display their unwavering commitment to serve our customers, unify our teams together with N&B and deliver for our communities.
Despite the uncertain environment that we have continued to navigate, IFF's first half and Q2 results showcase the strengths of our combined portfolio and our ability to execute our ambitious business objectives.
And I'm incredibly proud to lead such a talented and passionate group of IFFs.
We have much to be proud of this quarter as we move ahead, I'm confident that we have built the financial operational structures needed for our combined company to reach even greater heights.
As Rustom and I have mentioned, we are targeting a strong full year performance indicative of our post-pandemic aspirations, and I know we are exceptionally positioned to achieve this, and we are seeing this strong top line momentum will continue in the early days of the third quarter.
Together, we will further our mission to be an innovative force for good and redefine what it means to be a leader in the global value chain for consumer goods and commercial products. | q1 adjusted earnings per share $1.60.
sees combined fy 2021 (excluding.
n&b jan) sales about $11.25 billion.
qtrly adjusted earnings per share excluding amortization $1.60. | 0 |
I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.
Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook for 2021.
To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and requeue for any additional questions.
All comparisons mentioned today are against the prior year period.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
The format will be virtual again this year.
Please mark your calendars, invitations and more details will follow.
Strong demand continued in the third quarter across all our businesses, but global supply chain and COVID-19 disruptions to production and labor availability negatively impacted our financial results; approximately a $75 million impact to revenue and $75 million to operating profit in the quarter.
Company revenue was up slightly to a third quarter record of $1.06 billion with the benefit of strong price in the shipment constrained environment.
GAAP operating income was down 3%.
GAAP earnings per share from continuing operations was relatively flat at $3.41 compared to $3.42 in the prior year quarter.
Total segment profit was down 7% and total segment margin was down 120 basis points to 15.5%.
Adjusted earnings per share from continuing operations was down 4% to $3.40, including approximately $0.55 of negative impact from the global supply chain and COVID-19 disruptions.
Looking at business segment highlights for the third quarter.
Residential revenue was down 2% and segment profit was down 6%.
Segment margin was down 90 basis points to 20.3%.
Residential revenue from replacement business was down mid-single-digits.
Revenue from new construction was up low-double-digits.
Lennox Brand revenue was down low-single-digits and revenue from our Allied and our other brands were up low-single-digits.
Market demand remains high entering the fourth quarter, and we remained bullish on the residential market as we look ahead to 2022 in the coming years.
More people continue to work from home and run our HVAC systems than before the pandemic.
With global warming, the hotter weather we are seeing has an exponential impact on reducing the life of cooling systems, and there are more complete HVAC system sales taking place with all R22 refrigerant systems in replacement window.
This is driven by the EPA ban on the sale and distribution of equipment using R22 refrigerant effective January 1, 2010 and the ban of the production or import of R22 refrigerant effective January 1, 2020.
While R22 refrigerant is still available on the market, it's significantly more expensive than 410A.
In many cases, it is cheaper to replace with the new 410A system, which is also more efficient and comes with the new warranty then to repair the old R22 system.
For 2005 to 2010, 60% of air conditioners and heat pumps sold were R22.
The need to replace these has a meaningful benefit to residential growth.
We expect these dynamics to lead the strong residential market conditions for the years ahead.
In addition, Lennox and Allied will be running a proven playbook for market share gains.
Moving to our Commercial business.
Third quarter revenue was up 2%.
Commercial profit was down 42%.
Segment margin declined 800 basis points to 10.7%.
On top of supply chain shortages and bottlenecks disrupting production, our Arkansas factory was hit the hardest by COVID-19 in the quarter and labor availability was a significant issue.
At constant currency, commercial equipment revenue was down low-single-digits in the quarter.
Within this, replacement revenue was up low-single-digits with planned replacement up more than 20% and emergency replacement down more than 30%.
New construction revenue was down mid-single digits.
Breaking out revenue another way, regional and local business revenue was down high-single-digits.
National Account equipment revenue was up high-single-digits.
The team won two National Account equipment customers in the third quarter to total 11 year-to-date.
On the service side, Lennox National Account Service revenue was up mid-teens.
VRF revenue was up more than 30%.
In Refrigeration, for the third quarter, revenue was up 10%.
North America revenue was up more than 20%.
Europe Refrigeration revenue was relatively flat.
And Europe HVAC revenue was down mid-single-digits.
Refrigeration segment profit was up 12% as margin expanded 20 basis points to 10.6%.
Looking ahead for both our Refrigeration and Commercial businesses, demand remained strong.
Backlog is up approximately 60% for Refrigeration and 90% for Commercial and order rates continued to be strong.
Demand is clearly not an issue, but as we look to the fourth quarter, we continue to expect a material impact to production for supply chain shortages and bottlenecks.
We currently expect a similar negative financial impact to our business as we saw in the third quarter, approximately $75 million of revenue and $25 million of operating profit.
We continue to see broad inflationary pressures, including for commodities and components, but we have enacted three rounds of price increases this year.
The latest one was just on September 1 with a focus on staying ahead of inflation.
The company yielded 4% price overall in the third quarter, including 5% in residential.
In addition to the carryover benefit next year from our June and September price increases, we're announcing additional price increases heading into 2022.
Our Refrigeration business has announced a price increase of 8% in North America effective for December 1.
Likewise, our European business has recently announced another round of increases generally from 5% to 10% to drive price in 2022.
Our Commercial business has announced a price increase of up to 13% effective January 1.
And our Residential business will be announcing another round of price increases in November to be effective heading into 2022.
For 2021, we are narrowing our revenue and earnings per share guidance for the year.
We are narrowing 2021 guidance for revenue from 12% to 16% to new range of 13% to 15%.
Foreign exchange is still expected to be a 1% favorable to revenue.
We are narrowing 2021 guidance for adjusted earnings per share from continuing operations from $12.10 to $12.70 to a new range of $12.10 to $12.30.
Our free cash flow guidance remains $400 million for the year.
As the company continues to battle through the disruptions to production from the global supply chain and COVID-19, we are also positioning the company for the future.
It's too early to set guidance for 2020, but as we think about next year, we expect strong pricing power to continue.
The company yielded 4% in the third quarter, which had just one month of benefit from the third price increase this year.
For 2022, we will have carryover price benefit from our June and September 2021 price increase.
We have announced additional price increases in our next year.
We will have strong price benefit to offset commodity headwind next year.
Looking at market drivers and our strong backlog position and order rates, we see Residential, Commercial Unitary and Refrigeration up in 2022 as you get more and more of the supply disruptions behind us.
We expect to return to strong growth and profitability as we capitalize on market opportunities.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the third quarter, revenue from Residential Heating & Cooling was $711 million, down 2%.
Volume was down 6%, price was up 5% and mix was down 1% with foreign exchange neutral to revenue.
Residential segment profit was $144 million, down 6%.
Segment margin was 20.3%, down 90 basis points.
Residential profit was primarily impacted by lower volume due to global supply chain and COVID-19 disruptions to production, factory inefficiencies, unfavorable mix, higher material, freight, distribution, tariffs and other product costs with partial offsets included favorable price and lower SG&A expenses.
Now turning to our Commercial Heating & Cooling business.
In the third quarter, Commercial revenue was $212 million, up 2%.
Volume was down 6%, price was up 1% and mix was up 6%.
Foreign exchange had a positive 1% impact to revenue.
Commercial segment profit was $23 million, down 42%.
Segment margin was 10.7%, down 800 basis points.
Segment profit was primarily impacted by lower volume due to global supply chain and COVID-19 disruptions to production, factory inefficiencies, higher material, freight, distribution, tariffs and other product costs with partial offsets included favorable price and mix.
In Refrigeration, revenue was $137 million, up 10%.
Volume was up 9%, price was up 2% and mix was down 1%.
Foreign exchange was neutral to revenue.
Refrigeration segment profit was $15 million, up 12%.
Segment margin was 10.6%, which was up 20 basis points.
Global supply chain and COVID-19 disruptions to production constrained revenue and profit growth.
Segment profit was negatively impacted by factory inefficiencies and higher material, freight and SG&A costs.
Results were positively impacted by higher volume and favorable price.
Regarding special items in the quarter, the company had net after-tax benefit of $0.5 million that included a benefit of $2.7 million for excess tax benefits from share-based compensation and a net charge of $2.4 million in total for various items excluded from segment profit, including personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic and a net benefit of $0.2 million for other items.
Corporate expense was $16 million in the third quarter, down from $28 million in the prior year quarter, primarily due to lower incentive compensation.
Overall, SG&A was $134 million compared to $152 million in the prior year quarter.
SG&A was down as a percent of revenue to 12.7% from 14.4% in the prior year quarter.
In the third quarter, cash from operations was $222 million compared to $440 million in the prior year quarter.
Capital expenditures were $23 million in the third quarter compared to approximately $12 million in the prior year quarter.
Free cash flow was $199 million in the third quarter compared to $428 million in the prior year quarter.
The company paid $34 million in dividends and repurchased $200 million of stock in the quarter.
Total debt was $1.28 billion at the end of the third quarter and we ended the quarter with a debt to EBITDA ratio of 1.8.
Cash, cash equivalents and short-term investments were $44 million at the end of the third quarter.
For Residential and Commercial Unitary HVAC and Refrigeration markets in North America, for the full year, we continue to expect low-double-digit shipment growth for the industry.
For the company, we are now narrowing guidance for 2021 revenue growth from 12% to 16% to a new range of 13% to 15% and we still expect a 1% benefit to revenue from foreign exchange.
We are narrowing guidance for 2021 GAAP earnings per share from continuing operations from $11.97 to $12.57 to a new range of $11.97 to $12.17.
And we are narrowing 2021 guidance for adjusted earnings per share from continuing operations from $12.10 to $12.70 to a new range of $12.10 to $12.30.
And as previously mentioned, the fourth quarter of 2021 will have a headwind of 6% from fewer days than the prior year quarter.
The first quarter of 2021 had a 6% benefit from more days in the prior year quarter.
For 2022, there are no days differences, I'd like just to highlight.
Now let me run you through the key points of our guidance assumptions and puts and takes for 2021.
First for the items that are changing.
We now expect a benefit of $130 million from price for the year, up from prior guidance of $110 million benefit.
We continue to -- with continued inflation in components, we are reducing our net savings from sourcing and engineering-led cost reduction to neutral, down from prior guidance to be a $5 million benefit.
We now expect LIFO accounting adjustments to be approximately $20 million this year, up from a prior guidance of $15 million due to higher material costs from inflationary pressures.
About 40% of that was in the third quarter and about 40% is expected in the fourth quarter.
Factory productivity is now expected to be a $10 million headwind, down from prior guidance to be a $10 million benefit.
Residential mix is swinging from a $10 million headwind -- excuse me, swinging to a $10 million headwind from a $10 million benefit.
And corporate expense is now expected to be $95 million, down from prior guidance of $100 million on lower incentive compensation.
Overall, SG&A is now expected to be approximately a $40 million headwind, down from prior guidance of $45 million.
Within SG&A, we continue to make investments in research and development and IT for continued innovation and leadership in products, controls, e-commerce, factory automation and productivity.
For headwinds that are unchanged from our prior guidance, commodities are still expected to be a headwind of $80 million and freight is still expected to be a $5 million headwind with tariffs still expected to be a $5 million headwind as well.
Other guidance items that remain the same.
Foreign exchange is still expected to be a $10 million benefit.
We still expect a net interest and pension expense to be approximately $35 million.
The effective tax rate guidance remains approximately 20% on an adjusted basis for the full year.
And we still expect capital expenditures to be approximately $135 million this year, about $30 million of which is for the third plant at our campus in Saltillo, Mexico.
This is still on track to be completed by the end of 2021.
Pilot runs of the initial products took place in mid-October.
We now plan to start initial production before the end of 2021 and ramp up to full production in mid-2022.
And we expect nearly a $10 million in annual savings from that third plant.
Free cash flow is targeted to be approximately $400 million for the full year.
In the third quarter, we repurchased $200 million of stock to complete our target of $600 million for the full year.
And then guidance for our weighted average diluted share count for the full year remains between 37 million to 38 million shares.
And with that, operator, let's now go to Q&A. | compname reports q2 earnings per share of $4.51.
q2 adjusted earnings per share $4.57 from continuing operations.
q2 gaap earnings per share $4.51 from continuing operations.
q2 revenue $1.24 billion versus refinitiv ibes estimate of $1.18 billion.
raising 2021 stock repurchase guidance to a total of $600 million after $400 million of buyback in first half of year. | 0 |
The Toro Company delivered record third quarter results.
We continue to benefit from robust demand in both our Professional and Residential segments and our operations team went above and beyond to execute even as global supply chain challenges affected availability.
Our employees together with our channel partners, kept a sharp focus on serving the needs of our customers.
As a result, total net sales for the third quarter were up 16% year-over-year.
Professional segment net sales increased 15%, marking the second quarter in a row of double-digit growth for this segment.
We saw continued strength in landscape contractor and golf markets worldwide.
Higher pre-season shipments of BOSS snow and ice management products, and strong demand for our rental and specialty construction equipment and Ventrac products.
Our lineup of innovative products, combined with strong business confidence fueled robust demand.
Residential segment net sales were up 23% and that comparison is on top of a 38% growth rate in the third quarter of last year.
Growth in the quarter was driven by strong retail demand for our zero-turn and walk power mowers.
Customers also continued to respond favorably to our all-season Flex-Force 60-volt product lineup, which offers power and durability with no compromise on performance.
The recent actions we've taken to introduce innovative new products, refresh marketing, and expand mass retail distribution continue to strengthen the Toro brand and drive positive results.
As noted last quarter, we expected supply chain constraints and inflationary pressures to escalate at a rate faster than could be fully offset in the near term, through pricing and other mitigating actions.
Despite these challenges, both segments delivered solid earnings growth in the third quarter, Professional earnings up 7.6% and Residential earnings up 10.5%.
I'll now touch on some of the key themes for the quarter.
First is the robust and broad-based demand, we continue to see across our markets worldwide.
This has been driven by consumer and business confidence as well as customer investment priorities focused on outdoor environments.
We continue to capitalize on these drivers with our commitment to investing in new product development, our best-in-class distribution, and our talented teams.
Second, the continued escalation of global supply chain and inflationary challenges.
This included component availability constraints as well as material freight and wage related cost headwinds.
Our operations team took extraordinary steps to enable us to source and produce as effectively as possible in this incredibly dynamic environment.
We also continue to execute on our productivity and synergy initiatives, demonstrated disciplined expense control and implemented market align pricing actions.
Regardless of how long these pressures persist, we remain focused on managing the factors within our control.
Third, in line with general economic trends we saw an increasingly challenging labor market, including wage pressures and workforce availability limitations in some of our manufacturing location.
Across the enterprise, we have talented and dedicated teams committed to serving our customers.
We're focused on having workforce and other resources in place to put ourselves in the best position to meet demand and deliver our products to the right places at the right time.
Our innovative product portfolio, outstanding team, and deep relationships with our channel partners and end customers set us apart and position us well for the long term growth.
We have the financial capacity to invest in the future and we continue to allocate capital to best drive value for all stakeholders.
This fiscal year, we've made strategic investments in key technologies, both organically and through acquisitions to advance our priority areas of alternative power, smart, connected, and autonomous.
Our healthy cash flow also has allowed us to return capital to shareholders while maintaining ample liquidity.
Looking ahead, we will continue to execute against our enterprise strategic priorities of accelerating profitable growth, driving productivity, and operational excellence and empowering people.
I'll discuss our outlook further following Renee's more detailed review of our financial results.
As Rick said, our record results for the third quarter were driven by robust demand in both our professional and residential segments.
Against the backdrop of increasing supply chain, inflation and labor pressures.
We grew net sales for the quarter by 16.2% to $976.8 million.
Reported earnings per share was $0.89 per diluted share, up from $0.82 last year and adjusted earnings per share was $0.92 per diluted share, up 12.2% from $0.82 in the prior year.
Both of our segments delivered record top and bottom line third quarter results.
Professional segment net sales were up 15.2% to $718.5 million.
This increase was driven by broad-based demand in landscape contractor, golf, snow and ice management, rental and specialty construction, and Ventrac products.
This was slightly offset by lower sales of underground construction equipment due to supply chain disruptions that impacted product availability.
Professional segment earnings for the third quarter were up 7.6% to $122.3 million.
And when expressed as a percent of net sales, decreased 120 basis points to 17%.
This decrease was largely due to higher material and freight cost, partially offset by net price realization and productivity improvements.
Residential segment net sales for the third quarter were up 23% to $252.1 million.
This increase was primarily driven by strong retail demand for zero-turn and walk power mowers.
Residential segment earnings for the quarter were up 10.5% to $31.5 million and when expressed as a percent of net sales, down 140 basis points to 12.5%.
This decrease was primarily driven by the same factors as in the Professional segment.
Turning to our operating results for the quarter.
We reported gross margin of 33.9%, a decrease of 110 basis points compared to the same period in the prior year.
Adjusted gross margin was 33.9%, down 130 basis points on a comparative basis.
These decreases were largely due to the same factors that affected Professional and Residential earnings.
SG&A expense as a percent of net sales for the quarter increased 20 basis points to 21.4%.
This increase was primarily driven by more normalized spending compared to the third quarter of last year and a legal settlement in the third quarter this year.
Operating earnings as a percent of net sales for the third quarter decreased 130 basis points to 12.5%.
Adjusted operating earnings as a percent of net sales decreased 80 basis points to 13.1%.
Interest expense was down $1.3 million for the quarter to $7 million, driven by lower debt levels and decreased interest rate.
The reported effective tax rate for the third quarter was 18% and the adjusted effective tax rate was 19.3%.
Turning to the balance sheet and cash flow.
Accounts receivable totaled $301.2 million, down 2.2% from a year ago, primarily driven by channel mix.
Inventory was essentially flat to last year at $665.6 million.
However, finished goods were significantly lower, driven by strong retail demand while working process was higher.
This was a reflection of the supply chain variability and our efforts to procure higher levels of key components when available.
Accounts payable increased 53% from last year to $411.4 million.
This was primarily due to the timing of purchases as well as more normalized spending compared to last year.
Year-to-date free cash flow was $429 million with the conversion ratio of 123%.
This positive performance was largely the result of higher earnings and lower working capital, primarily driven by higher payables.
At the end of the quarter, our liquidity remained at $1.1 million.
This included cash and cash equivalents of $535 million and full availability under our $600 million revolving credit facility.
Our cash balances are elevated from pre-pandemic levels, largely driven by our desire to ensure adequate liquidity at the onset of pandemic.
And our cash was further strengthened by the accelerated demand we're experiencing along with the related working capital impacts.
Over the past nine months, we deployed the majority of cash generated year-to-date, including the funding of our Turflynx and Left Hand Robotics acquisition, an increase in our regular dividend with $85 million paid out so far this year, the resumption of share repurchases with $177 million through the third quarter and $100 million in debt pay down.
We also increased our capital expenditure budget reflecting our commitment to invest in key technologies and ensure we have the capacity to meet future demand.
We remain disciplined in our capital allocation strategy fueled by our strong balance sheet.
Our priorities have not changed and include reinvesting in our businesses to support sustainable long-term growth both organically and through acquisition, returning cash to shareholders through dividends and share repurchases and maintaining our leverage goals to support financial flexibility.
As we enter the final quarter of our fiscal year, we're benefiting from strong demand momentum and our leadership position in the markets we serve.
At the same time customer demand continues to outpace supply and production.
We're not immune to the challenges facing companies worldwide and we remain focused on serving our customers, winning in our markets and managing the factors within our control.
We previously indicated that operational headwinds would be most pronounced in the third quarter.
As a result of collective work of our team to fulfill additional demand, we were able to deliver a stronger third quarter than we had anticipated.
This resulted in lower finished goods heading into the fourth quarter.
We remain focused on procuring materials, components and other resources to accelerate the pace of production in the face of supply chain, inflation, and labor pressures.
With this backdrop, we are updating our full year fiscal 2021 guidance.
We now expect net sales growth of about 17%, up from 12% to 15% previously.
We anticipate the Professional segment growth rate will be similar to the company average, with the Residential segment exceeding the company growth rate.
Looking at profitability, we now expect overall adjusted operating earnings as a percent of net sales for the full year to be similar to fiscal 2020.
We expect professional segment operating margins to be similar to last year.
And we expect Residential margins to be down compared to last year, but still well above historical levels.
This reflects our volume leverage and strong operational performance year-to-date offset by increasing supply chain, inflation, and labor pressures.
We continue to take actions to counteract these market dynamics.
Based on current visibility, we now expect full-year adjusted earnings per share in the range of $3.53 to $3.57 per diluted share, up from our previous range of $3.45 to $3.55.
This higher earnings per share guidance reflects our strong year-to-date performance, the robust demand environment, and continued solid business execution while also taking into account the headwinds previously discussed.
All in, we remain well positioned to capitalize on this period of profitable growth as we continue to execute on our strategic long-term priorities.
The guidance Renee just discussed reflects continuing strong demand across our end markets as well as our current operational outlook.
Looking at global key demand drivers for the remainder of the fiscal year and into fiscal 2022, we are watching consumer and business confidence levels along with developments related to COVID-19, customer prioritization of investments to maintain and improve outdoor environments, a continuation of strong momentum in golf and government support and funding of infrastructure investments.
These end market factors should continue to drive strong demand in the fourth quarter and into next year.
Our biggest challenge remains our ability to produce, to meet retail demand across all of our markets given the current operating environment.
We believe constraints will begin to ease as we see improvements in key material and component availability, logistic channels and other COVID related factors.
Our operations team remains committed to doing everything reasonably possible to meet increased production requirements and grow market share in this challenging environment.
When operating constraints begin to ease, we expect to be in a better position to build field inventory from our current historically low levels.
We remain focused on driving productivity and synergies prudently managing expenses and implementing market based pricing actions as appropriate.
We are well positioned to capitalize on long-term growth opportunities with our strong cash flow, market leadership, investments in innovation and trusted relationships.
A few recent examples that highlight our commitment to innovation and relationships include for the second year in a row, a Partner of the Year Award from Tractor Supply Company, this time as omnichannel partner.
From Green Industry Pros, the selection of three of our products for their 2021 Editor's Choice Award citing innovation and utility has factors.
The three products include the Exmark 96-inch Lazer Z Diesel, the Toro Z Master 4000, and Z-Spray LTS spreader sprayer.
In August, two of our rental and specialty construction offerings received Editor's Choice Award from Rental magazine, including the Ditch Witch SK3000 full size stand-on skid steer, which offers the most power in its class and the Toro Swivel Mud Buggy with superior traction and maneuverability.
And finally, the International Sustainable Irrigation Expo recently recognized our Aqua-Traxx Azul micro-irrigation solution as new products of the year.
In addition to awards, our innovative products have been showcased at recent marquee events.
Earlier this summer, our Perrot Irrigation Systems helps keep the playing fields in top condition at many of the Euro Cup Championship sites.
In July, our irrigation and turf equipment supported Paul Larsen and his team at Royal St George's Golf Club as their expert work was on full display at the Open Championship.
And more recently, our turf and irrigation solutions helped Tokyo's Japan National Stadium and Kasumigaseki Country Club maintain pristine conditions for this summer's high-profile events.
Our mission to deliver superior innovation and customer care is deeply rooted in our purpose of helping our customers enrich the beauty, productivity and sustainability of the land.
This long-standing focus on sustainability extends to our communities where we have a strong legacy of giving back.
A few recent examples highlight this legacy.
First, close to our worldwide headquarters, we partnered with Better Futures, an organization that works to transform the lives of men post incarceration and supports Minnesota's environment.
Our donations of equipment and training resources helped further the organization's mission.
Second, on a national level, we've partnered with the American Rental Association Foundation on a new community impact project.
This initiative is improving communities across the US by rebuilding green spaces.
These are just a couple of examples of the many ways our company employees are giving back and promoting sustainability, supporting our customers, and communities as an important part of our culture and core to who we are as a company.
In closing, we are optimistic as we finished fiscal 2021 and head into 2022 while also acknowledging the continuing dynamic environment.
We believe our updated guidance appropriately reflects both the risks and the opportunities we face.
We have strong fundamentals and momentum across our businesses and are well positioned to capitalize on future growth. | compname reports q3 adjusted earnings per share of $0.92.
q3 adjusted earnings per share $0.92.
q3 earnings per share $0.89.
raises full-year fiscal 2021 net sales and *adjusted diluted earnings per share guidance.
sees fy 2021 adjusted earnings per share in range of $3.53 to $3.57 per diluted share.
expects fy 2021 net sales growth of about 17%, up from a range of 12% to 15% previously. | 1 |
Before we begin, let me remind you that this discussion along with the associated slides and the question-and-answer session that follows will include statements regarding estimates or expectations of future performance.
A copy of today's transcript and slides will be available on our website in the Investors section under Past Events.
I'm pleased to report the Olin team has once again proved to be the most unique and agile in the industry in meeting the clear expectation of our shareholders.
Again, I just have to say that the solid performance by the complete team sets me up to be able to focus on the items that drive our future which are enhancing our contrarian value model, turning our ratchet on undervalued products, call in to grow accretive capital allocation, building out our interlinked matrix of activation knobs, growing shooting sports participation and lifting all Olin people.
This is a company that is focused on continuing to grow adjusted EBITDA and coupling that with balanced capital management to deliver more than $10 of earnings per share in the near future.
So I'll make some brief commentary on a few slides and get to the Q&A quickly.
2021 is expected to be a solid result for Olin for the reasons shown on Slide number 3.
While the longer term fundamental of demand that grows faster than supply is starting to be exposed here in 2021, our leading actions to get a higher value for our scarce resources is proving to be successful.
Current highlights of that success are that we continue to exit business that was based on non-negotiated pricing allowing our product chain mix with the intended impact from purposeful settings of our interlinked matrix of activation nodes start accelerating the value capture of epichlorohydrin and drive expansion in shooting sports participation with our Shoot United movement.
While there maybe some end-of-year holiday slowdowns, which are really supply driven, not demand driven, and some seasonality that result in a sequentially flattish fourth quarter results, we still expect 2022 to exceed 2021.
The reason thematic for better results in 2022 is shown on Slide number 4.
The minor reason in our thematic is that the previously mentioned demand growth versus supply growth dynamic just gets better and better across all our businesses.
More people are enjoying shooting sports, demanding clean wind energy and expanding their homes to have us.
The major reason in our thematic is that all of Olin's activities are designed around a foundational cultural principal of only selling into value.
We know who we are.
In October, we took the decision to close some more undervalued assets and simultaneously used other existing global asset and product liquidity to grow Olin's value.
As our own ECU assets are getting rightsized, we are a global buyer of ECUs to satisfy our higher value products demand.
Even though we have grown our earnings for five consecutive quarters and delivered a levered free cash flow that is approaching 20%, we still must show that our performance will continue to improve, but maybe more importantly, we must demonstrate our ability to manage uncertainty and volatility.
Slide number 5 has an illustration.
Olin has three substantial businesses, each with a meaningful contribution to segment earnings.
For reasons that we previously discussed, the Winchester, which is shown in red on the slide, Consumer and Defense business offer solid and sustainable growth.
For reasons we will discuss in just a moment, the Epoxy, which is shown in green on the slide, Engineered Materials, offer differentiated growth as we expand margins in that business.
The Chlor Alkali products and Vinyls industrial essentials are largest organic and inorganic growth opportunity.
We expect the Chlor Alkali segment results to be slightly volatile across a brief transitional window when we have a model profile shift between the relative strengths on the two sides of the ECU.
We think of the net company volatility as ripples on a deep ocean, not waves on a shallow lagoon.
We should control our destiny here.
Continuing with the theme of good fundamentals on Slide number 6, our perceived old world chemistry has new world application and value.
I won't read all of these mega trend multipliers, as I'm sure they're familiar to you, but instead jump to Slide number 7 and hit on the differentiated growth profile of Epoxy.
Epoxy sets itself apart from other engineered materials by offering nearly non substitutable performance.
Almost every end use category is growing faster than global GDP.
Consider the outlook for more and larger wind turbines for clean energy, consider the outlook for electrical laminates for the New Mobility trends and broad electrification trends, consider the outlook for infrastructure expansion and replacement and so on.
Even though we recognize the value of this business in Epoxy resin sales and in Epoxy systems sales, the value driver is really epichlorohydrin and we will be expounding on our globally leading epichlorohydrin position in future earnings calls.
We expect it won't be long before our Epoxy business delivers greater than $1 billion of EBITDA and carries the same enterprise value that all of Olin carries today, more representative of a highly engineered materials company.
Finally, I will close on Slide number 8.
We are going to start talking more about earnings per share in conjunction with EBITDA and segment earnings.
We are advancing in our evolution and expect our activities in debt reduction, refinancing, share repurchases and M&A to be big contributors of forward value and that value shows in EPS.
No doubt that a majority of our forward discussion will center on leadership, our linchpin products, great supply demand fundamentals, parlaying and lifting Olin people, however, new ways to create shareholder returns are evolving for Olin and help us earn above $10 of earnings per share.
So that concludes my opening comments and Tom, we're now ready to take questions. | compname reports q3 adjusted earnings per share of $0.58 excluding items.
q3 adjusted earnings per share $0.58 excluding items.
q3 sales $1.6 billion.
sees fy adjusted earnings per share $1.77 to $1.82.
sees q4 adjusted earnings per share $0.30 to $0.35. | 0 |
We're pleased to have you join us for a discussion of Tenet's second quarter 2021 results as well as a discussion of our updated financial guidance for the year.
Tenet's senior management participating in today's call will be Ron Rittenmeyer, Executive Chairman and Chief Executive Officer; Dr. Saum Sutaria, President and Chief Operating Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer.
Actual results and plans could differ materially.
Starting with as we take a look at our results, I wanted to offer somewhat of a look back on where we are, particularly in the context of what we set out to do as part of our transformation a few years back and even how that transformation is pivoted considering COVID, other challenges we have managed through, and the opportunities we've captured as recently as second corner -- quarter.
The cornerstone of our strategy remains our commitment to our four pillars of compliance, quality, service, and safety, which drives consistent improvements resulted in the performance trajectory we have noted for the last several quarters.
The results thus far have provided a solid first half of this year and you can see how we are building a truly unique and diversified operation following the strategy we discussed the last few years.
The results are in line with the strategy, which we have closely followed, which have resulted in greater diversified EBITDA streams, targeted inflection points for growth, top quality environments for our patients, and the addition of highly skilled positions covering important and high-demand specialties.
The output is greater financial strength with greater cash flow generation and a more agile setting overall at every level of the enterprise.
And importantly, we have incorporated community-based programs which have bolstered our ESG commitments, ensuring our sustainability has broad and a strong race going forward.
The second quarter in the first half of 2021 have been better than expected on many fronts.
This was largely driven by the continued commitment of our strategy, our extensive use of data and analysis which have allowed us to trace deviations quickly, take action as needed, and thus ensured a focus on execution at every level.
We've created an environment as COVID cases decreased in which doctors and patients are comfortable coming back to our hospitals and ASCs, and we continue to invest in our service lines and community relationships, which helped ensure a very accessible health system over the last year.
We certainly believe and the results support that this approach has been successful and we also believe we have more to accomplish to ensure the approach remains a solid part of our foundation going forward.
Please realize we're not claiming any victory and we're not relaxing, other than to recognize the trends remain strong and importantly consistent and underscore our commitment to continuing this development and ensure deeper roots are generated systemwide.
I would like to take a moment to comment from our perspective on the current COVID situation.
Clearly, the variance, coupled with the unvaccinated individuals has resulted in an uptick in certain parts of the country.
Our COVID inpatient numbers remain low, roughly 4% of our total cases as of now.
And while we've seen increases in selective markets, given our experience, we're really able to manage through this like we did when we were hit with other waves earlier last year.
We have sufficient PPE on hand, we have sufficient capacity across every market and facility, and we remain vigilant to any changes that occur taking appropriate action to continue to process cases effectively based on current and anticipated conditions.
Vaccinations continue to play a crucial role in bringing down the number of COVID inpatients and the number of patients once infected who become seriously ill.
We continue to support the vaccination rollout on our own employees and the public at large, advocating for and communicating the significant benefits of vaccinations and other necessary precautions to everyone in our communities.
In addition, all of our COVID-safety protocols remain in place in our field locations and have been highly effective and continuing to ensure staff infection rates remain low.
Focusing back now on the second quarter performance, there are several strategic and financial highlights, which deserve some discussion.
As you can see in the numbers, we are delivering a much stronger growth trajectory on the hospital side in terms of admissions, outpatient visits, ER volumes, and surgeries.
In particular, the higher acuity work that we have been focused on with general surgery, cardiovascular, ortho, neuro, etc.
, have been steadily progressing in key markets across the country.
For example, last week in El Paso, we announced the expansion effort to increase capacity and serving growing needs along the Eastern regions of the city.
The new project to be carried out over the next year and a half will include the addition of 30 elementary units, a third cath lab equipped to provide a higher level of care for patients with stroke symptoms, enhanced capacity to the NICU, and continued efforts to expand trauma services and robotics.
In San Antonio, we will soon move forward on our plans to build a new medical campus as the city continues to expand.
This multi-phase project is slated to begin later this year and will include medical office buildings and ASC, an acute care hospital with the potential for additional medical and retail entities in the future development phases.
We plan to invest in critical services including cardiovascular, maternity, and surgical care at a scale that is commensurate with the needs of that area.
Oncology is another area of focus as we recently announced a new affiliation between Memphis-based Saint Francis Healthcare and world-class West Cancer Center & Research Institute, which is an independent Comprehensive Cancer Center.
The project will include a new cancer urgent care center at Saint Francis, the first of its kind in the area as well as a specialized hospital within a hospital with dedicated oncology beds and an investment in the latest treatments all staffed by professionals trained in cancer care.
In addition, Saint Francis has the largest number of surgical robots in one location in the mid-South, which the surgeons of West Cancer will use to perform minimally invasive surgeries that can lead to shorter hospital stays and faster recoveries.
Our commitment to attracting and retaining quality physicians remains a critical element of our growth strategy.
That effort spans multiple service lines across our hospital portfolio and especially in USPI.
For example, in Palm Beach, we're completing the buildout of a large physician group, focused on general surgery with specialization of care and a team environment to best serve the larger community.
In Phoenix, we have a highly talented group of physicians in our Biltmore cardiology group and we've been working to significantly expand their in-market presence.
In Palm Springs, we're building a top-quality, multi-disciplinary orthopedics aimed for surgery, spine, and trauma group.
And with USPI, we've added more than 570 physicians joining our medical staffs during this quarter, bringing the number now that have joined to 1,100 year-to-date.
These are only a couple of examples and there's more to come.
Together with the investments I mentioned earlier on expansions, these activities are actively supporting our current performance and we see a long runway in front of us.
Finally, focusing on our hospital portfolio, as you know, we recently announced the sale of our Miami-based hospitals, which is compelling for several reasons.
We received an attractive multiple for the transaction from a credible and experienced buyer who will support continued development of these facilities.
Conifer remains the revenue cycle provider post sale.
Florida remains a very important part of our portfolio as our five Palm Beach hospitals, which continue to grow and improve, coupled with more than 40 Florida ambulatory assets ensures a very strong, viable network in our continued -- in this continually growing area.
This is supported by our successful physician recruitment efforts in the state and specifically in the Greater Palm Beach market.
As we focus investments on procedural care modernization, program ProMed progress managed service line development, market branding, and overall expansion to meet current and future community needs.
Strategically, the Miami transaction also continues the objective of diversifying our EBITDA further to our Ambulatory segment, which we project to be approximately 43% or so by the end of the year.
Our hospital portfolio is now positioned as the number one or two in 70% of our markets and with the Miami sale, that number will edge higher.
Another segment then will be USPI.
USPI had a very good quarter in line with our expectations and the mix of business continues to be weighted toward higher acuity cases in comparison to 2019.
The integration of SCD facilities has been going well and in terms of other development activity, we added four facilities to USPI in Q2.
We continue to presume the same type of opportunities we spoken about previously, and we have a healthy and strong pipeline that we're working to deploy.
That includes USPI's traditional three-way model as well as a greater two-way opportunities, both of which foster direct collaboration between USPI and local physicians.
And we are continuing our historical strong efforts on developing de novos, in which we handle all aspects from syndication to first patient.
Organic growth opportunities continue to remain substantial throughout the balance of the year and beyond USPI.
USPI has in-house, a very advanced service line and development team, and in the second quarter, for example, we added 25 new starts for service lines across the range of specialties bringing that total to 45 year-to-date.
We also remain a leader in musculoskeletal surgery and the depth of our platform across other types of procedures keeps expanding, allowing our facilities continue to hit important milestones, servicing the needs of their respective communities.
Quality remains a cornerstone of Tenet's overall mission as a company and USPI given its more intimate patient experience, continues to set a high bar in this area.
USPI's patient experience results have again earned important recognition in the last year.
For example, all but one of our eligible surgical hospitals are either four or five-star rating in the most recent age gaps survey.
Let's take a minute and talk about Conifer.
Conifer continues to deliver strong margins, remain on track with our growth plans, and we've made some opportunistic hires at all levels as our pipeline has begun to expand.
We are in the middle of a more targeted and efficient tech transformation at Conifer as well as the Global Business Center, both defining and accelerating our innovation roadmap.
Technology as an offering has moved to the forefront and become one of our main strategic pillars.
And we recently hired a new Chief Technology Officer at Conifer, who will advance these efforts significantly.
Operationally, we continue to deliver strong cash collections on behalf of our clients at Conifer over the last year and we remain very pleased with that performance.
So in closing my remarks, the second quarter was a very tangible example of how clear and direct business fundamentals properly adjusted for the situations we face result in sustainable performance.
We are a data-driven, real-time analysis company who properly executes on a consistent trajectory and when you reflect on the last years, our results have been consistent and directionally aligned with our strategy and above all transparent.
Let's begin on Slide 6.
Following a strong first quarter, we produced another very good quarter as we generated adjusted EBITDA in the quarter of $834 million which was $109 million better than the midpoint of our expectations.
Consistent with the themes in the first quarter, each of our three business units delivered solid results in the quarter.
Our hospital and ambulatory volumes improved across the board, patient acuity remained strong, and cost continued to be well managed, all of which contributed to a sequential margin improvement in all three of our businesses.
Looking back to the second quarter of 2019, our consolidated adjusted EBITDA this quarter represents a compounded annual growth rate of about 12% and our adjusted EBITDA margin increased 170 basis points, excluding grants.
As a result of another strong performance in the quarter and some additional grant income which was not forecasted, we increased our 2021 outlook for the second time this year, which I'll discuss further in a few minutes.
I'll begin with our hospitals, which produced another very strong quarter.
Substantially, all of our 20 hospital markets exceeded our expectations for the quarter, including 14 markets that exceeded our internal EBITDA forecast by more than 10%.
Surgical volumes, ER visits, and outpatient visit volumes during the quarter returned at a faster pace, and patient acuity remains at higher-than-normal levels, and pricing yield remains strong as well.
Our case mix index in the quarter was about 10% higher than the second quarter of 2019.
These positive trends were further supported by our continuing cost control initiatives to yield further operating efficiencies to help mitigate the impact of incremental cost pressures as a result of the pandemic, such as elevated temporary contract labor and PPE costs.
Our hospital adjusted EBITDA margin, excluding grants, was 10.9% in the second quarter, which was 50 basis points higher than in the first quarter of this year and 150 basis points higher than the margin we reported in the second quarter of 2019.
As a reminder, our hospital margins do not include the results of our very strong margin ambulatory business, which is reported separately.
Turning to our ambulatory business, USPI continues to deliver on its value proposition on providing high-quality care and a consumer-friendly, low-cost environment while producing attractive financial results.
USPI generated EBITDA of $295 million in the quarter, which included $20 million of grant income.
USPI's EBITDA in the second quarter, excluding grants, represents a compounded annual growth rate of about 15% looking back to the second quarter of 2019.
Surgical volumes this quarter recovered to 100% of pre-pandemic levels, patient acuity, and revenue yield remained strong, and cost continue to be well managed.
USPI's EBITDA margin, excluding grants, of 41.4% was 190 basis points higher than the second quarter of 2019.
Also, we anticipate approximately 43% of our consolidated adjusted EBITDA in the second half of 2021 will be from our USPI business, demonstrating further progression toward our goal of approximately 50% by 2023.
Turning to our revenue cycle management business, Conifer generated $90 million of adjusted EBITDA and continue to deliver strong margins of 28.2%, which was 50 basis points higher than the first quarter.
Also, Conifer's cash collection performance for our hospitals continues to be an important contributor to our strong cash flow results so far this year.
Let's now look at volume for the quarter on Slide 8.
Our hospital and ambulatory volumes improved significantly in the quarter compared to last year due to the dramatic impact on volumes in Q2 last year due to the pandemic.
And as I mentioned earlier, volumes rebounded stronger across the board compared to pre-pandemic levels in 2019.
These volume trends demonstrate notable improvement from the trends in the first quarter of this year.
We continue to be in a strong liquidity position.
We ended the quarter with about $2.2 billion of cash on hand and no borrowings outstanding on our $1.9 billion line of credit.
We generated $123 million of free cash flow in the quarter or about $275 million before the repayment of over $150 million of Medicare advances we received last year at the outset of the pandemic.
Year-to-date, we've produced $536 million of free cash flow or about $688 million before the Medicare advance repayments.
As we previously discussed, we began to repay the advances as scheduled in April this year.
Our leverage ratio at the end of the second quarter was 4.17 times adjusted EBITDA and 4.86 times adjusted EBITDA minus NCI expense.
Also, we refinanced $1.4 billion of notes during the quarter, which will result in $13 million of future annual cash interest savings and we realized over $100 million of cash proceeds during the quarter from the sale of our urgent care centers, a medical office building, and some other property.
Let's now move to Slide 10, which highlights key cash flow sources and uses during the quarter.
We've provided this information since the beginning of the pandemic to illustrate that we're generating net positive cash flows when you exclude non-routine cash received or used related to stimulus funding and cash inflows and outflows from non-routine transactions, such as early retirement of debt, acquisitions or asset sales.
Turning to Slide 11, let's review our updated 2021 guidance.
This slide shows the key factors that have contributed to us raising our 2021 adjusted EBITDA outlook twice this year.
As you can see on the slide, we raised our guidance, $100 million after the first quarter due to our strong performance and grain income that we were able to recognize, which was not assumed in our original guidance.
Similar to the first quarter raise, we are again increasing our 2021 guidance primarily as a result of our outperformance in the second quarter.
The other item to call out is that we are assuming the sale of our Miami-area hospitals will be completed during the third quarter which will result in about $55 million of earnings being removed from our previous guidance.
Our adjusted EBITDA outlook for 2021 is now projected to be $3.200 billion at the midpoint, which is $200 million higher than our original outlook at the beginning of the year.
Since we are assuming that the sale of our Miami hospitals will occur on August 1st this year, we removed approximately $22 million of Miami EBITDA from our Q3 EBITDA outlook and approximately $167 million of revenue.
After normalizing for the Miami sale, the midpoint of our Q3 EBITDA is slightly above the current EBITDA consensus for Q3 and the midpoint of our revenue outlook for Q3 is also in line with the current consensus for Q3.
For the last five months of the year, we removed $55 million of EBITDA from our outlook due to the planned sale and we removed about $418 million of revenue from our outlook due to the planned sale.
Listen, that's a lot of numbers but we believe it's important to point out our Q3 guidance is in line with current Q3 consensus after you normalize for the planned sale of Miami hospitals.
And to reiterate, we've raised our full-year 2021 guidance for the second time this year with our full-year EBITDA midpoint now $200 million higher than the start of the year.
I want to point out that our updated outlook includes a pre-tax book gain of about $400 million for the anticipated sale of the Miami hospitals, but this gain is not -- it's not included in our adjusted EBITDA or adjusted earnings per share guidance.
As for cash flows for the year, at the midpoint, we anticipate generating free cash flow of about $1.275 billion and adjusted free cash flow of $1.400 billion this year at the midpoint before taking into consideration the repayments we anticipate making in 2021 of approximately $700 million for Medicare advances and the deferred payroll tax match.
While we have -- we will have to repay the Medicare advances and the taxes this year, we have already sufficiently reserved for that amount in our balance sheet cash.
Free cash flow for the year of $1.275 billion before the repayment of the advances and the taxes, less expected cash NCI payments of $470 million results in positive net cash flows of about $800 million this year.
Also, I wanted to mention our income tax payments for 2021 are anticipated to be approximately $150 million.
The increase in expected tax payments in the back half of the year is due in large part to the about $50 million of federal and state taxes related to the gain on sale of our Miami hospitals.
I do want to remind you that utilization, net operating loss carry-forwards for -- from the two most recent years are limited to 80% of taxable income for 2021 tax filing purposes.
The underlying free cash flow generation of the company has significantly improved over the past several years and we continue to maintain sufficient liquidity to continue to invest in growth opportunities.
Our strong second quarter results together with our ongoing enhanced operational execution increases our confidence that we are on the right strategic path in our ability to deliver consistent results.
Their teamwork and level of devotion continues to be exceptional.
I really don't have any other closing comments.
I think we've covered the waterfront here.
So I think we ought to just move to questions in the time remaining. | tenet healthcare- fy 2021 adjusted ebitda outlook range now $3.150 billion to $3.250 billion (previously $3.000 billion to $3.200 billion. | 1 |
Unless otherwise stated, all net sales growth numbers are in constant currency and all organic results exclude the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of currency translation.
As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms.
It also includes estimated sales of our products through our retailers' websites.
We are grateful you have joined us today.
We delivered excellent performance to begin fiscal year 2022, reinforcing our optimism in the opportunities of tomorrow as we discussed with you in August.
Our multiple engines of growth strategy enabled us to excel amid continued volatility and variability from the pandemic.
Organic sales rose 18%, and adjusted diluted earnings per share grew an even stronger 31%.
Encouragingly, relative to the pre-pandemic first quarter of fiscal year 2020, our business is 13% larger on a reported basis and more profitable.
We achieved these outstanding results with increasingly diverse growth engines as we expected.
By virtue of our dynamic strategy, we could act locally amid the complexity of the pandemic to both create and capture demand.
The growth engines of makeup, developed markets in the West, and brick-and-mortar reignited and complemented momentum in skincare, fragrance, Mainland China, Travel Retail in Asia Pacific, and global online.
13 brands contributed double-digit organic sales growth, demonstrating the breadth of strength across our portfolio.
Estée Lauder and MAC drove makeup emerging renaissance, while La Mer and Clinique delivered standout results in skincare.
Impressively, skincare solidly outpaced its prior-year organic sales growth performance despite having the far toughest comparison among the categories.
Fragrance showed double digits, driven by Tom Ford Beauty and Jo Malone London.
Let me share a few highlights by brand.
Estée Lauder advanced planning for the makeup renaissance delivered significant sales growth.
As social and professional usage occasions resumed in certain markets, the brand was well-positioned with compelling innovation, superb merchandising, and on-point communication.
Its double wear and futurist foundation franchises rose strong double digits, while its new pure color whipped matte lipstick was a hit.
MAC strategically engaged consumers to drive performance in makeup.
In the Americas and EMEA, excellent results from in-store activations and regional MAC the Moment campaigns combined with desirable innovation like luster glass sheer shine lipstick and magic extension mascara.
The brand's new omnichannel capabilities, which leverage its freestanding stores, also contributed to the strength and demonstrate a new capability for MAC to benefit from going forward.
La Mer performed magnificent and led the company with sales rising strong double digits.
Its new hydrating infused emulsion expanded our portfolio of east to west innovation captivating consumers in every region.
It is a striking example of the innovation gains we can achieve when the power of our data analytics combined with our creative talent and R&D.
La Mer's iconic creme de la Mer prospered as a new global campaign focused on its moisturizing benefit realized terrific initial results.
Clinique strived in skincare from the strength of its heroes.
Moreover, its new smart clinical repair wrinkle correcting serum with powerful clinically led claims and compelling before-and-after visualizations extended Clinique win streak with innovation and further demonstrated the brand's ability to be highly relevant for consumers of all ages.
DECIEM complemented our organic sales growth in skincare with its coveted vegan brand, The Ordinary.
DECIEM is known for its transparency, which has enamored it with consumers.
And in the first quarter, we launched the insightful Everything is Chemicals campaign.
And the new Regimen Builder by The Ordinary on brand.com realized spectacular adoption, further enhancing the brand's powerful online ecosystem.
Fragrance momentum continued with stellar double-digit performance in every region, powered by hero products and innovation from Tom Ford Beauty, Jo Malone London in our artisanal offerings.
We are excited for the Estée Lauder brand launch of its luxury collection in the second quarter as it expands our portfolio in the high-growth segment of fragrances.
Our fragrance category benefits from diversification among our categories as well as regions with outstanding performance from both historically strong markets for fragrance and emerging fragrance opportunities.
The self-care rituals related to scent, which were embraced during the pandemic, continued even as social and professional usage occasions resumed.
Of note, Tom Ford Beauty performed strongly in both fragrance and makeup such that the brand was among our top performers in the quarter.
Its new Ombre Leather perfume and hero's Oud Wood and Lost Cherry fueled the brand's success.
Our growth engines also diversified geographically, led by developed markets in the West.
Our business in North America executed with excellence to deliver strong double-digit organic sales growth, powered by readiness for makeup's emerging renaissance, ongoing strength in skincare and fragrance, and recovery in hair care.
Strategic go-to-market initiatives supported by on-trend innovation increased advertising spending, and expert in-store virtual services delighted consumers.
Our expanded consumer reach enhanced these initiatives as Bobbi Brown launched in Ulta Beauty exceeded expectations, and we are encouraged by the early results of the new Ulta Beauty at Target and Sephora at Kohl's relationships.
In Asia Pacific, many markets faced COVID-induced lockdowns and temporary store closures, which pressured performance.
Despite this, the region still grew 10% organically driven by strength in Greater China and Korea.
Mainland China achieved double-digit organic sales growth owing to skin care and fragrance, with online and brick-and-mortar both higher.
We launched locally relevant innovation which proved highly desirable, while we also increased advertising spending, strategically expanded our consumer reach to match success on JD, and designed successful activation for Chinese Valentine's Day.
We continue to invest in the vibrant and compelling long-term growth opportunity in Mainland China, led by our talented local team.
We are enthusiastic for our new innovation center in Shanghai to open in the second half of this fiscal year.
This new world-class innovation center will be the first of its kind for our company.
With it, we will have a unique ability to grow and build on our market and consumer insights to develop exceptional products to meet and surpass the needs and desires of Chinese consumers.
What is more, we are seeing the benefits of recent investment in online fulfillment, which have led to higher service levels and better inventory manager while setting the stage for expanded omnichannel capabilities in the market.
From a channel perspective globally, brick-and-mortar grew strongly in markets which are gradually emerging from the latest wave of COVID-19.
We realized excellent results across the board in brick-and-mortar, most especially in the Americas and EMEA.
Our brands created excitement in store with enticing high-touch services and unique activations.
We are encouraged by improving trends in the productivity of brick-and-mortar, owing to both increased traffic and our strategic actions, including those under the post-COVID business acceleration program.
As brick-and-mortar reignites, our global online business continued to showcase its tremendous promise, with impressive organic results despite significant organic sales growth in the year-ago period.
Online grew to be nearly double the size, on a reported basis, of the pre-pandemic first quarter of fiscal year 2020.
Many markets capitalized on the remarkable new consumer acquisition trend of the pandemic to deliver sustained gain in repeat purchases.
As we seek to engage with consumers in innovative ways, we advanced our work with Instagram, Snapchat, TikTok, WeChat, and others to capitalize on exciting trends in social commerce.
We also deployed a technology solution, which enables brands to better customize consumer outreach by leveraging data to merchandise and personalized communication.
This is leading to higher conversion rates for new consumers and a deeper level of relationship building after the initial purchase to foster retention.
Initiatives such as this position us well to realize even greater success with trial and repeat.
We continued to invest in online to strategically expand our consumer reach and realize promising results.
For example, in the first quarter, La Mer launched on Lazada in Southeast Asia to tremendous success with differentiated merchandising, unique services, and prestige packaging, making it one of the platform's biggest brand launches ever.
Our relationship with Lazada expanded in the current quarter with Jo Malone London's debut.
Before I close, I wanted to share that today we will release our fiscal year 2021 social impact and sustainability report.
We are incredibly inspired by the achievements of our employees globally.
The report highlights initiatives across key areas, including inclusion, diversity, and equity.
Climate, packaging, social investment, responsible sources, and green chemistry.
I'm particularly proud of our support to employees globally who faced financial hardships due to COVID-19.
The ELC Cares Employee Relief Fund awarded nearly 14,000 grants and distributed nearly $8 million through June 30, 2021.
Here, a few among the many other highlights of the report: We are continuing to contribute to a low-carbon future.
For the second year in a row, we sourced 100% renewable electricity globally for our direct operations and achieved net-zero scope one and scope two emissions.
The company also made strong progress in its Science-based Targets for scope one and two and made efforts toward meeting its scope three science-based targets.
We achieved our existing post-consumer recycled content goal ahead of schedule and announced a more ambitious goal to increase the amount of such material in our packaging to 25% or more by the end of calendar year 2025.
We also committed to reduce the amount of virgin petroleum plastic in our packaging to 50% or less by the end of calendar year 2030.
On the last few earnings calls, I discussed actions we are taking to make more progress on our commitments for racial equity as well as women's advancement and gender equality, which are reflected in the report.
We also deepened our work by further aligning the strategy of The Estee Lauder Companies' charitable foundation to identify and support programs at the intersection of climate, justice, human rights, and well-being with a focus on equity, building upon our legacy of founding girls' education and leadership programs.
In the beginning of fiscal year 2022 and aligned with our social impact commitments, we were pleased to announce a three-year partnership with Amanda Gorman, activist, award-winning writer, and the youngest inaugural poet in U.S. history.
The Estée Lauder Companies will contribute $3 million over three years to support Writing Change, a special initiative to advance literacy as a pathway to equality, access, and social change.
In addition, Mrs. Gorman will bring her voice of change to the Estée Lauder brand, debuting her first campaign in the second half of this fiscal year.
In closing, we delivered outstanding performance to begin the new fiscal year amid the volatility and variability of the pandemic, while continuing to invest in sustainable long-term growth drivers.
We are focusing on fundamental capabilities for product quality and the consumer-centric elements of acquisition, engagement, and high-touch experiences and services.
We are doing this while improving our cost structure, diversifying our portfolio and its distribution, investing behind the best growth opportunities, and leading our values.
Our confidence in the long-term growth opportunities for global prestige beauty and our company is reflected in the announcement today to raise the quarterly dividend.
I'm forever grateful to the grace, wisdom, and ingenuity of our employees globally, who are making us a stronger company each and every day.
We are off to an outstanding start with first-quarter net sales growing 18% organically, driven by the nascent recovery in the Americas and EMEA during the quarter compared to a more difficult environment in the prior year.
Global logistics constraints caused some retailers, primarily in North America, to order earlier to ensure popular sets and products would be on counter for holiday.
We estimate that this contributed approximately 1.5 points to our first-quarter sales growth that otherwise would have occurred in the second quarter.
The inclusion of sales from the May 2021 DECIEM investment added approximately three points to reported net sales growth, and currency added just over two points.
From a geographic standpoint, organic net sales in the Americas climbed 27% as COVID restrictions eased throughout the region.
Brick-and-mortar retail grew sharply across all formats compared to the prior-year period when many stores were temporarily shut down.
Distribution in Kohl's with Sephora and in Target with Ulta Beauty began its phased rollout to initial stores and online in mid-August, with minimal impact on net sales growth for the quarter.
With the strong resurgence of brick-and-mortar traffic, online organic sales growth in the Americas declined single digits against a sharp increase last year, while organic online penetration remained solid at 31% of sales.
The inclusion of sales from DECIEM added about nine points to the overall reported growth in the region.
In our Europe, the Middle East, and Africa region, organic net sales rose 19% with virtually every market contributing to growth, led by the emerging markets in the Middle East, Turkey, and Russia as well as the U.K. Most markets throughout the region saw COVID restrictions lifted, and some tourism resumed during the peak summer months.
By channel, the region saw more balance between brick-and-mortar and online growth.
All major categories grew this quarter, and the region saw the strongest growth in fragrance and makeup as social occasions increased.
Our global Travel Retail business grew double-digit as China and Korea continued to be strong.
Internal travel restrictions during the quarter in China slowed Hainan sales temporarily, but restrictions lifted in early September, and traffic rebounded.
Retailers also responded to the August dip by driving post-travel consumption online.
Summer holiday travel in Europe and the Americas picked up, but international travel still reached only 40% of pre-COVID levels.
In our Asia Pacific region, organic net sales rose 10%, driven by Greater China and Korea.
The region overall experienced higher levels of COVID lockdowns this quarter compared to last year's quarter due to the rise of the delta variant, although online remains strong.
Sales growth in Mainland China was somewhat slower due to COVID restrictions during July and August.
And the pace of online sales growth slowed following the successful 6.18 programs last quarter and in anticipation of the 11.11 shopping festival.
As we've mentioned before, these key shopping moments have created some additional seasonality in our business in this region.
More than half of our brands in virtually all channels rose double-digit in Mainland China.
Hong Kong and Macau were bright spots this quarter.
They benefited from strong new product launches from La Mer and Jo Malone and successful marketing campaigns from several other brands.
From a category perspective, net sales growth in fragrance jumped nearly 50%.
Virtually every brand that participates in the category contributed to growth, with exceptional double-digit increases from Tom Ford Beauty, Jo Malone London, and Le Labo.
Perfumes and colognes led the category growth; and bath, body, and home fragrances continue to perform well.
Net sales in makeup rose 18% as markets in the Americas and Europe began to recover from COVID shutdowns.
We are encouraged by the sequential improvement in makeup versus pre-COVID levels.
However, makeup sales in the quarter were still 19% below two years ago.
Nonetheless, Estée Lauder foundations continue to resonate strongly with consumers, and MAC leaned into the makeup recovery with a number of fun and compelling campaigns.
Skincare sales remained strong during the quarter.
Organic net sales grew 12%, and the inclusion of sales from DECIEM added six percentage points to reported growth.
Nearly all of our skincare brands contributed to growth, although Estée Lauder had a tough comparison with the prior-year launch of its improved Advanced Night Repair Serum.
Our haircare net sales rose 8% as traffic in salons and stores in the U.S. and Europe began to return.
Both Aveda and Bumble and bumble saw growth in-hero products as well as continued strength from innovation.
Our gross margin declined 100 basis points compared to the first quarter last year.
The positive impacts from strategic pricing and currency were more than offset by higher obsolescence costs for both basic and holiday product sets and the inclusion of DECIEM.
Operating expenses decreased 240 basis points as a percent of sales.
Our strong sales growth was partly due to earlier orders from some North America retailers concerned about logistics constraints, and costs related to these sales are expected to be incurred in our second quarter.
We do continue to manage costs with agility, realizing savings from our cost initiatives, while also investing to support a continued brick-and-mortar recovery as well as our strategic initiatives.
Our operating income rose 32% to 941 million, and our operating margin rose 140 basis points to 21.4% in the quarter.
Diluted earnings per share of $1.89 increased 31% compared to the prior year.
During the quarter, we used 81 million in net cash flows from operating activities, which was below the prior year.
This reflects a more normalized first quarter where we typically have seasonally higher working capital needs.
We invested 205 million in capital expenditures as we ramped up our investment to build a new manufacturing facility in Japan.
And we returned 749 million in cash to stockholders through both share repurchases and dividends.
So now let's turn to our outlook.
We are encouraged by the green shoots we are seeing around the world, even in the context of an environment of increased volatility.
Our strong performance reflects our ability to navigate through the volatility while leveraging our multiple engines of growth.
At the same time, we are mindful that recovery is tenuous and likely to be uneven.
Nevertheless, we are cautiously optimistic, and our assumptions for fiscal 2022 remain consistent.
We continue to expect an emerging renaissance in the makeup category as restrictions are safely lifted and social occasions increase.
And as intercontinental restrictions are lifted, we expect international passenger traffic to build toward the end of the fiscal year.
We began taking strategic pricing actions in July.
And overall, pricing is expected to add at least three points of growth, helping to offset inflationary pressures.
On the costs side, we plan to continue to increase advertising to support our brands and drive traffic in all channels.
Selling costs are expected to rise to support the reopening of brick-and-mortar retail.
We also continue to invest behind key strategic capabilities like data analytics, innovation, technology, and sustainability initiatives.
As you are all aware, global supply chains are being strained by COVID and its related effects in some markets, resulting in port congestion, higher fuel costs, and labor shortages at a time when demand for goods is rising.
This is causing us to experience inflation in freight and procurement, which we expect to impact our cost of goods and operating expenses beginning next quarter.
Based on what we see through October, the expected benefit of pricing, combined with good cost discipline elsewhere, are enabling us to maintain our expectations for the year.
For the full fiscal year, organic net sales are forecasted to grow 9 to 12%.
Based on rates of 1.163 for the euro, 1.351 for the pound, and 6.471 for the Chinese yuan, we expect currency translation to be negligible for the full fiscal year.
This range excludes approximately three points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM.
Diluted earnings per share is expected to range between 7.23 and 7.38 before restructuring and other charges.
This includes approximately $0.04 of accretion from currency translation and $0.03 accretion from DECIEM.
In constant currency, we expect earnings per share to rise 11 to 14%.
At this time, we expect organic sales for our second quarter to rise eight to 10%.
The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about three points to reported growth, and currency is forecasted to be neutral.
Operating expenses are expected to rise in the second quarter as we support holiday activations and the continued recovery of brick-and-mortar retail around the world.
Additionally, the prior-year quarter included some benefits of government subsidies, which are not anticipated in the current year quarter.
We expect second quarter earnings per share of $2.51 to $2.61.
Both currency and the inclusion of DECIEM are expected to be immaterial to EPS.
Notably, our earnings per share forecast also reflects a 23% tax rate, compared to 15.9% in the prior year when we benefited from certain one-time items.
In closing, we are pleased with the terrific start to the year and are proud of the continued efforts of our global team.
We remain confident in our corporate strategy with its multiple growth engines to drive sustainable, profitable growth. | sees q2 earnings per share $2.51 to $2.61 excluding items.
confirming full year outlook.
qtrly adjusted diluted earnings per common share to $1.89.
qtrly net sales increased 23% to $4.39 billion.
for fiscal 2022, we continue to expect strong net sales and adjusted earnings per share growth with margin expansion.
higher transportation and logistics costs to negatively impact cost of sales and operating expenses in fiscal 2022. | 1 |
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We recognize the challenges you are facing personally and professionally.
We will continue to support you and to maintain our unwavering commitment to keeping you safe as we continue to effectively service our clients and preserve the strength of our business.
As we expected, the negative impact of COVID-19 on our business peaked in the second quarter and we experienced significant improvements in third quarter.
Organic growth declined by 11.7% or $424 million, which includes a decline in our third-party service costs of $194 million.
Sequentially, we saw improvements across all geographic regions and most countries with the only few exceptions, including Brazil, India, Japan and Singapore.
Similarly, our largest industry sectors had significant sequential growth, with pharma and health as well as technology growing in the third quarter versus the prior year.
As anticipated, some of our clients' industries that have been hit the hardest, such as travel and entertainment, as well as our events businesses continue to be challenged.
Our EBIT margin in the third quarter was 15.6% as compared to 13.1% in the third quarter of 2019, driving year-over-year growth in operating profit and net income.
The performance can be attributed to a number of factors, including repositioning actions taken in the second quarter, significant reductions in addressable spend, voluntary pay cuts across the group, which will be phased out by the end of the year, and reimbursements and tax credits under government programs in several countries.
As you know, earlier in the year, we took measures to provide additional liquidity during the COVID crisis, and we further enhanced our working capital processes.
We also stopped our share repurchase program.
We don't expect to restart share repurchases this year and will be reviewing the policy with our board in December.
I'm pleased to report that our efforts continue to pay off.
Year-to-date, we generated $1.1 billion in free cash flow and paid dividends of $423 million.
Phil will discuss our liquidity and balance sheet in more detail, which remain very strong.
Let me now turn to our strategies and business performance.
It goes without saying this year has been a period of significant change with COVID-19 causing shifts in consumer behavior, which, in turn, have augmented the services we provide our clients.
Across almost every sector, our clients pivoted their operations to accelerate their digital transformation, e-commerce, and direct-to-consumer initiatives.
Further, leverage data analytics and insights to drive their marketing and communication programs and seek ways to reinvent and differentiate their brands in an always-on environment.
These initiatives were already well under way before COVID, but they've taken on a new urgency for our clients with the main purpose of achieving the best outcomes in reaching their customers.
I'm pleased with how our agencies have responded.
They've had to reimagine marketing strategies, move quickly to provide our clients with relevant insights into how consumers were thinking, feeling and behaving, and provide counsel on where, when and how brands should show up differently.
In fact, these COVID-19-induced changes in consumer behavior are profound and will have a lasting impact.
With the exponential shift to virtual and online activities and its effect on almost every routine, consumers, more than ever, expect effortless, interconnected brand experiences that need to be delivered through increasingly dynamic and non-linear paths to purchase.
Fortunately, we are well-positioned to excel in this environment as a result of our long-term growth strategies.
For more than a decade, we have invested a substantial amount of time and money in the areas of analytics, insights precision marketing and digital transformation services.
These investments enable our companies to put the consumer at the center with data-driven digital and personalized offerings.
Omni, our world-class people-based data and analytics service platform is being leveraged by our creative, media, precision marketing, CRM, healthcare, PR and e-commerce agencies across the group.
The power of the platform is providing our clients a unique understanding of their audiences as people, not just as consumers, enabling us to develop targeted and coordinated marketing programs across multiple mediums.
Omni is being deployed by our client service teams using process-driven frameworks that can be applied to their specific client situations and for new business opportunities.
This combination of our platforms, processes, and people allows us to offer flexible programs and solutions that can be customized to meet the rapidly changing demands of today's market.
We also continue to invest heavily in growing our precision marketing, mark tech and digital transformation businesses through a series of strategic investments and acquisitions.
We've realigned several agencies into Omnicom Precision Marketing Group, a practice area we formed several years ago and we've expanded its capabilities through the acquisitions of Credera, Smart Digital and in the third quarter, DMW.
These investments have been instrumental in the relative performance we have achieved in these disciplines over the past few quarters.
We expect them to continue to be a key driver of our growth as digital transformation and precision marketing initiatives accelerate.
As I said earlier, demand for our transformation work cuts across industries, whether it's auto, retail, FMCG or healthcare, we are helping our clients design and deploy new technology platforms, develop online strategies and personalized digital experiences, optimize content creation, and automate content delivery.
These consumer-centric engagements deliver measurable outcomes that improve time-to-market and ROI associated with marketing investments.
Another area fueled exponentially by COVID is e-commerce.
For a period of time this year for many of our clients, e-commerce is the only way to transact with their customers.
From CPG to retail to autos to education and virtually every other industry, e-commerce adoption accelerated in a period of days and weeks, where in normal times it would have otherwise taken years.
During the quarter, we strengthened our practice area grounded in e-commerce space, led by Sophie Daranyi, our newly formed Omnicom Commerce Group is a center of excellence for commerce and conversion marketing.
The group brings together best-in-class creativity and consulting capabilities from several agencies and will partner closely with our media and precision marketing practices to help clients achieve reductions in the gap between awareness and sales, leverage our e-commerce offers across the group, and accelerate our speed and agility in connecting our expertise and capabilities for our clients.
Whether in-store or online, brands that are best-known and trusted are ones that people have turned to during the pandemic and will continue to turn to as these shifts in behavior take hold for the long term.
Helping to build that familiarity, affection and trust in a brand is at the core of what our creative agencies have done for decades.
We have the creativity to think differently, to design and create relevant experiences that are resident, more importantly rewarding.
We know it is what will drive long-term growth for our clients.
While 2020 has been a time of disruption and reinvention, a constant through it all has been the resiliency of our people.
Despite the challenges thrown our way, our agencies and our people have continued to step up and display world-class creativity, innovation and ideas.
Their performance is demonstrated by our recent new business success.
Peugeot chose Omnicom's O.P.EN.
, which is an acronym for Omnicom for PEUGEOT Engine, as its new agency of record.
Creative precision marketing and strategy teams from across 17 different markets put together the winning proposal.
BBDO was selected by AARP as its brand agency of record.
Cox Automotive appointed Hearts & Science U.S. media agency of record for its Autotrader and Kelley Blue Book brands.
Fiesta [Phonetic] was awarded the multicultural advertising for Frito-Lay brands, Cheetos and Doritos.
And in pharma and healthcare, our companies continue to outperform with significant wins across our practice areas, including advertising and creative services for key products for Gilead, CSL Plasma and AbbVie.
Digital innovation services for Novartis across their pharma and oncology business units.
And in PR, we had wins with J&J Pharma, UPenn Medical Center and KKI Pharma.
The common denominator across these business wins and our work during the quarter is it happened with most of our people are working remotely.
Looking ahead, we know when we enter the post-COVID phase, the way we work will be different.
With that in mind, we have formed a committee dedicated to our agency leaders, evaluate how our business should operate post-COVID.
The objective of the group is to rethink the way we work to best serve each agency specific services, people, clients, space and culture.
We've also accelerated how we use technology and share information well beyond video calls and virtual meetings.
For example, we're using technology platforms to deliver more training programs, on-board new talent and clients, collaborate on creative ideas, and produce shoots.
In fact, the accelerated adoption of technology has improved almost every aspect of our operations, both in servicing our clients and in our back office.
I'm certain that we will take away many learnings from the current environment that have allowed us to work more efficiently and effectively.
Let me now provide an update on our DE&I initiatives and some key changes.
Over a decade ago, we hired one of the industry's first Chief Diversity Officers.
Tiffany R. Warren, who was instrumental in developing our DE&I strategy and framework.
Since then, she has helped us build the core of our DE&I programs.
As announced earlier this month, Tiffany has decided to join Sony Music and we are in the process of finding a new diversity leader, who will lead us in the next phase of our efforts.
As mentioned last quarter, our DE&I strategy aims to create supportive environments and is led by the Omnicom People Engagement Network or OPEN.
OPEN provides structure and counsel and visibility to DE&I initiatives and policies throughout our organization.
Our OPEN2.0 actions focus on four key tenets, culture, collaboration, clients and community, and is organized into eight action items.
These include the development and retention of our diverse talent, client and community involvement, mandatory training, and accountability of our leaders.
One of our first action items is the expansion and empowerment of our OPEN leadership team, which is responsible for leading the implementation of our framework.
To date, through a combination of new hires and promotions, we've expanded the OPEN leadership team from 15 to 25 diversity champions and we're making good progress on our initiatives.
I look forward to sharing more with you on this front in the future.
Before turning it over to Phil, let me provide an update on our expectations for the fourth quarter.
While the third quarter trend was positive and we expect to see continuing improvement in several industries and markets, there are a number of challenges and uncertainties as we look at the fourth quarter.
First is the trajectory of the virus globally, which will impact the pace of economic recovery in each country we operate in.
Next is the outcome of the U.S. election and the potential delays in its results.
Third is the timing and effect of government stimulus programs in the U.S. and around the world.
And last, our labor market conditions, especially as stimulus programs end and their effect on the overall rate of economic recovery.
All of these factors create greater uncertainty in our financial forecasts and a much lower level of visibility than we've experienced in the past across our businesses.
This is especially so in our project-based services, as well as in the year-end project spend that we normally expect to see from our clients.
As a result, we continue to focus on the things we can control.
Our agencies are dedicated to ensuring the safety of their staff, servicing their clients, pursuing new business opportunities, aligning their staffing levels with revenue and aggressively managing their costs.
Each of them is being asked to plan for alternative scenarios for accelerated growth, as well as potential declines in client spend.
While 2020 has been a difficult year in many ways, I'm incredibly pleased with how we've operated and the progress we've made in executing our strategies.
As John said, the negative impact on our business caused by COVID-19 peaked in Q2 and as business conditions improved, our results improved considerably in Q3.
Our performance reflects the benefits from the actions we took to align our cost structure with the current operating environment.
And while the decline in revenue was in line with our expectations, our margin improvement exceeded our expectations.
I will cover that in more detail later.
Turning to slide 4 for a summary of our revenue performance for the third quarter, our organic revenue performance was negative $424 million or 11.7% for the quarter.
The decrease was an improvement from the unprecedented decrease of 23% in the second quarter and was in line with our internal expectations throughout the quarter.
And while we still experienced declines across all regions and disciplines, except for the continued growth of our specialty healthcare businesses, those reductions were about half the levels we saw in Q2.
The impact of foreign exchange rates increased our revenue by 0.5% in the quarter versus a slightly negative impact we anticipated.
This was due to the moderation of the strengthening of the dollar compared to the prior period.
And the impact on revenue from acquisitions net of dispositions was relatively flat or a decrease of 0.3%.
As a result, our reported revenue for the third quarter decreased 11.5% to $3.2 billion when compared to Q3 of 2019.
I'll return to discuss the details of the changes in revenue in a few minutes.
Turning back to slide 1, our reported operating profit for the quarter was $501 million, up from $473.3 million in Q3 of last year.
Our operating profit in the quarter was positively impacted from the cost reductions resulting from the repositioning actions we undertook in the second quarter, and good management of our addressable spend cost categories by the leaders of our agencies.
The results for the quarter included the benefit of reductions in salary and related costs, which increased operating profit by $68.7 million, related to reimbursements and tax credits under government programs in several countries, including the U.S., Canada, the U.K., Germany, France and others.
Operating margin for the quarter increased 250 basis points to 15.6% compared to point 13.1% in Q3 of last year.
Excluding the benefit of the reductions in salary and related costs from the government reimbursements and tax credits, operating margin for the quarter increased 40 basis points to 13.5%.
EBITA for the quarter was $522 million and EBITA margin was 16.3% compared to 13.6% in Q3 of last year.
Excluding the benefit of the reductions in salary and related costs previously referred to, EBITA margin for the quarter increased 50 basis points to 14.1%.
You will recall we estimated that the severance and real estate actions taken in the second quarter would generate approximately $230 million in savings over the second half of 2020.
We also expected to generate additional savings in excess of $75 million in the second half from reductions in discretionary costs.
Through the end of Q3, the reductions in our payroll and real estate costs were in line with those estimates.
And we experienced greater cost savings resulting from the active management of our discretionary addressable spend cost categories, including travel and entertainment, general office expenses, professional fees, personnel fees and other.
As we previously discussed, we have and will continue to actively manage our costs to ensure they align with our revenue structure.
In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization, focusing on our real estate portfolio management, back office services, procurement and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
Salary and related service costs declined by $223 million in the quarter, reflecting both the impact of our staffing reductions during the second quarter and the impact of the benefits from government reimbursements and tax credits discussed previously.
Third-party service costs, which include expenses incurred with third-party vendors when we act as a principal, when we're performing services for our clients, primarily related to our events, field marketing and merchandising and media businesses, decreased by $194 million in the quarter or 20%.
In comparison, the decrease in third-party service costs in the second quarter year-over-year was nearly $400 million or 40%.
Occupancy and other costs, which are less linked to changes in revenue, declined by approximately $18 million, again reflecting the decrease in the cost structure from the actions taken in the second quarter and from our people not being in our offices during the quarter for the most part.
And SG&A expenses declined by $7 million in the quarter.
Net interest expense for the quarter was $48.5 million, down $800,000 versus Q3 last year and up $1.3 million compared to Q2 2020.
When compared to the third quarter of 2019, our gross interest expense was down $8.4 million resulting from debt refinancing actions over the last 12 months.
This includes the impact of the additional $600 million of 10-year 4.2% senior notes that we issued as liquidity insurance in early April of this year.
As we've discussed on our previous calls this year, these actions reduce the effective interest rate on our senior debt by 60 basis points when compared to Q3 of 2019.
This reduction was offset by a decrease in interest income of $7.6 million versus Q3 of 2019, primarily due to lower interest rates.
When compared to the second quarter of 2020, interest expense increased slightly by $700,000, while interest income was down $600,000.
As we enter the final quarter of the year, we expect that our refinancing activity over the past year plus will continue to more than offset the increase in interest expense, resulting from the issuance of the 4.2% notes this past April.
We believe adding this additional liquidity while maintaining our interest expense levels was a prudent step to take.
We expect net interest expense to increase in Q4 of 2020 by approximately $10 million compared to Q4 of 2019, largely driven by an estimated reduction in interest income.
Our effective tax rate for the quarter was 26.7% in line with our expectations.
For the nine months ended September 30, 2020, the rate was 28.5%, an increase from 26% for the comparable period in 2019.
The increase in the nine-month rate for 2020 was primarily attributable to activity from Q2 related to the non-deductibility of certain repositioning costs in certain jurisdictions and the loss on dispositions.
Excluding the impact of these items, the year-to-date effective rate was 26.3%, which was in line with our expectations.
We anticipate that our effective tax rate for the fourth quarter will approximate 27%, excluding the impact of share-based compensation items, which we cannot predict because it is subject to changes in our share price.
Earnings from our affiliates totaled $2.9 million for the quarter, up a bit versus Q3 of last year.
And the allocation of earnings to the minority shareholders was $21.6 million during the quarter, relatively flat with the prior year.
As a result, net income for the third quarter was $313.3 million, up 8% or $23.1 million when compared to Q3 of 2019.
Our diluted share count for the quarter decreased 1.6% versus Q3 of last year to 215.8 million shares, resulting from share repurchases prior to the suspension of our share repurchase program, which we announced toward the end of March.
As a result, our diluted earnings per share for the third quarter was $1.45, which is an increase of $0.13 or 9.8% when compared to our Q3 earnings per share for last year.
On slide two, we provide the summary P&L, earnings per share and other information for the year-to-date period.
As a reminder, in response to the pandemic during the second quarter, we undertook a comprehensive review of our operational structure to reflect the current and expected economic realities of the COVID landscape.
The repositioning actions included severance actions to reduce employee head count, real estate lease impairments, terminations and related fixed asset charges that will allow us additional flexibility to match our additional changes in the need for space based on our head count, as well as the disposition of several small agencies.
These repositioning charges totaled $278 million, which reduced our year-to-date net income by $223 million and diluted earnings per share by $1.03.
Additionally, our results for the nine-months ended September 30 include the benefit of reductions in salary and related costs, which increased operating profit by $117.8 million related to reimbursements and tax credits under the government programs we've previously discussed.
Returning to the details of our revenue performance on slide four, while the decrease was significantly better than the reductions in client spending we experienced during the second quarter, demand for our services continued to decline compared to last year's levels, as marketers continued to manage expenditures due to the economic impact of the pandemic on their businesses.
Our reported revenue for the third quarter was $3.2 billion, down $417 million or 11.5% from Q3 of 2019.
As you can see on slides eight and nine, and as you would expect, certain client industry sectors continued to be more negatively affected than others.
Our clients and industries such as travel and entertainment and energy, as well as non-essential retail, are continuing to reduce their marketing communication expenditures to match the declines in those business sectors.
However, during the quarter, we continued to see clients in the pharma and healthcare industries, as well as the technology and telecommunications industries fair better.
The disciplines that are most negatively impacted were CRM consumer experience, primarily from our events businesses, and CRM execution and support, primarily due to our field marketing and non-profit agency businesses.
And our advertising discipline, including media, experienced declines similar to our overall organic decline.
A considerable amount of the revenue decline in these businesses resulted from reductions in third-party service costs incurred when providing services for our clients when we act as a principal.
These third-party service costs, which fluctuate directly with changes in revenue, declined across all of our disciplines by just under $200 million in Q3 of 2020 versus Q3 of 2019.
Turning to the FX impact, on a year-over-year basis, the strength of the U.S. dollar moderated against our foreign currencies.
For the first time since Q2 of 2018, the FX impact increased our reported revenue.
The impact of changes in exchange rates increase reported revenue by 0.5% or $18 million in revenue for the quarter.
On a reported basis, the dollar's performance was mixed this quarter, weakening against some of our major foreign currencies, while strengthening against others.
In the quarter, the dollar weakened against the euro, the U.K. pound and the Australian dollar, while the dollar strengthened against the Brazilian reais, Russian ruble and the Mexican peso.
Looking forward, if currencies stay where they currently are, we anticipate that the FX impact would slightly increase our reported revenue by approximately 50 basis points in Q4.
And for the full year, the FX impact would be negative by about 50 basis points.
The impact of our recent acquisition of DMW in the U.K. that we completed at the beginning of the third quarter, net of our disposition activity, decreased revenue by $11.3 million in the quarter or 0.3%, which was in line with the estimate we made entering the quarter.
Inclusive of the disposition activity through September 30 and not including any acquisitions or dispositions we may complete before the end of the year, we estimate the projected net impact of our acquisition and disposition activity will reduce reported revenue by approximately 50 basis points in the fourth quarter of 2020.
Our organic revenue decreased approximately $424 million or 11.7% in the third quarter when compared to the prior year.
As mentioned earlier, our revenue was down in Q2 across all major geographic markets.
But the percentage decreases in organic revenue were significantly lower than those we experienced in the second quarter.
Within our service disciplines, our healthcare agencies saw increased activity across all regions, resulting in organic revenue growth for that discipline, while both of our CRM disciplines, particularly our events and field marketing businesses, continue to face significant disruptions to their businesses due to the impact of COVID-19.
Turning to our mix of business by discipline on page five.
For the second quarter, the split was 56% for advertising, and 44% for marketing services.
As for the organic change by discipline, advertising was down 11.7%, with our media businesses seeing a significant improvement organically compared to the second quarter, when media activity slowed considerably.
Our global and national advertising agencies also improved their organic performance this quarter compared to the second quarter, although performance by agency was mixed.
CRM consumer experience was down 19% for the quarter.
The strongest performance in the discipline came from our precision marketing agencies, which were down globally around 5%.
Our events businesses in the discipline continue to face significant challenges as they adapt their business models to the new operational realities due to COVID.
And our shopper and brand consulting agencies continue to experience COVID-19 headwinds.
CRM execution and support was down 19.4% as our field marketing and non-profit consulting businesses lagged for the quarter.
PR, while mixed by market, was down 3.4%.
And our healthcare agencies continued to turn in strong performances across the portfolio, this quarter up organically 3.8% with growth across all geographic regions.
Now turning to the details of our regional mix of business on page six.
You can see the quarterly split was 55% in the U.S., 3% for the rest of North America, 10% in the U.K., 17% for the rest of Europe, 12% for Asia-Pacific, 2% in Latin America and 1% for the Middle East and Africa.
The mix in Q3 is fairly consistent with what we saw by region in the first and second quarters of the year.
In reviewing the details of our performance by region on slide seven, organic revenue in the second quarter in the U.S. was down $227 million or 11.4%, which is an improvement over the Q2 results when organic revenue fell by over 20% domestically.
For the quarter, our events businesses again experienced our largest organic decline in the U.S.
Our domestic specialty healthcare agencies were positive organically, while we again saw decreases in our advertising and media businesses, but at decreased levels from Q2.
And our domestic PR and precision marketing agencies were just about flat compared to Q3 of 2019, solid performance considering the overall environment.
Outside the U.S., our other North American agencies were down just under 8% or $8 million.
Our U.K. agencies were down $43 million or 12.5%.
Positive performance from our precision marketing and healthcare agencies was offset by reductions from our other businesses.
The rest of Europe was down 9.6% organically, a significant improvement over Q2 when organic revenue fell nearly 30%.
In the eurozone among our major markets, Germany and Italy were down single-digits.
Ireland, the Netherlands and Spain were down between 10% and 20%, while France continued to lag behind the other markets.
Outside the eurozone, our organic growth was flat during the quarter.
Organic revenue growth in Asia-Pacific for the quarter was negative 12.8%.
Our agencies in Greater China and Australia were down single-digits, while in Japan and India, we saw similar decreases in Q3 as we did in Q2.
Latin America was down 22.3% or $22 million organically in the quarter, driven by the continuing weakness from our agencies in Brazil.
And lastly, the Middle East and Africa was negative again for the quarter.
Turning to slides eight, nine and 10, we present our mix of revenue by our clients' industry sector.
When comparing the year-to-date revenue for 2020 to 2019, we continue to see a small shift in our mix with increased contribution from our pharma and technology clients, while travel and entertainment and financial services decreased.
Turning to our cash flow performance on slide 11, you can see that in the first nine months of 2020, we generated $1.14 billion in free cash flow, excluding changes in working capital, down when compared to the same period in 2019.
But the $412 million generated in the third quarter was up a bit versus the $394 million generated during Q3 of 2019.
As for our primary uses of cash on slide 12, dividends paid to our common shareholders were $423 million, effectively unchanged when compared to last year.
Dividends paid to our noncontrolling interests shareholders decreased to $58 million.
Capital expenditures in the first nine months of the year were $50 million, down when compared to last year.
As we've talked about on our prior calls, we have limited our capital spending in the near term to only those deemed essential.
Acquisitions, including earnout payments, totaled just under $105 million and stock repurchases, net of the proceeds received from stock issuances under our employee share plans, totaled just over $216 million, a decrease compared to last year, reflecting the suspension of our share repurchase program in mid-March.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $284 million in free cash flow during the first nine months of 2020, $141 million of which was generated in the third quarter alone.
Turning to our capital structure as of September 30, our total debt was a little under $5.8 billion, up $670 million since this time last year.
Major components of the change were the retirement of $600 million of dollar-denominated senior notes, which were due earlier this year, replacing those borrowings with $1.2 billion of 10-year senior notes due in 2030, along with the FX impact of converting the EUR1 billion of euro-denominated borrowings into dollars at the balance sheet date.
Versus December 31, 2019, gross debt at the end of the quarter was up $641 million, primarily as a result of the $600 million issuance of U.S.-denominated senior notes in early April.
Our net debt position at the end of the quarter was just over $2.5 billion, up about $1.7 billion compared to year-end December 31, 2019, an improvement of $166 million for the comparative prior-year last 12-month period, reflecting the results of our improved cash management.
The increase in net debt since December 31, 2019 was a result of the use of working capital of about $1.8 billion, plus the impact of FX on our cash and debt balances, which increased net debt by $120 million.
Partially offsetting those increases was the free cash flow we generated during the first nine months of the year of $284 million.
Over the past 12 months, our net debt is down $166 million, primarily driven by our excess free cash flow of approximately $500 million.
Offsetting this was the reduction in operating capital during the past 12 months of approximately $230 million and the negative impact of FX, which totaled around $55 million.
As for our debt ratios, our total debt-to-EBITDA ratio was 3.1 times and our net debt-to-EBITDA ratio was 1.4 times.
And finally moving to our historical returns on page 14.
For the last 12 months, our return on invested capital ratio was 17.7%, while our return on equity was 37.7%, both reflecting the decline in operating results, driven by the economic effects of the pandemic, as well as the impact of repositioning charges we took back in the second quarter. | compname reports q3 earnings per share $1.45.
q3 earnings per share $1.45.
worldwide revenue in q3 decreased 11.5% to $3,206.5 million from q3 of 2019.
worldwide revenue in q3 of 2020 decreased 11.5% to $3,206.5 million from $3,623.8 million in q3 of 2019.
reduction in co's revenue continued during second and third quarters of 2020 and is expected to continue for remainder of year.
operating margin for q3 of 2020 increased to 15.6% versus 13.1% for q3 of 2019.
qtrly decrease in revenue from negative organic growth of 11.7%.
qtrly change in revenue included increase in revenue from positive impact of foreign currency translation of 0.5%.
reductions in revenue could adversely impact ongoing results of operations and financial position and effects could be material. | 1 |
Joining us today will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and Chief Financial Officer.
All of our core businesses are producing strong financial results and we are optimistic that 2021 will be an outstanding year for First American.
Today I will focus my comments on the progress we are making on a number of key strategic initiatives, and Mark will then provide details on our second quarter results.
The process of buying a home is complex and involves multiple parties.
First American sits at the center of the transaction, coordinating among realtors, lenders and consumers to protect the integrity of the process.
As the transactions become increasingly digital, First American is focused on leveraging our unique property data and technology to enhance the customer experience which make the process more efficient and secure for all parties.
First American's data assets and process expertise provide a unique competitive advantage.
Last quarter, we announced our initiative to expand our title plants from 500 to 1500.
By building an additional 1000 plants our databases will cover approximately 80% of all real estate transactions.
We've made significant progress since our launch, we are currently up to 850 plants and are on track to achieve our goal of 1500 by the year end.
These additional plants are currently being built on a go-forward basis and will accrue significant benefits to us in the years to come as our historical content becomes deeper and richer.
Due to our patented extraction process, First American is in a unique position to build these plants at a fraction of our historical cost.
Plus we are now capturing virtually every data point on 7.5 million documents per month up than 5 million last quarter, data that can be leveraged to automate title underwriting decisions and geographic areas that were previously done manually.
In addition to our data leadership, we are focused on developing digital solutions to improve the customer experience.
Across the enterprise, we are developing next-generation cloud-based technology to make it even easier for our customers to do business with us.
For example, our direct division recently launched IgniteRE, a platform that provides real estate professionals with enhanced productivity tools and enables them to manage transactions from open to close with buyers, sellers and settlement agents with secure environment.
IgniteRE and ClarityFirst, which we discussed last quarter, are two examples of technology investments we've made to strengthen our competitive edge and more will follow.
Both platforms make it easier to work with us and expand our customer relationships.
To support our technology initiatives, we acquired a 130 product managers, designers and engineers so far this year.
These critical hires reflect our commitment to expand our position as the industry leading innovator.
Turning to our venture strategy.
Since 2019, we've invested $260 million in venture-backed companies in the proptech ecosystem.
These investments give us insight into a high growth technology companies, most of which have become strategic partners.
In addition to providing strategic benefit they are contributing to profits as well.
Venture investments will continue to be a component of our capital allocation strategy.
In closing, I'm confident that 2021 will be another strong year for First American.
All of our core divisions are performing well and we have a healthy pipeline of business heading into the second half of the year.
Our balance sheet is strong and our strategy of focusing on data and technology to enhance the customer experience will continue to succeed.
We're pleased to report excellent results this quarter.
We earned $2.72 per diluted share.
Included in this quarter's results were $0.59 of net realized investment gains.
Excluding these gains, we earned $2.13 per diluted share.
I'll start with our title business.
Revenue in our Title segment was $2.1 billion, up 44% compared with the same quarter of 2020 due to the strength of the purchase and commercial markets.
Purchase revenue was up 66% driven by a 43% increase in the number of closed orders coupled with a 16% increase in the average revenue per order.
Commercial revenue was $223 million, a 104% increase over last year.
Large transactions have resumed as we closed 54 transactions in the U.S. with premiums greater than $250,000, up from just 12 last year.
This year, we expect a record year in our commercial business.
Refinance revenue declined 23% relative to last year as the rise in mortgage rates that occurred during the first quarter put pressure on second quarter closings.
On the agency side, revenue was a record $905 million, up 51% from last year.
Given the reporting lag in agent revenues of approximately 1 quarter, we are experiencing a surge in remittances related to Q1 economic activity.
Our information and other revenues were $298 million, up 31% relative to last year.
Revenue growth was primarily due to higher demand for the Company's title information products in our data and analytics, commercial and loss mitigation business lines.
Investment income within the Title Insurance and services segment was $47 million, up 10%, primarily due to higher interest income from the company's warehouse lending business and higher average balances in the company's investment portfolio, partially offset by the impact of the decline in short-term interest rates on the company's tax deferred property exchange and escrow balances.
In our Title segment, pre-tax margin was a record 19.1% excluding the impact of net realized investment gains, pre-tax margin was 15.3%.
Turning to the Specialty Insurance segment.
Pretax earnings totaled $20 million, up from $7 million in 2020.
Revenue in our home warranty business totaled $108 million, up 10% compared with last year.
Pretax income in our home warranty business was $14 million, a decline of 13% in part due to elevated claims expense.
Our property and casualty business generated a pre-tax income of $6 million this quarter.
Included in this quarter's results were the $12 million gain on the sale of our agency operations.
At the end of the second quarter our policies in force have declined by 22% at the beginning of the year and we expect a 70% decline by year-end.
The full wind down of the property and casualty business is on track to be completed in the third quarter of 2022.
The effective tax rate for the quarter was 24% in line with our normalized tax rate.
Cash flow from operations was $253 million in the second quarter, down from $344 million in the prior year, due primarily to the deferral of estimated tax payments allowed by taxing authorities during the height of pandemic in 2020.
With respect to this information security incident, as we previously disclosed, we reached a settlement with the SEC for $487,616.
The New York Department of Financial Services matter remains ongoing.
We continue to believe that it along with all other matters relating to the incident will be immaterial.
As Dennis mentioned in his remarks, we've invested a total of $260 million in venture-backed companies.
This quarter we recorded a $44 million gain related to our investment side, a real estate SaaS company that serves real estate agents, teams and brokers.
Our largest investment has been in OfferPad an iBuyer that is now party to a merger with the SPAC, which recently announced that the value of the aggregate equity consideration to be paid to OfferPad stockholders and option holders will be equal to $2.25 billion.
At that valuation, we would expect to book a gain of approximately $237 million on our $85 million equity investment.
We expect this merger to close later this year.
Due to the growth of our venture portfolio, we have expanded disclosures in our Form 10-Q, which we expect to file later today.
These disclosures will include the cost, unrealized gains and carrying amount of our non-marketable equity securities, as well as information on concentration of these securities.
We remain optimistic about our 2021 outlook.
Although refinance orders have declined corresponding to an increase in mortgage rates, the purchase and commercial markets remain strong.
Our claims experience is favorable and the general improvement in economy to tailwind into our business. | q1 earnings per share $2.10.
q1 revenue rose 43 percent to $2.0 billion. | 0 |
Information on risk factors that could affect our business, can be found in our SEC filings.
We will also refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel.
Over to you, Ben.
In 2021, Alaska has established a track record of leading the industry in the recovery from the pandemic.
This has been enabled by the strength of our business model, our measured approach to capacity and our financial discipline.
Our 2.4% pre-tax margin in the fourth quarter continues that trend, especially considering the disproportionate impact that severe weather had on our hubs, and the Omicron-related impacts we began to face at the end of the year.
While I'll discuss the impact of weather on our fourth quarter and the impact of Omicron on our first quarter, let me start by saying, both of these are temporary challenges that do not deter my confidence in our underlying business model and its ability to outperform the industry.
Starting with recent events.
The combination of severe snow, multiple consecutive days of sub-freezing temperatures in our Pacific Northwest hub and stacking disruptions caused by the Omicron variant, resulted in one of the challenging holiday travel periods we have ever experienced.
Our completion factor was extremely challenged at the end of the year, which resulted in flying approximately 1 point less than our expected capacity in the quarter and 2.5 points less than we planned to operate in December alone.
In terms of the financial impact of these events, they were material.
Our fourth quarter result was worse by approximately $70 million, and our pre-tax margin was reduced by 3.5 points.
Even with this outsized impact, Alaska was profitable in Q4 and strongly led the industry in pre-tax performance over the second half of 2021.
In response to the ongoing impacts of Omicron in early January, we proactively reduced our remaining Q1 scheduled client by about 10%.
I am pleased to report that Omicron absences are down significantly, and our operation is once again stable.
Omicron has not only impacted our ability to operate fully and has dampened closer to the mainline substantially as well.
Andrew will provide more detail on the demand environment.
But the silver lining is that demand for travel from presence date and beyond, remain strong and booking trends have rebounded week over week since their low point in early January.
We expect the bulk of the Omicron impact to be felt in the first quarter, specifically in January and February, as revenue has reduced and as unit costs are pressured, given lower ASM production and higher staffing-related costs.
However, as I opened with, this will be short term in nature and has not changed our expectations about the overall recovery.
Clearly, this was a tough way to end a year that otherwise had progress worth celebrating.
First, our revenues recovered to $6.2 billion or 70% of 2019 levels, and we achieved this while flying less capacity than many of our peers, who had similar revenue-recovery results.
Second, while the full year adjusted pre-tax loss was $342 million, we recorded $282 million of adjusted pre-tax profit during the second half of the year.
Our second-half adjusted pre-tax margin was over 7%, clearly outperforming the industry, even though West Coast travel has recovered slower than much of the country.
Third, with decent demand recovery and disciplined cost management, we returned to positive operating cash flows.
Excluding any CARES funding, we generated more than $100 million in operating cash flow for the year, which reflects $100 million pension contribution we funded in the third quarter.
Fourth, as profits and cash flow returned to positive territory, we have essentially repaired our balance sheet.
We closed the year with a 49% debt-to-cap ratio, 12 points lower than prior year and within our target range.
And lastly, given we were able to meet or exceed several of our recovery goals, our employees earn the industry's highest bonus pay through our incentive-based pay program.
For the average employee, this payout amounts to about 6.2% on top of their annual pay.
All told, I'm really pleased to report that our bonus programs will pay out $151 million to our employees for the year.
In addition to these financial milestones, we also cemented several critical strategic decisions during 2021 that will help drive our success well into the future.
We made the decision to return to a single fleet of Boeing aircraft, which will drive revenue and cost benefits.
The remaining 27 Airbus A320s that are flying today, will be retired by the end of 2023, enabled by our Boeing MAX order of 93 firm and 52 options.
We joined oneworld and launched our West Coast international alliance with American Airlines, which will unlock additional revenues and loyalty across our West Coast hubs, especially in Seattle.
We announced sustainability goals, committed to net zero carbon emissions by 2040 and further embracing a sustainability mindset by linking a portion of our annual performance-based pay plan for all employees to the carbon intensity of our operations.
We also integrated this goal into our executive compensation targets.
Let me close with a brief look ahead at 2022.
Like our industry peers, Q1 will clearly be impacted by Omicron, both for revenues and unit costs.
We do believe that virus will move to endemic status and that demand will ultimately stabilize.
And when it does, our business model is set to outperform.
Notwithstanding a challenging first quarter, we expect to be profitable for the month of March and for the remainder of the year.
We remain committed to returning to pre-COVID capacity by the summer and plan to grow from there.
I expect full year capacity to be up versus 2019, between 2% and 6%, dependent on demand.
This guidance reflects first-half capacity that is flat, to slightly up and second-half capacity that could be up as much as 10% versus 2019.
As we did throughout 2021, we will continue scaling our business back in a measured way, leveraging our strong balance sheet and running our operation to produce consistent, industry-leading financial performance in 2022.
I hope you'll join us at our upcoming investor day.
We plan to share our long-term expectations, including comprehensive 2022 guidance.
This event is set for March 24 in New York.
It is no secret that this is a tough business, but the pandemic has surprised and challenged even the most seasoned in our industry.
The strength of our company comes from our people and culture of care, our focus on safety and operational excellence, our reputation for customer service and our financial discipline.
I am confident these strengths will serve us well again in 2022.
Fourth quarter revenues totaled $1.9 billion and were only down 15% versus 2019, which was better than our guide.
And with flowing capacity also down 15%, our fourth quarter unit revenues were flat in 2019.
As Ben mentioned, end-of-quarter weather disruptions were significant, impacting revenue by approximately $45 million.
Even with these setbacks, our revenue recovery improved by 3 points from what we viewed was a relatively strong third quarter.
Load factors showed continued improvement throughout the quarter as well, progressing from 75% in October to 80% in November and 83% in December, signaling demand for travel continues to move in the right direction.
The strength of this demand clearly played out in our November revenue results.
November revenues were down just 7% versus 2019 on 12% less capacity.
My take from that result is that our fundamental revenue results were better this November than in 2019.
Even though we've not seen anywhere close to a full business demand recovery, the full impact of our oneworld and American partnerships or a complete West Coast recovery.
Our network is well-positioned for recovery.
Another encouraging indicator of yields, which ended the quarter up 3% versus 2019.
This was driven by the strength of holiday bookings and solid demand management by our RM team, despite the Delta and Omicron variants bookending the quarter.
For the winter holiday period, we were on pace for flat-to-positive load factors and double-digit yield gains, prior to the impact of the winter disruption.
They came together as a fully integrated team and did a tremendous job stimulating demand and welcoming guests back to flying, managing loads and yields and taking care of guests during disruptions.
The net result of all of this was posting the best unit revenue performance in the industry for the second half of 2021 is down just 0.5%.
As we've seen all year, guest preference for our first- and premium-class products remained strong in the fourth quarter.
First-class-paid load factor ended the quarter up 2 points and premium-class-paid load factor was up 8 points, both versus the fourth quarter of 2019.
Royalty strength also carried through year end, particularly from our credit card program.
Our bank card remuneration reached record levels in the fourth quarter, up 13% versus the fourth quarter of 2019.
We have a tremendous partner in Bank of America, who issued our co-brand card.
And we're excited about the highly engaged cardholder base that we've established together.
Looking ahead, while the impact of Omicron will be transitory, each successive variant has been expensive for our business.
Impacts also blend in the February 3 Presidents Day, but at a much reduced rate from January.
We estimate Q1 bookings lost to this way by approximately $160 million.
As Ben mentioned, we've seen bookings start to recover from down 40% versus 2019 in the first week of January, to around 25% today.
March loads and yields are strong.
And we expect them to remain this way, as the negative impact of the variant continues to subside.
Given the abrupt softening of close-in demand, we've moderated our capacity plans in the first quarter.
We will fly approximately 10% to 13% below the same period in 2019.
With the lost bookings in January and February, we expect total revenues in Q1 to be down 14% to 17% from 2019 levels.
Q1 is our seasonally weakest quarter.
And while it's unfortunate, it will be significantly impacted by Omicron, I prefer Q1 was impacted versus any other quarter.
We do anticipate that when Omicron moves behind us, demand will snap back to recovery path we were seeing, leading into the holidays.
As that has been the trend after prior waves, spring and summer travel should be strong on the leisure side and benefit from further unlocking of business and international travel.
I look forward to quantifying our expectations for the full year, but we're saving many of those details for our upcoming investor day.
That said, I do want to speak in a bit more detail about our '22 capacity plans.
As Ben shared, we're targeting to return to pre-COVID capacity by the summer and the growth through the back half of the year for full year 2022 capacity growth of between 2% and 6%, depending on demand.
In Seattle, we are already above pre-COVID capacity.
A material portion of our planned growth in the back half of 2022 will be from our Pacific Northwest hubs, as we look to continue to enhance relevance and scale, mostly through scheduled debt.
California demand has recovered more slowly than the rest of the network.
But as we bring California fully back in '22, I'm excited about the opportunities that await us.
This must be brought onboard a new regional vice president of California, Neil Thwaites, who will be a pivotal part of growing our presence in the state, from both a business and leisure perspective.
From a commercial perspective, I'm anxious to capitalize on a full recovery.
I believe, we have the right cost structure, the right commercial offerings and the right balance sheet to allow us to grow versus 2019, as the recovery continues to unfold.
We have flexibility to adjust our capacity as needed to match supply with demand, and we are looking at the back half of 2022 as a period that pivots from capacity recovery to one of capacity growth.
And as we plan for growth across our West Coast hubs, we're eager to maximize the potential of our Loyalty program and leverage the international capabilities of our oneworld partners to provide our guests with global access.
Beginning summer of 2022, British Airways will fly non-stop service from Portland to London, Heathrow, and Finnair is set to launch non-stop flight from Seattle to Helsinki.
This summer, Alaska partners will have over 100 non-stop flights per week of the West Coast to Europe.
We've been navigating the ups and downs of this pandemic for nearly two years now.
And while we know the first quarter will be weaker than we expected just a month ago, I'm very optimistic about how we are positioned for March and beyond.
And with that, I'll pass it to Shane.
I'll start, as I always do with an update on cash flow, liquidity and our balance sheet.
We ended the year with $3.5 billion in total liquidity, inclusive of on-hand cash and undrawn lines of credit, which is essentially unchanged from Q3 and reflects $112 million in debt repayments during the quarter.
Our Q4 cash flow from operations was $129 million, above our previous guidance, largely driven by stronger demand recovery than anticipated, given we were dealing with the now old news Delta variant, as we came into the quarter.
Our balance sheet remains a bright spot in point of differentiation within the industry.
This year, our debt-to-cap ratio fell to 49%, 12 points below year-end 2020, placing us within our stated target range and as Ben said, essentially back to our pre-COVID balance sheet strength.
In fact, in a period marked by increasing debt across the industry, our adjusted net debt ended the year 40% lower than 2019.
We're pleased to have received a credit upgrade in late December as well, moving us one step closer to an investment-grade rating.
The weighted average effective rate of our outstanding debt is 3.3% and our debt service is entirely manageable going forward.
Contractual debt repayments in 2022 are about $370 million with $170 million in Q1.
Given the low-cost nature of our debt, we don't plan to make any significant prepayments during 2022.
Rounding out the strength of our balance sheet, our pension plans ended the year at 98% funded, the highest level we've achieved since 2013.
Our strong balance sheet and ample liquidity put us in a terrific position to pay cash for the 32 737-9 aircraft deliveries we have in 2022.
We feel very comfortable with our liquidity position, especially given our belief that we are back to annual profitability and consistent annual positive cash flow generation.
By the end of 2022, I expect our total liquidity will step down to around $2.5 billion.
Our net debt-to-EBITDA to settle around two times or less.
Turning to the P&L, our 2.4% pre-tax profit was a solid outcome, given the circumstances in the quarter.
Andrew spoke to the revenue results, and I'll dive into our cost.
Our non-fuel costs were $1.4 billion in the fourth quarter, inclusive of approximately $25 million of unexpected costs from the December disruption.
This was driven by approximately $18 million for overtime and wage premiums, as we worked to stabilize the operation from staffing disruptions, and $7 million incurred for passenger remuneration, EIC and other related costs.
Typical bad weather event for Alaska might last a couple of days and impact a single hub.
The December event lasted an entire week, impacted both Seattle and Portland and was exacerbated by the start of a surge in Omicron-related staffing shortages.
In short, a literal perfect storm.
As Andrew indicated, the revenue impact of our cancellations was $45 million.
And given the $25 million in incremental cost, this event alone raised $70 million of profit from the December month and quarter.
The combination of lower ASM production and higher costs, resulted in our CASMex being up 12% versus 2019 outside the high end of our range.
Absent the disruption, our cost results would have been in line with our guide.
Looking ahead on costs, our commitment to returning to 2019 CASMex levels remains unchanged.
We know we've got our work cut out for us.
Our business model drives some predictability and execution.
And it is obvious that COVID has inserted a level of volatility into our industry that makes managing a high fixed-cost business more difficult.
2022 will start off very challenged, but we fully expect it to sequentially improve materially, as the year progresses.
For the first quarter, Q1 CASMex is expected to be up 15% to 18% and capacity down 10% to 13% versus 2019.
7 points of this is purely driven by our late pull down of first-quarter capacity.
While the reduction will help ensure our ability to operate the flights we sell, given Omicron's impact on staffing, and as a hedge against lower-closing demand.
The reality is, we cannot pull out most cost.
Absent the capacity pull down, our unit cost guide would have been up 8% to 11%.
In addition, our costs in Q1 include two items contributing another 3.5 points of pressure that are worth detailing.
First, approximately 2.5 points of our Q1 unit cost increase is related to lease return expenses for our Airbus aircraft.
As previously noted, given the speed with which we plan to return to a single fleet, we will be incurring significant costs associated with returning these leased Airbus aircraft, primarily over the next two years.
I currently expect the total waste return expense to be between $200 million and $275 million in total with more than half of that being recorded this year.
These transitory return costs begin in earnest in the first quarter of 2022 will peak by Q4 of this year and will then taper through 2023, as the last A320 leaves the fleet.
So while a headwind right now, it will become a tailwind to our cost structure in the next eight quarters, which will be further helped as we replace the 150-seat Airbus with the 178-seater, cost-efficient Boeing 737-9 aircraft.
Second, approximately one point of our expected Q1 unit costs are being driven by incremental trading costs and wages of newly hired employees, as we prepare to recover to pre-COVID capacity by the summer.
To move from 80% to 85% of pre-COVID flying to 100% and then beyond, we must staff up early, given the throughput capacity of our hiring and training infrastructure.
We expect fuel prices to be between $2.45 and $2.50 per gallon in Q1, also increased from the last quarter.
Despite this quarter's cost guide, largely driven by the late pull down of capacity that I noted, we expect significant sequential improvement in unit cost, as we recover capacity throughout the year.
We expect full year 2022 unit costs inclusive of lease return expense, to be up 3% to 6%, and on an ex-lease return basis, to be up 1% to 3%.
This estimate implies returning to our pre-COVID cost structure during the second half of the year.
This entire pandemic and our recovery has been, obviously, unpredictable, but I'm excited about what lies ahead for Alaska.
I truly believe we've set up our business to deliver superb results, as demand fully stabilizes.
With continued focus on our cost initiatives, fleet transition and our commercial opportunities, we have valuable levers that set us up for a great next couple of years. | compname reports q4 earnings per share of $0.68.
q4 earnings per share $0.68.
q4 sales $288.6 million versus refinitiv ibes estimate of $289.8 million.
q4 net sales of $288.6 million, down 3.8%.
backlog at $354.1 million at quarter end, up 35.6% compared to year end 2019.
qtrly acquisition adjusted diluted earnings per share non-gaap $1.10. | 0 |
Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic net sales growth excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of currency translation.
As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms and also includes estimated sales of our products through our retailers' websites.
[Operator instructions] [Audio gap] Fabrizio.
It is good to be with you today as our hearts continues to be with those impacted by COVID-19 around the world.
We achieved record sales and profitability in the second quarter of fiscal year 2022.
Our multiple engines of growth strategy showcased the benefit of its diversification.
Every category, region, and major channel expanded.
We size the favorable dynamics of skincare, fragrance-developed markets in the West, brick and mortar, and continue to prosper in the East with Chinese consumer, as well as in global travel retail and global online.
The flexibility we built into our business model over the last decade enable us to both allocate resources to attractive growth opportunities and effectively manage the impacts by increasing inflationary environment.
Our advanced planning for the key shopping moments of 11.11 and holidays allowed us to overcome supply chain obstacles.
For our second quarter, reported net sales grew 14%.
Organic net sales rose 11%.
Adjusted operating margin expanded, and adjusted diluted earnings per share increased 15%.
Today's results are all the more impressive compared to the pre-pandemic second quarter of fiscal year 2020 when we delivered record organic sales growth in our seasonally largest quarter.
Despite the ensuing challenges of COVID-19, which escalated during the quarter with Omicron, we far exceeded the exceptional results of two years ago.
Reported sales are 20% higher, driven by organic sales growth, and with every region now larger, and we are much more profitable.
Our gains during the last two years reinforced our confidence in our ability to navigate the impacts of the prolonged pandemic.
Moreover, our optimism in the opportunities of tomorrow remains incredibly strong, owing to the timeless desirability of our brands and our commitment during the pandemic to invest for the near and the long term.
Our brand portfolio of large, scaling, and developing brands served as a powerful catalyst for growth as consumer reward the quality of our trusted brand and hero products.
In the second quarter, 11 brands achieved double-digit organic sales growth versus the prior-year period.
This broad-based trend is similar to the contribution in the first quarter despite a far tougher comparison.
The momentum in our largest brands, Clinique, Estee Lauder, La Mer, and M·A·C, continues as the hero franchises capitalize on innovation in product engagement and high-touch experiences and services to drive trial and repeat.
La Mer and Clinique delivered standout results in skin care, while Estee Lauder and M·A·C drove makeup emerging renaissance.
Our scaling and developing brands achieved excellent results.
Jo Malone London and Tom Ford Beauty led fragrance and were among our top-performing brands, while Bobbi Brown grew strongly driven by skincare.
Aveda and Bumble and bumble delivered accelerating sales growth in hair care as Too Faced and Smashbox rose double digits in makeup.
Product innovation also served as a powerful catalyst for growth across our brand portfolio, contributing nearly 25% of sales.
This level of contribution is notable in a quarter when holidays exclusives represent a larger mix of business and especially so in a challenged supply chain environment.
La Mer fueled by its iconic heroes on-trend holidays merchandising and highly sought new The Hydrating Infused Emulsion led the company's sales growth.
The brand excelled in every region and across major channels, cheered by its loyal consumer and embraced by new cohort of consumers, including more men.
Clinique's skincare portfolio with its desirable innovation and hero franchises performed strongly.
Its new Smart Clinical Repair Wrinkle Correcting Serum drove sales gains in North America, amplifying the brand's global momentum in the serum subcategory.
Clinique Take The Day Off makeup remover saw a dramatic uptick in sales, evidence of makeup's emerging renaissance and the staying power of this crowd-favorite skincare product, which is recruiting a new generation of consumers.
For makeup, the Estee Lauder brand is a driving force in the category emerging renaissance, with makeup sales for the brand already larger than two years ago.
Estee Lauder Double Wear hero franchise delivered remarkable performance, while its Futurist foundation, which is an East to West product born of skinification of makeup trend, was very strong.
Our fragrance portfolio continued to go from strength to strength, owing to the enduring sand-based ritual created in the pandemic and enhanced by innovation, better online storytelling, and expanded reach as consumers in the East embrace this category.
Each of Jo Malone London, Tom Ford Beauty, Le Labo, KILIAN PARIS, and Frédéric Malle delivered strong double-digit growth in every region, demonstrating the allure of these brands around the world.
Tom Ford Beauty exemplifies the benefits of a strategic focus on heroes and innovation.
Its new Ombre Leather Parfum had a halo effect on the other perfumes such that sales for the franchise doubled.
In the third quarter, the brand is leveraging its global appeal with a flare of local relevance in the fragrance launch of Tom Ford Rose Trilogy.
Our growth engines also continue to diversify by region as we anticipate.
Developed markets in the West performed especially well.
North America executed with excellence to capture brick-and-mortar reopening trends and deliver a strong holiday across channels.
Festive seasonal exclusive, including Estee Lauder Blockbuster Set and Aveda collaboration with Philip Lim, proved highly sought.
Indeed, our in-store and online activation and merchandising were incredibly successful, with brand.com posting a record Black Friday.
Every category grew double digits organically in North America led by makeup where our brand paired trusted product with enticing innovation as social and professional user education increased.
M·A·C, Bobbi Brown and Too Faced produced engaging content and artist-led education to inspire consumers to size the joy and creativity of the category.
Mainland China delivered high single-digit organic sales growth, an impressive result given the regional restrictions in the quarter, the pressured brick and mortar, and makeup.
Online sales rose double digits organically, even after having posted significant growth in the year-ago period.
For 11.11 on Tmall, the Estee Lauder brand ranked No.
1 flagship store in beauty for the second consecutive year as La Mer's flagship store topped luxury beauty once more and Jo Malone London again led in prestige fragrance.
On JD, the Estee Lauder brand ranked No.
1 flagship store in beauty in its first year.
Skincare and fragrance grew double digits organically in Mainland China.
Hero products and innovation excelled, driving new consumer acquisition and repeat purchases.
Several brands expanded prestige beauty share in the quarter, including Estee Lauder, La Mer, and Dr. Jart+.
Looking ahead, we are excited about the long-term growth opportunity in the vibrant Asia-Pacific region and, most notably, in China.
We are a few months from opening our new innovation center in Shanghai.
Our aspiration for it are bold as we aim to meet and exceed the desires of Chinese consumers.
The center is designed to enable end-to-end innovation from concept, from product packaging through development, scale-up, and commercialization.
I am pleased to share that the build-out of our state-of-art manufacturing facility near Tokyo is also progressing very well, which is a testament to the amazing work of our global supply chain team amid the pandemic.
Its first phase is complete, and we are on track to start limited production by the first quarter of fiscal year 2023.
Our growth engines further diversified by channel as both online and brick and mortar prospered.
Specialty-multi and department store contributed meaningfully, and freestanding store in the West performed very well on reopening.
Traffic improved and complemented our strategic actions, including those under the post-COVID business acceleration program, to benefit productivity in brick and mortar.
This channel trends are encouraging for the long term, even if tempered in this moment by Omicron.
We continued to expand our omnichannel capabilities in the quarter to give consumers flexible and convenient shopping options for greater certainly for fulfillment.
Buy online, pickup in-store offerings in the United States for M·A·C, Aveda, Jo Malone London, and Le Labo are driving favorable average order value trends, and we are expanding the capability to more doors internationally, which holds great promise for the future.
Our global online channel delivered excellent performance, with organic sales rising high single digit after having surged over 50% in the year-ago period.
Each of brand.com, third-party platform, pure play, and retail.com contributed to growth.
The drivers included higher levels of engagement for virtual try-on and tools for choosing shade and scent, sophisticated assembly to drive trial and repeat, and more and better live streaming.
Indeed, in North America, La Mer generated the most sales from a live stream to date in the quarter.
Our brands are innovating in social commerce on Instagram, Snapchat, TikTok, and WeChat, among others.
We gained momentum in this promising online ecosystem during the quarter.
Too Faced leveraged an Instagram live shopping event to launch its new fragrance.
Estee Lauder Double Wear followers on TikTok skyrocketed with its latest campaign also driving brand awareness and affinity much higher.
And Tom Ford Beauty creatively debuted its new flagship site on WeChat's mini program in China.
Embedded with these outstanding results across categories, regions, and channels is the progress we are making in social impact and sustainability.
Since we spoke with you in November, we are pleased to have received several external recognition of our ESG efforts.
We were named to Forbes inaugural list identifying the world's top female-friendly companies, leading the way to support women inside and outside the workforces.
And for the fifth year in a row, we were named to Bloomberg Gender Equality Index.
We were included in the CDP's Climate A-List for the second consecutive year, which is a tribute to our deep commitment to climate action and to the highest level of transparency around our environmental interest.
Last, MSCI recognized our progress toward our 2025 ESG goal in its recent upgrade of the company to an A rating.
The company, our brands, and our employees have a number of events and activations planned in honor of Black History Month, and we are continuing to focus on our racial equity commitments and the work of accomplishing our goals.
As we embarked in -- on the second half of our fiscal year, our innovation pipeline is rich with newness, especially for sustainability.
La Mer newly advanced The Treatment Lotion, which will be on country in March as a powerful upgrade inside and out, crafted using our unique Green Score methodology and housed in a new recyclable glass bottle made with 20% post-consumer recycled glass.
This methodology, which was peer-reviewed in academic journal, Green Chemistry, during the quarter, evaluate ingredients and formulas throughout the lenses of human health, ecosystem health, and the environment.
This approach can be adopted, built upon, and scaled by others across our industry to further advance sustainability.
Estee Lauder is launching an all-new Revitalizing Supreme moisturizer created with innovations in formula and ingredients in a new recyclable glass jar.
Smashbox is introducing Photo Finish Silkscreen Primer collection featuring vegan formulas with a skin-defending complex and instant makeup benefits.
Lastly, DECIEM vegan brands, The Ordinary, is welcoming back Salicylic Acid 2% Solution, boosting a win list of over 400,000 for the new formula.
In closing, we delivered outstanding performance amid the accelerated volatility and variability, as well as supply chain challenges of the pandemic.
This demonstrates that we have the competency to navigate complexity well.
Our commitment to invest for the long term is of great importance in this moment as we benefit from the advancement we have made over the last few years in data analytics, technology, R&D, and supply chain.
These announced capabilities, combined with our strong portfolio of desirable brands, exceptional talent, and more flexible resource allocation, are enabling us to realize the power of our multiple engines of growth strategy even in a difficult external environment.
The grace, wisdom, and ingenuity of our employees in this still-challenging moment knows no bounds.
They are the embodiment of our company's strong culture.
And to them, I extend my deepest gratitude.
As you just heard, our momentum continued in our second quarter, with net sales growing 11% organically and 14% in total, led by a continued overall progression and recovery despite the volatility inherent across markets with a prolonged pandemic.
We had a solid holiday performance across all of our regions.
The inclusion of sales from the May 2021 DECIEM investment added approximately 3 points to reported net sales growth, and the currency impact was neutral.
From a geographic standpoint, organic net sales in the Americas rose 19% as holiday shoppers return to brick-and-mortar retail where we had an exciting array of gifting products and holiday activations in-store.
And even with more consumer shopping in stores, organic sales online also grew solidly in the Americas, with online representing more than a third of sales in the region.
Every market in the region contributed to sales growth this quarter, and the inclusion of sales from DECIEM added approximately 5 points to the total reported sales growth in the region.
In our Europe, the Middle East, and Africa region, organic net sales rose 13%.
Growth was diverse and broad-based, with global travel retail, as well as every market contributing.
All channels grew, led by double-digit growth across brick and mortar as recovery continued in both developed and emerging markets in the region.
Despite a strong performance during key shopping moments, organic sales online declined slightly, primarily driven by the U.K., due to a tough comparison with the prior year, which was more severely impacted by brick-and-mortar lockdowns.
The inclusion of sales from DECIEM added about 3 points to total reported sales growth in the region.
Our global travel retail business grew low double digits.
Travel restrictions have eased globally, and international passenger traffic continued to progressively improve, resulting in some stores reopening during the quarter, particularly in Europe and the Americas.
Travel retail continues to be led by Asia Pacific where demand from Chinese consumers remain strong.
In our Asia-Pacific region, organic net sales rose 5%.
Most of the markets in the region grew, led by Mainland China and Australia, although we continue to see variability in COVID restrictions and retail traffic across markets.
Sales grew across most major channels in the region, especially online, which benefited from the recent launch of three brands on JD.com.
The inclusion of sales from DECIEM added approximately 1 point to total reported sales growth in the region.
From a category standpoint, organic net sales of fragrances grew 30% with double-digit increases across all regions.
Exceptional double-digit increases from Jo Malone London, Tom Ford Beauty, Le Labo, and KILIAN PARIS reflected strong performances from hero products, new product launches, and the continued growth of the bath and body and home subcategories.
Organic net sales in makeup rose 12% as consumers in the Americas and Europe responded to social media activations, holiday assortments, and trends.
Estee Lauder foundations continue to resonate very strongly with consumers, especially those in the Double Wear and Futurist franchises.
M·A·C continued to drive the makeup renaissance with engaging, interactive campaigns throughout the quarter, like the special M·A·C trend Halloween report and solid holiday collections.
Too Faced, Tom Ford Beauty, Smashbox, and Bobbi Brown also contributed to growth in the category this quarter.
Organic net sales in skincare grew 7%, reflecting double-digit increases from La Mer, Clinique, and Bobbi Brown.
The inclusion of sales from DECIEM added 4 percentage points to reported growth.
Our organic net sales in hair care rose 18% as traffic in salons and stores improved, primarily in the Americas.
Aveda's growth came mostly from holiday gifts and hero franchises and in online and freestanding stores, while Bumble and bumble focused on recruiting new consumers in the specialty-multi channel.
Our gross margin improved 20 basis points compared to last year.
The benefits of strategic price increases and favorable currency more than offset the impact of higher makeup mix and lower gross margin on DECIEM products.
Inflationary pressures in our supply chain are expected to begin to more prominently impact cost of goods in our fiscal third quarter.
Operating expenses decreased 140 basis points as a percent of sales.
Our leverage of selling expense and general and administrative expense was partially offset by increases in advertising and shipping costs, the latter due to both inflation and our direct-to-consumer online growth.
Operating income rose 22% to $1.44 billion, and our operating margin expanded 160 basis points to 25.9% in the quarter.
Our tax rate at 21.4% continued at a more normal level this year versus the prior year, which was impacted by a one-time benefit associated with GILTI.
Diluted earnings per share of $3.01 increased 15% compared to the prior year.
For the six months, we generated $1.85 billion in net cash flows from operating activities, compared to $1.98 billion last year, which reflects both a return to more normalized working capital needs, as well as increased inventory, to mitigate some of the risk of supply chain disruption, given the ongoing global macro challenges.
We significantly increased our capital investment to $459 million to support the construction of our new production facility near Tokyo, as well as investments in our online business and other technology enhancements.
And we returned $1.84 billion in cash to stockholders through a combination of share repurchases and dividends, with an increase in our dividend rate occurring in the second quarter.
So turning now to our outlook.
We delivered an exceptional first half characterized by strong and diversified double-digit organic sales growth and disciplined cost management in the context of intermittent COVID disruptions, including the rise of the omicron variant, high inflation, and volatility.
Looking ahead, we are raising guidance to reflect our expectation for a strong year despite the potential further spread of Omicron, supply chain challenges, and increased inflationary pressures.
Inflation and transportation and procurement is expected to impact our cost of goods in the second half.
However, the benefit of pricing and cost mitigation efforts are helping to offset some of the inflation impacts for the fiscal year.
At this time, we expect pricing to add approximately 3.5 points of growth with the inclusion of the additional pricing actions we are taking during our second half.
We are planning to support the continuation of the recovery with increased point-of-sale staffing as retail traffic continues to gradually improve.
We are also planning to support key hero franchise launches in our third quarter from Estee Lauder, La Mer, and Origins with increased marketing and advertising support.
This investment will increase cost toward the latter part of the third quarter with more of the benefit to be realized in the fourth quarter.
For the full fiscal year, organic net sales are forecasted to grow 10% to 13%.
Based on rates of 1.146 for the euro, 1.357 for the pound, and 6.399 for the Chinese yuan, we expect currency translation to be negligible for the full year.
This range excludes approximately 3 points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM.
Diluted earnings per share is expected to range between $7.43 and $7.58 before restructuring and other charges.
This includes approximately $0.07 of accretion from currency translation and $0.03 of accretion from DECIEM.
In constant currency, we expect earnings per share to rise by 14% to 17%.
We expect organic sales for our third quarter to rise 8% to 10%.
The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about 3 points to reported growth, and currency is forecasted to be negative by about 1 point.
We expect third quarter earnings per share of $1.55 to $1.65.
Currency is expected to be $0.01 accretive to EPS, and the inclusion of DECIEM is not expected to be material.
In closing, our results thus far clearly demonstrate the power of our diversified portfolio.
Temporary softness in our Eastern markets driven by the pandemic was again offset by renewed growth in our Western markets.
A resulting slight slowing of growth in skin care was offset by remarkable growth in fragrances.
We continue to be choiceful about where we invest, and the flexibility we have built into our cost structure is helping us to mitigate some of the COVID-related disruptions and inflation while allowing us to continue to invest appropriately in our future growth.
This agility, along with the resilience of our remarkable teams worldwide, gives us confidence that we can continue to manage through the temporary complexities caused by the prolonged pandemic by focusing clearly on our long-term strategy and executing against it with excellence. | sees q2 earnings per share $2.51 to $2.61 excluding items.
confirming full year outlook.
qtrly adjusted diluted earnings per common share to $1.89.
qtrly net sales increased 23% to $4.39 billion.
for fiscal 2022, we continue to expect strong net sales and adjusted earnings per share growth with margin expansion.
higher transportation and logistics costs to negatively impact cost of sales and operating expenses in fiscal 2022. | 0 |
Today's call is being recorded, and the supporting materials are the property of Dana Incorporated.
They may not be recorded, copied, or rebroadcast without our written consent.
Actual results could differ from those suggested by our comments today.
Additional information about the factors that could affect future results are summarized in our Safe Harbor statement found in our public filings, including our reports with the SEC.
As we jump right in, I'd like to share a quick overview of our results for the third quarter.
Dana delivered $2.2 billion of sales, representing an increase of $210 million over this time last year as our customers continue to see strong demand despite several headwinds.
Diluted adjusted EBITDA for the quarter was $210 million, a $9 million improvement over last year.
Free cash flow was a use of $170 million as the semiconductor shortage drove significant and unplanned OEM demand reductions which, of course, led to substantial downstream component inventory accumulation across the company.
Diluted adjusted earnings per share was up slightly compared with last year at $0.41 for the quarter.
Moving to the key highlights on the upper right-hand side of the page.
Today, we will provide you with an update on how we're navigating through unprecedented supply chain constraints, raw material cost inflation, and labor shortages that are impacting the entire global mobility industry.
We'll also outline how Dana is well-positioned to capitalize on long-term cyclical growth as near-term issues begin to subside.
Finally, I'll provide a recap on our recent Capital Markets Day that we conducted last month at our world headquarters in Maumee, Ohio.
This event was intentionally focused on vehicle electrification and more specifically the tremendous progress we've achieved by executing the strategy that we initially announced in 2016 and refreshed in 2019.
Very clearly our success in e-Propulsion continues to accelerate across all mobility markets as Dana's cohesive and streamlined global team is generating significant value for our customers around the globe.
Please turn to page 5 and we'll begin our discussion with the ongoing supply chain challenges and how it is impacting our markets.
Whether it is the semiconductor shortages causing OEMs to idle vehicle manufacturing or dramatic shortages of labor, sea containers, truck drivers, raw materials or numerous other issues resulting from the global pandemic, companies across the mobility industry are having to navigate through unprecedented manufacturing constraints.
As we all know too well, supply chain disruptions have significantly reduced global auto production as OEMs are challenged to procure chips required to produce their vehicles and meet robust consumer demand.
This reduced vehicle output has led to historically low finished vehicle inventories in the light vehicle segment.
The commercial vehicle and off-highway segments are largely experiencing similar high demand.
For example, the current Class 8 truck sales backlogs have reached pre-pandemic levels, and finished vehicle inventory levels for construction and agriculture equipment are at the lowest levels in the last three years, resulting in unfulfilled end-customer demand.
On the right side of the page, we are illustrating the issues constraining supply.
The disruptions we are seeing continue to cause component, raw material shortages, and escalating prices across all of our end markets.
In addition to the chip shortages I mentioned, shipping congestion at the ports around the world is translating to delays, container shortages, and increasingly just a cost resulting in overall higher input cost.
Labor shortages, particularly in the United States, are also leading to production inefficiencies, plant downtime, and higher labor cost.
All of this has led to customers struggling to meet the strong end-market demand.
We're actively navigating through the unprecedented and challenging market dynamics by working to offset and recover higher input costs for commodities such as steel through our established mechanisms.
Though due to the ongoing price inflation and inherent lag in recoveries, we continue to see a substantial margin headwind that will remain until the input cost stabilize and turn the other way.
While we do expect these challenges to continue in the near term, when supply chain issues do finally lessen, we anticipate a sustained recovery period as suppressed end-market inventory levels, combined with high consumer demand for our key platforms, provides the opportunity for a strong volume tailwind for us.
We are seeing the dynamic across all three of our end markets.
The alignment of these three will provide further demand momentum across our entire mobility landscape and Dana remains well-positioned to capitalize on the cyclical growth opportunities.
Moving to slide 6, I'd like to share a recap with you of our recent Capital Markets Day.
Last month, many of you participated either in person or virtually in our 2021 Capital Markets Day, which we hosted at our Sustainable Mobility Center on the campus of our world headquarters.
The goal of this event was to share our perspective on how electrified mobility will evolve in the coming years and how Dana's class-leading innovation and global presence will help to drive outsized growth and financial returns for our shareholders.
As many of you may recall, we introduced eight key elements that we believe showcase how Dana has successfully built a substantial EV franchise.
First is our guiding vision toward a zero-emissions future that is at the heart of everything we do and is the overarching theme of our electrification pursuits.
Second, we examined how our total addressable market is going to rise dramatically over the next decade as electrification becomes commonplace in each of the markets we serve.
Third, we presented Dana's industry-leading technical competencies in e-Propulsion systems.
More specifically, we illustrated how we are leveraging our design, engineering, and manufacturing team members' depth and capabilities to provide the most advanced three-in-one electrified drivelines in-house across all mobility markets.
Fourth, we discussed that as the use of batteries and electrodynamics accelerate in the mobility markets, the driveline will remain, and Dana will be a clear beneficiary of this megatrend.
The combination of electrodynamics and mechanical systems will increase our content per vehicle potential by three times and compared to our historical ICE product portfolio.
This migration of mechanical powertrains to smart electrodynamic systems requires embedded software controls, designing and integrating these into the driveline, along with in-house production of high-value sub-components will create a significant margin expansion opportunity for Dana in the future.
Six, Dana is a unique and compelling investment because we serve both the established OEMs transforming their businesses and the emerging OEMs are just getting started.
Our e Propulsion systems are on a vast array of vehicles and, as a result, we are well-positioned to capitalize on our broad base of new and existing customers.
Seventh, we utilize our existing global footprint and asset base, established operating system, and deep industry know-how that most our other competitors do not have and will require decades to build.
We view this as a significant cost and strategic advantage for Dana.
And finally, Dana's financial profile will remain robust throughout our electrification journey, because our core ICE product will remain in demand through the transition, thus generating significant cash flow to the power EV growth.
Our core business is not in a state of secular decline, but rather grows through the transition with assets that will remain largely relevant.
The combination of these factors tells the story of how the ICE to EV transition is positioning us for above-market secular growth and demonstrating that Dana is a great investment within the EV growth landscape.
Turning to slide 7, I'd like to share some evidence of how and where this is already happening.
During our Capital Markets Day, we highlighted a significant number of electrification new business wins.
As the saying goes, the scoreboard always tells the truth, and our electrification strategy is working.
Our EV solutions are being utilized by our off-highway customers in construction, underground mining, material handling, and even some green shoots in the agriculture applications.
In commercial vehicle, it's not by accident that we've achieved a market-leading position as Dana's initial focus and commitment was to medium- and heavy-duty trucks and buses.
In the light vehicle market, we're extremely active supporting full-frame electric truck OEMs with both rigid and independent e-axle concepts and potential solutions leveraging not only our complete in-house e-Propulsion capabilities but also significant experience we have from markets that were early electrification adopters, such as buses, material handling, and last-mile delivery vehicle solutions.
And while we are on the topic of the light vehicle market, we also announced for the first time in addition to significant battery and electrification cooling wins, a major new business win for a hydrogen fuel cell metallic bipolar plates.
The combination of our past successes, present capabilities, application know-how, and clearly demand [Phonetic] strategy for the future enables us to partner with and create value for our customers at any stage of their electrification progression, ultimately leading to us winning our share of nearly $19 billion addressable market by the end of the decade.
Now, I'd like to hand it over to Jonathan to walk you through our financials.
In the third quarter of this year, sales were $2.2 billion, a $210 million increase over last year, primarily driven by improved demand in our heavy-vehicle end-markets and the recoveries of raw material cost inflation in the form of higher selling prices to our customers.
Adjusted EBITDA was $210 million for a profit margin of 9.5%, which was 60 basis points lower than last year despite the higher sales as margin compression from raw material cost inflation more than offset the margin expansion from organic sales growth.
Diluted adjusted earnings per share was $0.41, a $0.04 improvement from the prior year.
And finally, free cash flow though was a use of $170 million, which was significantly lower than the third quarter of last year due to higher working capital requirements this year as recent customer schedule volatility and supply chain challenges have mandated higher inventory levels to ensure on-time delivery.
Please turn with me now to slide 10 for a closer look at the drivers of the sales and profit change for the third quarter.
The change in third quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, the organic growth increase of over $100 million was driven by improved demand for heavy vehicles in both our commercial vehicle and off-highway equipment segments.
The elevated incremental conversion of 40% was the result of targeted cost containment and cost recovery actions in the quarter, which helped to offset operational inefficiencies brought on by volatile customer production schedules, supply chain disruptions, and labor shortages.
Second, foreign currency translation increased sales by about $20 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As usual, this did not affect our profit margin.
Finally, while we had expected commodity costs to level off in the second half of this year, unfortunately steel prices have continued to rise.
During the quarter, gross commodity cost increased by more than $100 million compared to last year.
We recovered nearly 70% of these cost increases in the form of higher selling prices to our customers.
This remains lower than a steady-state recovery ratio due to the timing lag caused by the continued rapid rise in commodity prices.
Rising steel costs are entirely responsible for the margin compression during the quarter despite higher production.
Please turn with me to slide 11 for a closer look at how the adjusted EBITDA converted to cash flow.
Free cash flow was a use in the quarter of $170 million.
This use was driven by higher working capital requirements, specifically production inventory, resulting from volatile customer production schedules and instability in the global supply chain.
A combination of unpredictable demand pattern for our products, longer lead times for raw materials, and the impact of slower-than-usual logistics channels have caused us to hold significantly more inventory than normal to ensure that we protect our customers across all end-markets.
Inventory levels increased by more than $100 million sequentially and more than $400 million versus the same time last year as, at the time, the industry was just ramping the supply chain back up coming out of the pandemic containment-related shutdowns in the second quarter of 2020.
We expect our inventories will gradually retreat toward a more normalized level in the next few quarters, but the cash flow benefit won't be recognized until next year.
I'll provide some additional information on this in just a few moments.
Please turn with me now to slide 12 for a look at how the changing market conditions are affecting our full-year outlook in the form of our revised guidance for 2021.
On our last two quarterly earnings calls, we outlined the key assumptions underpinning our full-year sales, profit, and cash flow guidance.
Raw material costs were anticipated to plateau, the supply chain conditions were expected to improve modestly, and the chip famine was presumed to progressively abate.
Unfortunately, none of these came to fruition and, as a result, our top- and bottom-line expectations for this year have declined, as you can see on the right of the page.
We now anticipate full-year sales to be $8.9 billion at the midpoint of our revised range, down about $100 million from the indication we provided during our Q2 earnings call as lower-than-expected market demand of, approximately, $170 million will be partially offset by $70 million in additional commodity recoveries.
Full-year adjusted EBITDA is now expected to be about $845 million at the midpoint of the revised range, which is down about $115 million from our previous indication.
Loss contribution margin from lower end-market demand and higher operating costs make up, approximately, $70 million of this profit headwind and increased commodity costs will further lower profit by about $45 million.
Profit margin is expected to be, approximately, 9.5% and free cash flow margin is expected to be about 1%.
Diluted adjusted earnings per share is expected to be a $1.85 per share at the midpoint of the range.
Please turn with me now to slide 13 where I will highlight the drivers of the full-year expected sales and profit change from last year.
First, organic growth is now expected to add nearly $1.4 billion in sales.
Incremental margins are expected in the mid-20s providing nearly 300 basis points of margin expansion.
Second, as was announced yesterday, the agreement to acquire Modine's automotive liquid cooling business for a dollar has been terminated as we were unable to reach agreement on revised terms that would gain the approval of the German regulator.
As a result, there will be no significant impact from organic growth this year.
However, this was never included in our full-year guidance.
Third, we anticipate the impact of foreign currency translation to now be a benefit of, approximately, $150 million to sales and about $15 million to profit with no material impact to our profit margin.
And finally, we now expect gross commodity cost increases to be about $350 million compared to last year as steel prices have continued to escalate.
We anticipate recovering about $235 million, or just below 70% of the increase, from our customers in the form of higher selling prices leaving a net profit impact of $115 million, which will compress margins by about 170 basis points.
Please turn with me to slide 14 for a look at the second half profit margin implied in our revised full-year guidance and the key drivers of the trend through this year.
Typically, profit margins in the first and second half of the year are relatively flat in our business as sales and profit are higher in the middle of the year, the second and third quarters, and relatively lower in the beginning and end of the year, the first and fourth quarters, as a result of normal production seasonality.
The quarterly sales and profit cadence of our revised full-year guidance for 2021 is atypical where we now expect second-half margins to be about 200 basis points lower sequentially.
A few anomalies are driving this year's trend, including: one, a continued volume deterioration associated with the chip shortage; and two, rapid commodity cost inflation.
At a cursory view of the trend, the first anomaly is only visible by highlighting the second.
Essentially, the increasing raw material cost recoveries included in our sales are masking the sequential volume deterioration and both are having a profound adverse impact on profit and are amplified by the poor condition of the global supply chain.
On the right of the page, you will note the expected sequential deterioration in fourth quarter profit on relatively flat sales.
It's important to note that as we move into next year we continue to anticipate a plateau in commodity cost leading to an eventual decline, which will allow our recovery ratios to gravitate toward normal levels, ameliorating the commodity impact, and the period cost associated with the labor agreement ratification will not recur.
Our full-year outlook for 2022, which we will provide at year-end earnings in a few months, as we normally do, will take both of these sequential improvements into account.
Please turn with me to slide 15 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We now anticipate full-year free cash flow margin to be comparable with last year at about 1%, which represents a modest improvement of about $30 million as $0.25 billion of higher profits are invested in working capital to navigate the current environment and higher capital spending to fuel our future growth.
The downward revision compared to our prior expectation is attributed to the lower profit I just outlined on the last few pages as well as the higher working capital requirements we experienced in the third quarter that will gravitate toward more normalized levels in the coming quarters as production schedules stabilize.
It's worth noting, we are pulling multiple working capital levers to mitigate the cash flow impact associated with the elevated inventory.
Please turn with me now to page 16 for our perspective on the near-term challenges on the backdrop of the long-term outlook for our business.
As Jim outlined at the outset of the call, the current mobility market dynamics are the most challenging they have been in over a decade with robust demand for vehicles and equipment substantially constrained by the supply of materials, logistics, and people, which has led to dramatic cost inflation and substantial profit and cash flow margin compression.
These are all represented by the icons on the left of the page.
As we look to the future, we want to remind all of our stakeholders that as challenging as the current environment is, these forces position Dana for robust and dramatic cyclical recovery this business has seen in quite some time.
This is illustrated by the chart in the upper right of the page where we affirm our conviction that our business will exceed $10 billion of sales in 2023, and this represents 45% growth over three years and will lead to substantial profit and cash flow margin expansion as we progress toward our long-term financial potential.
But the cyclical recovery in our business is only a piece of our growth story.
As we outlined at our Capital Markets Day last month, we're poised to substantially outpace the market growth rate as we capitalize on the secular growth trend that vehicle electrification represents for Dana.
We expect the sales of our electrified products to double in the next two years contributing to the greater than $10 billion of sales in 2023, but then quadruple by the end of the decade to deliver a $3 billion business that will expand our profit and cash flow margins and reposition the business for the future.
This bright future is made possible by the highly skilled and extremely dedicated team of more than 38,000 around the globe who day in and day out embody the spirit of our company, people finding a better way. | dana inc q2 adjusted earnings per share $0.59.
q2 adjusted earnings per share $0.59. | 0 |
Warner and Michael will discuss our earnings results and guidance as well as provide a business update.
Before we begin, let me cover a few administrative details.
Such statements include those about future expectations, beliefs, plans, projections, strategies, targets, estimates, objectives, events, conditions and financial performance.
Simply put, our team continues to effectively execute our strategic plan across all of our businesses, which includes making significant investments in our energy infrastructure to enhance the reliability and resiliency of the energy grid as well as transition to a cleaner energy future in a responsible fashion.
These investments, coupled with our continued focus on disciplined cost management delivering significant value to our customers, communities and shareholders.
Moving now to our second quarter earnings results, yesterday, we announced second quarter 2021 earnings of $0.80 per share.
Our earnings were down $0.18 per share from the same time period in 2020, primarily due to a change in the seasonal electric rate design at Ameren Missouri that reduced earnings $0.19 per share.
The impact of this change in rate design will reverse in the third quarter of 2021 and is not expected to impact full year results.
Michael will discuss the other key drivers of our strong quarter earnings results a bit later.
Due to the continued strong execution of our strategy, I am pleased to report that we remain on track to deliver within our 2021 earnings guidance range of $3.65 per share to $3.85 per share.
Speaking of the execution of our strategy, let's move to Page five, where we reiterate our strategic plan.
The first pillar of our strategy stresses investing in and operating our utilities in a manner consistent with existing regulatory frameworks.
This has driven our multiyear focus on investing in energy infrastructure with a long-term benefit of our customers.
As a result and as you can see on the right side of this page, during the first six months of this year, we invested significant capital in each of our business segments, including wind generation at Ameren Missouri, which I will discuss later.
These investments are delivering value to our customers.
As I said before, our energy grid is stronger, more resilient and more secure, because of the investments we are making in all four business segments.
Consistent with the Missouri Smart Energy Plan, we have made significant investments to harden energy grid, which has reduced outages and installed nearly 300,000 electric smart meters for customers.
These smart meters will help customers better manage their usage and control their overall energy costs.
In Illinois, we continue to execute on our electric distribution and gas modernization action plans.
The plans include investments to strengthen electric power poles.
We placed gas transmission pipelines and compression coupled steel mains as well as to implement new efficiency measures, including mobile enhanced communications and assessment capabilities for our careers.
These improvements, along with our investments in outage detection technology, were resulting in improvements in system reliability and millions of dollars in savings for customers.
Moving now to regulatory matters, in late March, Ameren Missouri filed a request for a $299 million increase in annual electric service revenues and a $9 million increase in annual natural gas revenues with the Missouri Public Service Commission.
In our Illinois Electric business, we requested a $60 million base rate increase in our required annual electric distribution rate filing.
These proceedings are all moving along on schedule.
We will be able to provide you information on these proceedings as they develop later this summer and into the fall.
Finally, we have remained relentlessly focused on continuous improvement and disciplined cost management, including retaining the cost savings that we realized in 2020 due to the actions we took to mitigate the impacts of COVID-19.
Moving to Page six and the second pillar of our strategy, enhancing regulatory frameworks and advocating for responsible energy and economic policies.
Starting in Missouri, in May, the Missouri legislator passed the bill, allowing for securitization in the state.
This constructive legislation which is trying by governance parsing in July give us another important regulatory tool to facilitate our transition to a cleaner energy future and a cost effective manner for our customers.
However, as we have stated in the past, a robust integrated resource plan does not rely on securitization to be successful.
Our flexible and responsible plan, which includes approximately $8 billion of investments in renewable energy through 2040, the retirement of all of our coal-fired energy centers and extending the life of our carbon-free Callaway nuclear energy center focuses on getting the energy we provide to our customers as clean as we can, as fast as we can without compromising from reliability, customer affordability and the evolution of new clean energy technologies.
And as I will touch on later, I am pleased to say that we are already taking steps to implement this important plan for our customers, the State of Missouri and our country.
Moving now to Illinois, last month, the Illinois Commerce Commission approved Ameren Illinois electric vehicle charging program.
Under this program, we are able to support the development of a network of charging infrastructure in Central and Southern Illinois as well as implement special time-based delivery service rates and other incentives to help encourage the use of electric vehicles.
We are excited about this new program, because it will drive greater electrification of the transportation sector as well as help the state of Illinois move toward its clean energy goals.
Moving to legislative efforts, as many of you know, we have been working to enhance the regulatory framework for our Illinois Electric business.
The performance-based regulatory framework in place today has delivered strong value for customers and shareholders over the years.
However, the framework is scheduled to sunset in 2022.
As a result, we have been working with key stakeholders to develop constructive long-term regulatory policies that support important investments in energy infrastructure, while enabling us to earn fair returns on those investments.
As you know, throughout the regulator legislative session, which ended late May, we advocated for the Downstate Clean Energy Affordability Act which was largely extended the existing framework until 2032, while putting in place provisions that would set the Ameren Illinois electric distribution ROE at the national average.
At the same time, many other energy-related legislative proposals from other stakeholders were proposed during the legislative session, including proposals from Governor Pritzker, labor and environmental groups, to address the closure of nuclear plants in the states, Illinois clean energy transition and the electric distribution framework going forward.
For months, stakeholders have been in discussion seeking to find an appropriate compromise to all these proposals.
While progress is made in these issues, the regular legislative session ended on May 31 with no energy legislation being put before the Senate or House of Representatives for a vote.
A special session was called in mid-June to further discuss draft energy legislation, but no bill was filed nor action taken.
Needless to say, we will continue to work with key stakeholders to find a constructive solution to this important matter.
Turning to Page seven for an update on FERC regulatory matters, in April, FERC issued a supplemental notice of proposed rulemaking, or NOPR, on electric transmission return on equity incentive adder for participation in the regional transmission organization, or RTO.
As you may recall, under the NOPR, the RTO incentive adder would be removed from utilities that have been members of an RTO for three years or more, like the Ameren Illinois and ATXI.
We have been very clear that we disagreed with FERC proposed recommendation in this matter for a number of reasons and recently filed comments strongly posing the removal of the adder.
Of course, we are unable to predict the ultimate outcome or timing of this matter as the FERC is under no timeline to issue a decision.
In addition, in June, the FERC issued an order establishing a joint federal state task force and electric transmission.
This order establishes a first of its kind task force to respond with state commission's transmission-related issues including how to plan and pay for transmission facilities, recognizing that federal and state regulators share authority over different aspects of these transmission-related issues.
The task force will be comprised of the FERC commissioners and representatives nominated by the National Association of Regulatory Utility Commissioners from 10 state commissions.
The first public meeting is expected to be held this fall.
Also last month, the FERC issued an advanced notice of proposed rulemaking related to regional transmission planning and cost allocation processes, including critical long-term planning for anticipated future generation needs.
We continue to asses the managed rates in the advanced NOPR and expect to file comments with the FERC this fall.
Again, we are unable to predict the ultimate timing or outcome of this matter as FERC is under no timeline to issue a decision.
Speaking to plan for future transmissions, please turn to Page eight.
As I discussed on the call in May, MISO completed a study outlining a potential roadmap of transmission projects through 2039, taking into consideration the rapidly evolving generation mix that includes significant additions of renewable generation based on announced utility integrated resource plans, state mandates and goals for clean imaging or carbon emission reductions, among other things.
Under MISO's Future one scenario, which is the scenario that resulted in an approximate 60% carbon-emission reduction below 2005 levels by 2039 MISO estimates approximately $30 billion of future transmission investment in the MISO footprint.
Further, MISO's Future three scenario resulted in an 80% reduction in carbon emissions below 2005 levels by 2039.
Under this scenario, MISO estimates approximately $100 billion of transmission investment in the MISO footprint will be needed.
It is clear that investment in transmission is going to play a critical role in the clean energy transition and we are well-positioned to plan and execute potential projects in the future for the benefit of our customers and country.
We continue to work with MISO and other key stakeholders and believe certain projects outlined in Future one are likely to be included in this year's MISO's transmission planning process, which is currently scheduled to be completed in the fourth quarter of 2021.
However, it is possible the process could go into the first quarter of 2022.
Moving now to Page nine for an update on our $1.1 billion wind generation investment related to the acquisition of 700 megawatts of new wind generation at two sites in Missouri.
Ameren Missouri closed on the acquisition of its first wind energy center, a 400 megawatt project in Northeast Missouri in December.
In January, Ameren Missouri acquired a second wind generation project, the 300 megawatt Atchison Renewable Energy Center located in Northwest Missouri.
I am pleased to report that as of the end of the second quarter, the Atchison Renewable Energy Center is now in service.
With both facilities now operating, it marks a key milestone as we continue to transition our energy portfolio toward a cleaner energy future.
Turning now to Page 10 and an update on Missouri's Callaway energy center.
As we have previously discussed, during its return to full power, as part of its 24th refueling and maintenance outage in late December 2020, Callaway experienced a non-nuclear operating issue related to its generator.
A thorough investigation of this matter was conducted and a decision was made to rewind the generator stator and rotor in order to safely and sustainably return to energy center to service.
I am pleased to report that the generator project was executed very well and that the energy center returned to service on August 4.
The completion of this project positions Callaway for a sustainable long-term future.
The cost of the capital project was approximately $60 million.
As we have said previously, the insurance claims for the capital project and replacement power have been accepted by our insurance carrier, which will mitigate the impacts of this outage for our customers.
In addition, we do not expect this matter to have a significant impact on Ameren's financial results.
Turning to Page 11, we remain focused on delivering a sustainable energy future for our customers, communities and our country.
This page summarizes our strong sustainability value proposition for environmental, social and governance matters and is consistent with our vision, leading the way to a sustainable energy future.
Beginning with environmental stewardship, last September, Ameren announced its transformational plan to achieve net-zero carbon emissions by 2050 across all of our operations in Missouri and Illinois.
This plan includes interim carbon-emission reduction targets of 50% and 85% below 2005 levels in 2030 and 2040 respectively and is consistent with the objectives of the Paris agreement and limiting global temperature rise to 1.5 degrees Celsius.
We also have a strong long-term commitment to our customers and communities to be socially responsible and economically impactful.
Finally, our strong corporate covenants is led by a diverse Board of Directors focused on strong oversight that's aligned with ESG matters.
And our executive compensation practices include performance metrics that are tied to sustainable long-term performance, diversity, equity and inclusion and progress toward a cleaner, sustainable energy future.
I encourage you to take some time to read more about our strong sustainability value proposition.
You can find all of our ESG-related reports at amereninvestors.com.
Turning now to Page 12, looking ahead, we have a strong sustainable growth proposition, which will be driven by a robust pipeline of investment opportunities of over $40 billion over the next decade that will deliver significant value to all our stakeholders in making the energy grid stronger, smarter and cleaner.
Importantly, these investment opportunities exclude any new vehemently better special transmission projects, including the potential road map of MISO transmission projects I discussed earlier, all of which would increase the reliability and resiliency of the energy grid as well as enable our country's transition to a cleaner energy future.
In addition, we expect to see greater focus from a policy perspective and infrastructure investments to support the electrification of the transportation sector.
Our outlook through 2030 does not include significant event structure investments for electrification at this time.
Of course, our investment opportunities will not only create stronger and cleaner energy grid to meet our customers' needs and exceed their expectations, but they would also create thousands of jobs for our local economies.
Maintaining constructive energy policies that support robust investment in energy infrastructure and a transition to a cleaner energy future and is safe, reliable and affordable fashion will be critical to meeting our country's future energy needs and delivering on our customers' expectations.
Moving to Page 13, to sum up our value proposition, we remain firmly convinced that the execution of our strategy in 2021 and beyond will deliver superior value to our customers, shareholders and the environment.
In February, we issued our five-year growth outlook, which included a 6% to 8% compound annual earnings growth rate from 2021 to 2025.
This earnings growth is primarily driven by strong rate base growth and compares very favorably with our regulated utility peers.
Importantly, our five-year earnings and rate base growth projections do not include 1,200 megawatts of incremental renewable investment opportunities outlined in Ameren Missouri's and greater resource plan.
Our team continues to assess several renewable generation proposals from developers.
We expect to file this year with the Missouri PSC for certificates of convenience and necessity for a portion of these planned renewable investments.
I am confident in our ability to execute our investment plans and strategies across all four of our business segments, which we have an experienced and dedicated team to get it done.
That fact, coupled with our sustained past execution and our strategy on many fronts has positioned us well for future success.
Further, our shares continue to offer the investors a solid dividend, which we expect to grow in line with our long-term earnings-per-share growth guidance.
Simply put, we believe our strong earnings and dividend growth outlook results in a very attractive total return opportunity for shareholders.
I will now turn to Michael.
Earnings in Ameren Missouri, our largest segment, decreased $0.18 per share, driven primarily by a change in seasonal electric rate design, resulting from the March 2020 rate order, which provided for winter rates in May and summer rates in September rather than the blended rates used in both months in 2020.
The rate design change decrease earnings $0.19 per share and is not expected to impact full year results.
Earnings were also impacted by the timing of income tax expense, which decreased earnings $0.03 per share and is not expected to impact full year results.
As Warner mentioned, during the quarter, we remain relentlessly focused on continuous improvement and discipline cost management and have been able to largely maintained the level of operations and maintenance savings this quarter that we experienced during the year-ago period, which was significantly affected COVID-19.
The increase in other operations and maintenance expenses, which decreased earnings $0.02 per share, was primarily due to more favorable market returns on the cash surrender value of company-owned life insurance in the year-ago period.
As you can see, we have worked hard this year to control costs where we can.
The amortization of deferred expenses related to the fall 2020 Callaway Energy Center scheduled refueling and maintenance outage and higher interest expense primarily due to higher long-term debt balances outstanding also decreased earnings $0.02 per share.
These factors were partially offset by an increase in earnings of $0.05 per share due to increased investments in infrastructure and wind generation, eligible for plant and service accounting and the Renewable Energy Standard Rate Adjustment Mechanism, or RESRAM.
Higher electric retail sales also increased earnings by approximately $0.04 per share, largely due to continued economic recovery in this year's second quarter compared to the unfavorable impacts of COVID-19 in the year-ago period.
We've included on this page the year-over-year weather-normalized sales variances for the quarter.
Overall weather-normalized sales are largely consistent with our expectations outlined in our call in February as we still expect total sales to be up approximately 2% in 2021 compared to 2020.
Moving to other segments, Ameren Transmission earnings declined $0.03 per share over year, which reflected the absence of the prior year benefit from the May 2020 FERC order addressing the allowed base return on equity, which more than offset earnings on increased infrastructure investment.
Earnings for Ameren oil natural gas decreased $0.01 per share.
Increased delivery service rates that became effective in late January 2021 were offset by a change in rate design, which is not expected to impact full year results.
Ameren Illinois electric distribution earnings increased $0.02 per share, which reflected increased infrastructure investments and a higher allowed ROE under performance-based rate making.
Ameren parent and other results were also up $0.02 per share compared to the second quarter of 2020 primarily due to the timing of income tax expense, which is not expected to impact full year results.
And finally, 2021 earnings per share reflected higher weighted average shares outstanding.
Before moving on, I will touch on year-to-date sales trends for Illinois Electric distribution.
Weather normalized kilowatt hour sales to Illinois residential customers decreased 1%.
And weather normalized kilowatt hour sales to Illinois commercial and industrial customers increased 2.5% and 2% respectively.
Recall that changes in electric sales in Illinois, no matter the cause, do not affect our earnings since we have full revenue decoupling.
Turning to Page 16, now I'd like to briefly touch on key drivers impacting our 2021 earnings guidance.
We're off to a strong first half in 2021.
And as Warner stated, we continue to expect 2021 diluted earnings to be in the range of $3.65 to $3.85 per share.
Select earnings considerations for the balance of the year are listed on this page and are supplemental to the key drivers and assumptions discussed on our earnings call in February.
I will note that our third quarter earnings comparison will be positively impacted by approximately $0.19 per share due to the seasonal electric rate design change effective in 2021 at Ameren Missouri that we discussed earlier.
Moving now to Page 17 for an update on our regulatory matters.
Starting with Ameren Missouri, as you recall, on March 31, we filed for a $299 million electric revenue increase with the Missouri Public Service Commission.
The request includes a 9.9% return on equity, a 51.9% equity ratio and a September 30, 2021 estimated rate base of $10 billion.
[Indecipherable] will be filed in early September with the bottle testing by October 15.
Evidence hearings are scheduled to begin in late November.
In addition, on March 31, we filed for a $9 million natural gas revenue increase with the Missouri PSC.
The request includes a 9.8% return on equity, a 51.9% equity ratio and a September 30, 2021, estimated rate base of $310 million.
A Missouri PSC decision in both rate reviews is expected by early February, with new rates expected to be effective by late February.
Moving down renewal -- Illinois regulatory matters, in April, we made our required annual electric distribution rate update filing.
Under Illinois performance-based ratemaking, these annual rate updates systematically adjust cash flows over time for changes in cost of service and true up any prior period over or under recovery of such costs.
In late June, the ICC staff recommended a $54 million base rate increase compared to our request of a $60 million base rate increase.
An ICC decision is expected in December with new rates expected to be effective in January 2022.
Moving to Page 18.
In early June, Ameren published a sustainability financing framework, becoming one of the first utilities in the nation to do so.
Under this framework, Ameren and its issuing subsidiaries may elect to finance or refinance new and existing projects that have an environmental or social benefit through green bonds, social bonds, sustainability bonds, green loans or other financial instruments.
Given the amount of investment activity at Ameren and the utility subsidiaries are pursuing, that have environmental or social benefits, we expect to be a relatively frequent issuer under our sustainability financing framework.
In June, both Ameren Missouri and Ameren Illinois issued green bonds consistent with this new financing framework.
More information about this framework is available at amereninvestors.com.
Turning to Page 19 for a financing and liquidity update, we continue to feel very good about our liquidity and financial position.
As I just mentioned in June, Ameren Missouri and Ameren Illinois issued green bonds with the net proceeds to be allocated to sustainable projects, meeting certain eligibility requirements under the sustainability financing framework.
Additional debt issuances are outlined on this page.
Further, earlier this year, we physically settled the remaining shares under our forward equity sale agree for proceeds of approximately $115 million.
In order for us to maintain our credit ratings and a strong balance sheet while we found our robust infrastructure plan, we expected to issue a total of approximately $150 million of common equity in 2021 under the at-the-market or ATM program established in May.
This is consistent with prior guidance provided in February and May.
And to date, approximately $122 million of equity has been issued through this program.
Our $750 million ATM equity program is expected to support our equity needs through 2023.
Finally, Ameren's available liquidity as of July 30 was approximately $1.8 billion.
Lastly, turning to Page 20, we are well positioned to continue to execute on our plan.
We continue to expect to deliver strong earnings growth in 2021 as we successfully execute our strategy.
And as we look to the longer term, we expect strong earnings-per-share growth driven by a robust rate base growth and disciplined cost management.
Further, we believe this growth will compare favorably with the growth of our regulated peers.
Ameren shares continue to offer investors an attractive dividend.
In total, we have a strong total shareholder return story that compares very favorably to our peers. | compname reports outstanding results: fourth quarter earnings per share of $1.38, $1.50 on an adjusted basis; full year 2021 earnings per share of $4.79, $5.19 on an adjusted basis.
announcing 8% increase in quarterly dividend. | 0 |
Kevin Blair, president, and chief executive officer will begin the call.
Except as may be required by law.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now, Kevin Blair will provide an overview of the quarter.
I want to take a moment to officially recognize Cal Evans and his new role as investor relations and market intelligence senior director.
Cal expanded role in our company became official shortly after last quarter's call when Kevin Brown, who led IR for the past two years, shifted to our corporate treasury team.
Kevin has done a great job interfacing with our analysts and investor community, but his latest move will help with his development and career aspirations.
Cal has hit the ground running and brings a lot to the table given his credit and market intelligence background.
The transition is going well, and I know you will enjoy working with and getting to know Cal.
Now let's shift into the overview of 2021.
With the fourth quarter placing an exclamation point on the year.
2021 was again wrought with challenges and uncertainties.
But our teams were able to navigate the difficult environment to support our clients, contribute to our communities, and deliver for our shareholders.
As you'll hear today, we accomplished a lot, even as the pandemic continued to impact the operations of our clients and of our company.
Our team is capable and understands the assignment when it comes to meeting the challenge from the unexpected and anticipating opportunities with and for our clients.
Our strong fourth quarter and year-end report is an absolute testament to your talents and passions for the inspired and purpose-driven work we do that enables people to achieve their full potential.
What you'll see today is a story of execution and follow-through of doing what we said we could and would do, and in many areas doing even more.
As we began 2021, we focused on five core business objectives.
Number one, to regain growth momentum.
Two, to enhance the client experience by making it even easier to do business with Synovus.
Number three, to provide seamless delivery of our solutions across all of our lines of business, leading to a deeper wallet share and client relationships.
Four, to better leverage analytics in order to provide more informed and proactive advice.
And five, the development and attraction of talent to support our growth initiatives.
We have made significant progress in all five core areas, and our success in 2021 was largely driven by our execution of these business objectives.
Moving to Slide 3, let's review the year.
Our lines of business succeeded in delivering core performance via a solid loan, deposit, and fee income growth, while client loan demand was muted in the first half of 2021, in the second half, we saw double-digit, broad-based commercial loan growth, driven primarily by our wholesale bank.
With all 10 wholesale sub-lines of business posting growth for the year.
2021 funded commercial loan production increased 50% versus 2020 and was up 40% versus 2019.
With significant productivity gains across our community and wholesale teams.
We expect this momentum to continue into 2022 given the pipelines and activities of our bankers, as well as the incremental growth that will be provided by our key 2021 investments and talent in the middle market, restaurant services, and corporate and investment banking teams.
Deposit growth was driven by continued balance augmentation, as well as an ongoing sales focus on core operating accounts.
As a result, core transaction balances have increased 57% in the past two years.
We have strategically allowed higher-cost, lower-value deposits to attrite with an overarching goal of remixing our funding profile to optimize lower-cost deposit composition, during this period of excess liquidity.
At year-end, 77% of total deposits were core transaction deposits versus 70% at year-end 2020.
Ex-security gains non-interest revenues grew 5%, led by increases in core banking fees and income from various wealth businesses.
This was the seventh consecutive quarter of increases in wealth fees.
Drivers of this growth include a strong equity market, as well as net new assets under management from client growth, including the onboarding of 12 new family office clients during the year.
In 2021, we continue to make significant progress with Synovus forward initiatives.
As of year-end, we have achieved $110 million in pre-tax run-rate benefit ahead of our original projections.
Evidence of success includes reducing real estate expenses, lowering headcount, and a reduction of third-party spending, all of which resulted in adjusted 2021 expenses being flat versus 2020.
The Synovus forward savings allowed us to make strategic and impactful investments in every area while managing overall expenses.
This year, we will transition our Synovus forward efforts into our overall strategic plan but remain committed and on pace to achieve the $175 million Synovus forward target.
As part of our focus on innovation, we launched several new digital solutions and services, including enhanced deposit, online account origination, accelerate AR, our integrated receivables suite, and gateway, our commercial banking digital platform.
These investments have enhanced capabilities and functionality and are leading to a better overall client experience.
We also implemented the smart commercial analytics tool that is giving our bankers better insights into solutions, our client's needs, early warning on client attrition, and proactive risk monitoring.
In 2021, we also invested in people.
In particular, those who have experience and expertise to expand our advisory services and to build strong relationship value.
We grew our treasury and payments team, which had another record-breaking year, growing sales by almost 40% and adding to specialty banking our middle market talent, and our high growth central and west Florida regions.
We also continued to emphasize the development of our existing team members through the launch of two new leadership development tracks for emerging and senior leaders.
Despite the challenges associated with the pandemic, our recent voice of the team member survey indicated that 84% of our team members were actively engaged, which is top quartile relative to the financial services benchmark, and we have designated a great place to work by the Great Place to Work Institute.
We also have made measured progress in our diversity, equity, and inclusion efforts by meeting our short-term ethnicity and gender-based goals, and the leadership ranks in 2021.
So overall, a productive and rewarding year and one that carries a tremendous amount of momentum into 2022.
Now let me shift the highlights from the fourth quarter.
Let's start on Slide 4 with loan growth, which increased $1.4 billion or an annualized 14% excluding P3.
The growth this quarter resulted from our second consecutive quarter of record-funded commercial loan production at $3.2 billion.
This represented a 30% increase from the third quarter.
The quality of growth as measured by risk ratings and underwriting metrics is consistent with the existing portfolio, which continues to perform well and is supported by the reversal of credit losses of $55 million this quarter.
It's a similar story on the other side of the balance sheet, with core transaction deposit growth of $1.3 billion or 4% versus the third quarter.
Approximately 30% of this quarter's increase came from non-interest-bearing deposits.
The combination of balance augmentation and new account origination continues to be the drivers of growth.
Net interest income growth was also strong this quarter, as we delivered $1.7 billion in earning asset growth.
Net interest income increased by $16 million from the third quarter or 4%, excluding the reduction in P.3 fees.
The net interest margin declined five basis points in the quarter, largely due to lower P3 income.
But the NIM before PPP fees actually increased one basis point as earning asset yields were fairly stable and we continue to lower deposit rates during the quarter.
From a fee income perspective, we continue to be pleased with overall performance as the fourth quarter totaled $117 million.
Core banking fees have returned and exceeded pre-pandemic levels in the fourth quarter, as card and cash management income have more than offset reductions and NSF income.
And our core strategic segments such as wealth management, continue to generate growth through AUM expansion.
Diluted earnings per share were $1.31 or $1.35 on an adjusted basis and increased from $0.96 or $1.08 adjusted per share from the same period in 2020.
During the fourth quarter, we successfully completed our capital plan with $33 million of share repurchases.
For the full year, we balanced core client loan growth, a common dividend, and $200 million in share repurchases to achieve our target CET1 ratio of 9.5% at year-end, which represents the middle of our operating range target for the upcoming year.
Jamie will now share greater detail on the key initiatives and financial results for the quarter.
I'll begin on Slide 5.
We ended the year with total assets of $57.3 billion and loans of $39.3 billion.
In the fourth quarter, total loans, excluding PPP balances, were up $1.4 billion, or 4% from the prior quarter, bolstered by strong commercial loan growth.
The commercial growth was broad-based across businesses, asset classes, and markets, and included robust production in several of our key business lines, such as structured finance, senior housing, national accounts, and commercial banking.
The positive momentum was also evident in CRE, driven by healthy industry fundamentals in our footprint.
We achieved this growth while adhering to our prudent underwriting standards and disciplined approach to portfolio management.
Benefits from strategic growth initiatives are being realized, and we're excited about the potential of the corporate and investment banking team being led by Tom Deardorf, an industry veteran who joined the team in November growth momentum.
In Q4 was also supported by reduced pay-offs and increased C&I line utilization, which increased approximately 340 basis points to 43%.
This is the first quarter where we have seen clear evidence of inflection toward increased utilization.
We also saw continued growth in commitments up 4.4% or $512 million, which positions us well for economic expansion, particularly in the southeast, where growth is expected to exceed national averages.
A continued normalization of C&I line utilization on today's balance sheet would result in over $350 million in funding balances, which should occur over time as liquidity subsides.
Within our core consumer portfolio, the trend remains somewhat mixed with growth in card and other consumer products is more than offset by continued declines in the mortgage.
In aggregate, core consumer balances declined by $20 million in the quarter.
Looking outside of our core lending activities, we did see a modest decline in our third-party portfolio in Q4, as purchases were more than offset by elevated pay-down activity.
Additionally, our securities portfolio ended the quarter at $11 billion, up $400 million from the prior quarter, though that growth generally dragged out of the overall balance sheet and remained at 19% of total assets.
These portfolios will remain central to our overall balance sheet management efforts, and we'll continue to leverage both as a means to manage our capital and our liquidity positions.
Slide 6 highlights the deposit trends for the fourth quarter, as well as for the full year 2021.
As you can see, it was another very strong year for growth led by core transaction account balances, which were up $1.3 billion or 4% in the fourth quarter and up $5.1 billion or 16% for the full year.
Notably, the majority of the growth for the year was in non-interest-bearing deposits, while we've seen continued strategic declines in time deposits.
For Q4, our total cost of deposits continued to decline to 12 basis points, which was down one basis point from the third quarter.
The fourth quarter also experienced seasonal inflows related to public funds, while broker deposits were relatively stable.
Both of these portfolios experienced declines versus one year ago, and we expect further declines in the first quarter as seasonal balances normalize and as we further reduce broker balances.
In the first quarter, we expect broker deposits to decline by approximately $1 billion to $1.5 billion as we efficiently manage our significant liquidity position.
Slide 7 shows a total net interest income of $392 million in the fourth quarter or $380 million, excluding the impact of the Paycheck Protection Program.
NII growth largely resulted from strong earning asset growth, which began late in the third quarter and continued through the fourth quarter.
The net interest margin for the fourth quarter ended at 2.96%, a decline of five basis points from the prior quarter.
As expected, the wind-down of the Paycheck Protection Program is serving as a notable NII headwind.
Excluding the impact of PPP, the margin was stable in the quarter.
Our portfolio remains asset-sensitive and stands to benefit from increases in rates across the yield curve.
To that end, I would note that much of the loan production we saw in the second half of 2021 was variable rates.
The portion of our portfolio that is floating rate now stands at 58%, which helps to support our NII sensitivity estimated at an increase of 6.5% for a 1% immediate increase in rates.
Adjusted noninterest revenue of $116 million is highlighted on Slide 8, up $2 million from the prior quarter.
This includes a one-time, $8 million increase of BOLI income that offsets a $4 million reduction in mortgage income.
Wealth management continues to see an increase in fee revenue and assets under management, recording its seventh consecutive quarter of growth.
This growth is driven by continued strong client acquisition and asset inflows.
From a capital markets perspective, we recorded another strong quarter despite overcoming headwinds from a large one-time arranger fee.
In the third quarter, that was not expected to repeat.
As our commercial segments continue their robust growth, we should expect to see continued strength from arranger fees and swap income that will drive this line item.
On a full-year basis, NIR excluding security gains increased 5%.
Despite headwinds driven by the normalization of mortgage revenues.
Drivers of this growth included wealth management and core banking fees, which increased 24% and 20% year over year, respectively.
Within core banking fees, commercial cash management revenue increased $10 million, or 34% year over year.
This growth represents the momentum within our commercial segment, including the deep depository relationships we have with our core customers.
Slide 9 highlights a total adjusted non-interest expense of $286 million, up $19 million from the prior quarter.
This change included both recurring expense increases and other notable expenses that we do not believe will repeat in future quarters.
Recurring expense increases totaled $9 million and were driven by several factors, including growth initiatives related to Synovus forward, investments in tech and risk infrastructure, additional FDIC expenses, and expenses related to normalized travel and entertainment spending.
Other notable expense increases total $10 million and consisted of $4 million of incremental performance-based management bonuses, a $4 million seed gift into a newly established donor-advised fund, and a $2 million increase in health insurance expense driven by seasonal and pandemic related factors.
In spite of an elevated quarter of expenses, we were able to manage the flat year-over-year adjusted expenses, resulting in positive operating leverage in 2021.
Benefits from the successful implementation of other foreign initiatives can be seen in comparison to key areas from 2020 to 2021, particularly in base salaries, third-party spending, and real estate spending.
These reductions have helped lay the groundwork for future strategic growth initiatives.
The credit metrics on Slide 10 show continuing improvement in all key categories.
The net charge-off ratio fell 11 basis points to 0.11% while criticizing classified loans declined 16%.
The NPA ratio declined five basis points to 0.4% and the NPL ratio declined eight basis points to 0.33%.
Past dues dropped one basis point to 0.14% excluding the increase from Paycheck Protection Program loans.
There was a reversal of provision for credit losses, a $55 million in the fourth quarter, as further improvement in the economic outlook was partially offset by significant loan growth.
The ACL ratio, excluding PPP loans, declined 21 basis points to 1.21%.
On Slide 11 is a recap of our capital management efforts through 2021.
In the fourth quarter, we executed the remaining $33 million of our 2021 authorization.
And in doing so, we ended the quarter with our CET1 ratio at 9.5%.
For the year, we retired 4.4 million shares or approximately 3% of the common shares outstanding from the end of the prior year.
Our ongoing capital management efforts have helped maintain strong and stable capital ratios, which along with core PPNR, positions us well for continued balance sheet growth in 2022.
For 2022, our capital plan continues the prioritization of capital for client growth while returning an appropriate amount to our shareholders in the form of a dividend.
That includes an increase in the quarterly common shareholder dividend by $0.1 to $0.34, which would first be payable in April.
While our two 2022 plan also includes an authorization for up to $300 million in share repurchases are capital priorities, our focus is on supporting core client growth, and managing our CET1 ratio around the target level of 9.5%.
As we look ahead, we believe this focus on maintaining a strong capital position and prioritizing core growth is not only in the best interest of our shareholders, but also our clients, our communities, and our broader set of stakeholders.
Excluding the impact of $400 million in remaining P3 balances, we expect loan growth of 4% to 7% in 2022.
This growth assumes continued strong production in commercial lending, some curtailment of prepayment activity, particularly in the CRE portfolio, and relatively stable line utilization.
The adjusted revenue outlook of 4% to 7% largely aligns with the current rate expectations, assuming three FOMC rate hikes and excludes the impact of P3-related revenue.
Overall fee income growth will be muted due to the industrywide reduction in secondary mortgage revenue.
However, we expect continued growth in strategic fee categories, including core banking fees and wealth management.
Our adjusted expense outlook of 2% to 5% incorporates increases in compensation, a return to pre-pandemic travel and business development levels, and includes our strategic investments in talent and technology.
XP3, we expect to continue to generate positive operating leverage in 2022 while building out the bank of the future.
Benefits from Synovus forward initiatives will continue to offset increased inflationary pressures and will remain disciplined and agile in terms of managing expense growth throughout the year.
One significant efficiency initiative that is underway is the closing of an additional 15% of our branch locations, with an estimated run-rate savings of approximately $12 million by year-end.
Moving to capital, as Jamie shared earlier, we extended the upper range of our targeted CET1 ratio by 25 basis points, providing a new range of 9.25% to 9.75%.
This range will continue to support our strategic growth objectives while maintaining more than adequate protection against significant adverse conditions if they were to arise.
And in the terms of capital, core relationship growth remains our top priority for capital deployment, while whole bank M&A is not a priority.
We believe these expectations for 2022 support our continued progress toward becoming a sustained top quartile performer.
We have a tremendous amount of momentum in our core businesses, and the team is performing at a very high level.
Given the heightened levels of inflation, it appears the interest rate environment will serve as a tailwind in 2022 as we continue to position the balance sheet for asset sensitivity.
We also believe that our strategic investments will begin to drive top-line growth during the year.
We are making good progress on the build-out of our Banking as a Service product called Mast and are seeing strong talent pipelines for the corporate and investment banking build-out.
For all of these reasons, my confidence in delivering on our 2022 business and financial objectives is very high, and I know our team is poised and ready to win.
Operator, we're now ready to begin Q&A. | q4 adjusted earnings per share $1.08.
q4 earnings per share $0.96.
qtrly net interest income of $385.9 million increased $8.9 million or 2% sequentially. | 0 |
on the call today is Bob Schottenstein, our CEO and President Derek Klutch, President of our Mortgage Company Ann Marie Hunker, VP Chief Accounting Officer.
and Kevin Hake, Senior VP.
First to address regulation fair disclosure.
We had a record setting second quarter highlighted by a 97% increase in net income, a 23% increase in homes delivered a 35% increase in revenue, and a return on equity of 27%.
All of this is a result of a high level of performance across all 15 of our housing operations, as well as from our mortgage and title business.
More our margins for the quarter were very strong.
Despite significant cost pressures.
Our gross margins improved by 320 basis points over last year, and improved sequentially by 70 basis points from the first quarter to a second quarter level of 25.1%.
Our overhead expense ratio improved by 110 basis points from a year ago to 10.4% of revenues, reflecting greater operating leverage.
And most importantly, our pre tax income percentage improved significantly to 14.7% versus 10% a year ago.
Record second quarter results continue our trend of strong growth in both revenues and earnings that we have achieved over the past decade.
Since 2013, our revenues have grown at a compounded annual rate of 19%.
And our pre tax income has grown at an even more impressive annual rate of 43%.
Demand for new homes continues to be very good.
And as reflected in our year to date new contracts increasing by 24%.
And our record set second quarter new contracts just slightly better than a year ago, with 2267 homes sold during the quarter.
We achieved record second quarter sales notwithstanding that we are operating in nearly 20% fewer communities than a year ago.
And we are intentionally limiting sales and majority of our communities to control margins and better manage delivery times.
Given the drop in our community count and the difficult sales comps posed by this quarter in particularly the next quarter the third quarter, I wanted to provide a little more color on our sales results.
Last year was to say the least a most unusual year for our industry.
No one could have predicted how our economy would fare when faced with one of the worst health crisis of our time.
Knowing what we know now, it is clear that comparisons between 2021 and 2020 need to be viewed carefully.
Our second quarter sales comps more quick, were clearly more challenging due to the unusually strong sales pace, which began in May and June of last year, as our industry as a whole experienced a dramatic rebound in sales after the extreme initial COVID related sales.
slowed down in March and April of last year.
For EMI homes, we sold 31% more homes and last year second quarter, aided by the strength of last May in June.
The increased sales pace continued and even got better.
As you all recall, as we moved into last year's third quarter, where our sales grew by 71% over 2019.
It was in the late stages of last year, third quarter and frankly, in all of the fourth quarter of last year, when we first began to limit sales in many of our communities.
And of course, we were raising our prices to try and meet the market demand.
Despite these efforts, we began to sell out of communities much faster than expected.
On top of that, new community openings within our industry occurred slower than expected, due in part to delays in the governmental approval and inspection process, largely because of COVID related work from home protocols.
Thus, a greater than anticipated drop in our community count.
Looking ahead, we are very well positioned to grow our communities.
We expect to open more new communities in the second half of this year than we did in the first half.
And importantly, we expect to open a record number of new communities in both the first half of 2022 and the second half of 2022.
All in support of our growth goals.
Finally, let me just say that our slowdown or decline in order growth is not indicative of demand.
These are perhaps the best housing conditions.
We've seen, considering demand, buyer demographics and buyer sentiment, and the very strong credit credit quality of our buyers.
We will continue to manage or limit sales in many of our communities on a go forward basis in order to control deliveries and maximize margins.
And today we've seen little if any evidence of pushback on price on all of our product lines from attached townhomes to our diverse single family lineup of homes, as well as our homes geared to empty nesters have performed at or above expectations.
Speaking of our product line, our smart series, which represents our most affordable line of homes, continues to perform at a very high level.
Smart Siri sales in the second quarter accounted for just under 40% of total company sales compared to about 35% a year ago.
We are selling our smart series homes and 35% of our communities compared to 30% of the communities a year ago.
The average price of our smart series Homes is now just under $350,000 compared to roughly $330,000 at the end of the first quarter.
As we've said repeatedly over the last several years when discussing our smart series line of homes.
On average, our smart series communities produce better sales pace, better margins, faster cycle time, and thus better returns.
Our backlog sales value at the end of the quarter was $2.5 billion and all time quarterly record and 70% better than last year.
units in backlog increased by 49%.
To an all time record 5488 homes with an average price of homes in backlog equal to $454,000.
This is 15% higher than a year ago.
Now I'd like to provide a few comments on our markets.
As I mentioned at the beginning of the call, we experienced strong performance from each of our 15 homebuilding divisions, with substantial income contributions for most of our markets led by Orlando, Tampa, Minneapolis, Dallas, Columbus, and Cincinnati.
Our deliveries increased by 18% over last year in our southern region, reminding you that our southern region consists of our four Texas markets, three Florida markets and two North Carolina markets.
Deliveries in the southern region increased to 1297 homes, or 57% of the total.
The northern region, which is the balance of our markets, six to be exact in Ohio, Indiana, Illinois minutes Soda in Michigan contributed 961 deliveries, which is roughly 31% better than a year ago.
new contracts in our southern region increased by 3% for the quarter and decreased by 4%.
In our northern region, our owned and controlled lot position in the nine markets representing our southern region increased by 35%, compared to last year, and increased by 15%.
And the six markets that comprise our northern region 34% of our owned and controlled lots are in the north, with the balance roughly 66%.
In the south, we have a very strong land position.
company wide, we own approximately 18,300 lots, which is roughly a two year supply.
On top of that, we control the option contracts, and additional nearly 26,000 lots.
So in total, are owned and controlled lots are slightly slightly more than 44,000 lots, which is just below a five year supply.
Perhaps most important 59% of those near 44,000 lots are controlled under an option contract, which gives me my home's significant flexibility to react to changes in demand or individual market conditions.
First, our financial condition is very strong with one and a half billion dollars of equity at June 30, and a book value slightly over $50 a share.
We ended the second quarter with a cash balance of $372,000,000.00 borrowings under our $550 million unsecured revolving credit facility.
This resulted in a very healthy net debt to cap ratio of 16%.
We believe our low leverage in substantial cash generation allows us to allocate capital to share repurchases, while also continuing to make significant investments in replenishing our land position for the continued growth of our company.
This replaces our existing $50 million share repurchase authorization which had roughly $17 million of remaining availability.
The $100 million share repurchase authorization reflects our expectation of the ongoing strength in our business and our commitment to creating long term shareholder value, while always maintaining low debt leverage.
Finally, in closing, our company is an actual is in excellent shape.
Given the strength of our backlog, as well as the strength of our land position, we are poised to have an outstanding 2021.
And with our planned new community openings, we are equally excited about our prospects for a strong 2022.
new contracts and second quarter increased to 2267.
A second quarter record 2261 for last year second quarter.
And last year second quarter was up 31% versus 2019.
Year today, we have so 5376 homes 24% better than last year.
Our new contracts were up 103% in April, down 11% in May and down 33% in June.
Our sales pace was 4.2 in the second quarter compared to last year is 3.4.
And our cancellation rate for the second quarter was 7%.
We continue to manage sales to closely align ourselves with our ability to start and deliver our homes along with focus on our margins, especially given our record backlog of 5500 houses.
As to our buyer profile.
About 51% of our second quarter sales were to first time buyers, compared to 56% in the first quarter.
In addition 43% of our second quarter sales for inventory homes, the same percentage as the first quarter.
Our community count was 175 at the end of the second quarter compared to 220 at the end of last year second quarter, and the breakdown by region is 79 in the northern region and 96 in the southern region.
During the quarter we opened 16 new communities while closing 20 During last year of second quarter we opened 22 new stores and close 25.
We delivered an all time quarterly record of 2250 and homes in the second quarter.
And year today we have delivered 4277 homes, which is 28% more than last year.
production cycle times continue to lengthen.
And we have started over 5000 homes in the first half of this year, which is 1500 more homes than the first half of last year.
revenue increased 35% in the second order, reaching an all time quarterly record of 961 million.
And our average closing price for the quarter was 411,008% increase compared to last year second quarter average of 379,000.
Our second quarter gross margin was 25.1%.
Up 320 basis points year over year.
Our construction and land development costs continue to increase.
Recently we have seen some we have seen lumber costs decline in some of our markets.
And our second quarter SG and a expenses were 10.4 revenue, improving 110 basis points compared to 11.5 a year ago.
This reflects greater operating leverage, and it was our lowest second quarter leverage in our company history.
Interest expense decreased 2.1 million for the quarter compared to last year.
Interest incurred for the quarter was 10 point 1 million compared to 10 point 3 million a year ago.
This decreases due to lower outstanding borrowings in the second quarter, and also higher interest capitalisation due to more inventory being under development.
We are very pleased with our improved returns for the quarter.
Our pre tax income was 14.7 versus 10 last year, and our return on equity was 27% versus 17%.
And during the quarter we generated 156 million of EBITDA compared to 86 million in last year second quarter.
we generated 174 million of positive cash flow from operations in the second quarter compared to generating 83 million a year ago.
And we have 22 billion in capitalized interest on our balance sheet about 1% of our assets.
And our effective tax rate was 24% in the second quarter, same as last year, second quarter, and we estimate our annual rate for the year to be around 24%.
And our earnings per diluted share for the quarter increased to $3.58 per share from $1.89 per share last year.
Our mortgage and title operations achieved record second quarter results in pre tax income, revenue and number of loans originated revenue was up 50% to $28.6 million due to a higher volume of loans closed and sold, along with higher pricing margins.
And we experienced in the second quarter of last year.
Pre tax income was $18 million, which was up 66% over 2000 and 22nd quarter.
The loan to value on our first mortgages for the second quarter was 84% compared to 83%.
78% of loans closed in the quarter were conventional, and 22%, FHA or VA.
This compares to 77% and 23%, respectively, for 2000 and 22nd quarter.
Our average mortgage amount increased to $336,000 in 2021 second quarter compared to $311,000.
Loans originated increased to a second quarter record of 1704 loans 24% more than last year, and the volume of loans sold increased by 48%.
Our borrower profile remains solid, with an average down payment of over 16% and an average credit score of 747 up from 746 last quarter.
Our mortgage operation captured over 84% of our business in the second quarter, compared to 83% last year.
Finally, we maintain two separate mortgage warehouse facilities that provide us with funding for mortgage originations.
Prior to the sale to investors.
at June 30, we had $134 million outstanding under the MIF warehousing agreement, which is a $175 million commitment that was recently extended and expires in May 2022.
And we also had $34 million outstanding Under a separate $90 million repo facility, which expires in October of this year.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually.
As far as the balance sheet we ended the second quarter with a cash balance of 372 million and no borrowings under our unsecured revolving credit facility.
And during the second quarter, we extended the maturity of our credit facility to July 2025, and increased the total commitment to 550 million.
Total homebuilding inventory at June 30, was 2.1 billion, an increase of 250 million from last year, and our unsold land investment at June 37 or 82 million compared to 810 million a year ago.
We had 497 million of raw land and land under development, and 285 million of finished unsold lots.
We owned 3872, unsold finished lots, with an average cost of 74,000 per lot.
And this average lock cost is 16% of our Foreign Earned 54,000 backlog every sale price.
Our goal is to own a two to three year supply of land.
And during the second quarter, we spent 150 million on land purchases, and 87 million on land development for a total of 237 million, which was up from 156 million in last year, second quarter.
And in the second quarter, we purchased about 4000 lots of which 78% were all in 2,022nd quarter, we purchased about 2100 lots of which 67% were all in general, most of our smart series communities are rolling deals, and have above average company pace and margin.
And at the end of the quarter, we had 59 completed inventory homes, and 169 total inventory homes.
Another total inventory 498 are in the northern region in 371 are in the southern region.
And at the end of the first quarter, we had 98 completed inventory homes, and 708 total inventory homes.
We're now open the call for any questions or comments. | q1 earnings per share $2.85.
quarterly revenue increased 43% to $828.8 million.
homes in backlog at march 31, 2021 had total sales value of $2.4 billion, 82% increase from a year ago. | 0 |
Joining me on the call today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver; and our Chief Financial Officer, Olivier Leonetti.
In discussing our results during the call, references to adjusted earnings per share EBITA and EBIT exclude restructuring and integration costs as well as other special items.
Additionally, all comparisons to the prior year are on a continuing ops basis.
Let me kick things off with a brief update, spotlighting a few specific areas related to our strategic initiatives and Olivier will provide a detailed review of Q3 results and update you on our forward outlook.
Let's get started on Slide 3.
Another quarter of solid results with demand accelerating across most of our end markets as a robust recovery continues to expand.
Q3 represents our easiest comparison of the year, but I am encouraged to see the underlying sequential improvement experienced in the first half continue to accelerate in the third quarter, with many of our businesses back to operating at pre-pandemic volume levels.
Nonresidential construction markets continue to recover, led by the ongoing strength in retrofit activity tied to demand for healthy building solutions.
New construction is also beginning to show signs of stabilization and the inflection in order trends for our longer cycle project businesses sets us up well as we look to next year and beyond.
Our service business has recovered, and we continue to transform this business through our digital service strategy to drive higher levels of recurring revenue and an improved growth profile.
This recovery has not been without its challenges.
We have managed through significant headwinds related to persistent supply chain disruptions, component shortages, labor constraints and continued inflation.
While these dynamics have created some revenue pressure, which will continue near term, the pace and composition of order growth in the quarter provides confidence that we will remain on track over the medium and long term.
As you may recall, in an effort to mitigate the severe impact of the volume declines during the height of the pandemic, we implemented significant cost actions last year.
These actions provided a material boost to profitability in the prior year period and led to best-in-class decrementals.
Lapping that difficult comparison in managing the return of some of those variable costs, coupled with navigating current capacity constraints and supply disruptions, has resulted in significant margin pressure.
That said, we were able to deliver better-than-expected margin expansion in the quarter and remain on-track to meet our targets for the full year, which is a remarkable accomplishment in the current environment.
At the same time, we remain laser-focused on executing our strategy, which is driving continued share gains.
As we will discuss over the next few slides, we continue to advance our efforts to deliver innovative solutions to help customers enhance building performance and reduce costs, while achieving their net-zero carbon and renewable energy goals.
This will be accomplished through our ongoing digital transformation enabled by OpenBlue and accelerating our offerings to deliver the outcomes our customers need.
Continuing our trend to highlight a few notable achievements over the past quarter, recently, we launched the latest offering under our OpenBlue platform Net Zero Buildings as a Service.
I will spend more time on this announcement in a few minutes as this represents an important step forward in enabling our customers' achievement of decarbonization and sustainability commitments.
We have now filed our 200th U.S. patent application and received 90 U.S. patents for OpenBlue energy optimization innovations.
We announced another strategic partnership with DigiCert, which will allow us to leverage their IoT device manager, an industry-leading automated digital certificate platform to encrypt data and authenticate the identity of users, devices or services within a building.
This will further expand Johnson Controls' already robust capabilities around cybersecurity risk management, providing our customers peace of mind and resilient solutions that ensure hardware, software and communications remain trusted throughout the building life cycle.
Together with the announcement of our partnership with Pelion last quarter, OpenBlue solutions users will have confidence that their devices are safely and securely connected to the network.
About two weeks ago, we launched the Community College partnership program aimed at expanding and advancing associate degree and certificate programs in HVAC, fire and security and digital building automation systems across the U.S. Over the next five years, Johnson Controls will grant $15 million to nonprofit community colleges in support of academic programs that train and develop the next generation of skilled trades technicians.
In addition to the funding, Johnson Controls employees will be increasing their support through volunteer and mentorship programs and also provide a pathway for our student internships and entry-level employment opportunities.
Lastly, we are proud to have received additional recognition for our efforts to ensure we create a diverse and inclusive work environment, recently being named as one of the best companies for multicultural women by Seramount.
We are also proud to be a part of the full 2021 list of best employees for diversity as well as the Financial Times European Climate Leaders list, further demonstrating our commitment to sustainability.
Vijay is transforming our software organization, strengthening our engineering development processes and expanding the solution set of our OpenBlue platform.
We are excited to have Vijay on board.
He is already having an incredible impact internally, and you will hear more from him at our upcoming Investor Day.
Let's move to Slide 5 for a brief update on trends in our service business.
As we have shared with you over the past couple of quarters, accelerating growth in service has been a strategic initiative underway since well before the pandemic.
Ultimately, the actions we are taking are designed to drive 200 or 300 basis points of above-market growth, which would place us firmly in the mid-single-digit annual growth range for the entire $6-plus billion in revenues.
Our approach is multifaceted, simultaneously focusing on increasing our contractual service attach rate, reducing attrition and driving higher revenue per user while transforming our offerings through digital.
Enabling higher digital content and connecting our installed base compounds our ability to create higher levels of recurring revenue over time.
In the quarter, service revenue increased 11%, in line with the rebound we expected with double-digit growth across all three regions.
Order growth also accelerated, as expected, up 13%.
And our attachment rate year-to-date has now improved close to 400 basis points, already achieving our guidance range for the full year.
We expect to continue this pace going forward, again, aided by our digital services and solutions, which were up mid-teens in the quarter.
Please go to Slide 6.
I referenced our new OpenBlue offering, Net Zero Buildings as a Service back on Slide 4, and I thought I would spend a few minutes highlighting the importance of this launch.
Not only does this offering fulfill an immediate need as expressed by our customers, it also represents the next phase in the evolution of our digital, smart buildings offerings, which will drive our shift toward increased deployment of higher recurring as-a-service revenue models.
Our broad Building Systems portfolio and market-leading capabilities and expertise in ESCO projects combined with the OpenBlue software platform, uniquely positions Johnson Controls to provide customers with guaranteed outcomes and risk management models to achieve their emission reduction commitments.
Based on our high level of customer engagement and the extensive market-backed research conducted leading up to the development of this solution, the need for a trusted partner to deliver a one-source seamless road map to net-zero and the urgency to reduce carbon emissions is clear.
What is also clear is that digitally enabled solutions that tie together the IT and OT in the built environment are the only ways to provide these road maps.
And nearly $250 billion, sustainability and decarbonization is a once-in-a-generation opportunity and we are excited about our role in leading these critical trends.
Net Zero Buildings as a Service includes a full portfolio of sustainability offerings tailored to schools, campuses, data centers, healthcare facilities as well as commercial and industrial verticals.
It leverages a game-changing new solution, Net Zero Advisor, which delivers turnkey, AI-driven tracking and reporting of sustainability metrics and helps building operators ensure improved carbon reduction and renewable energy impacts of their buildings.
We also leveraged the full OpenBlue suite of connected solutions and services offered through flexible risk-sharing models that enable tailored deal structures where end users pay for outcomes rather than assets.
Turning quickly to Slide 7.
Just a few examples of customer wins tied to the theme of decarbonization and Net Zero.
I won't go through each of these.
But in every example, Johnson Controls is providing unique solutions to solve the outcomes our customers are looking for.
Some of these new relationships are borne out of our digital partner ecosystem while some are long-standing relationships where we are converting existing building automation systems to OpenBlue or advancing customers' ongoing sustainability initiatives.
In all of these, we are driving energy efficiency, reducing energy consumption, driving cost savings and emission reductions.
Our teams remain dedicated to achieving top-tier performance despite some of the short-term challenges we are facing.
We are watching closely the resurgence of COVID cases and the potential impacts renewed lockdowns and supply chain constraints may or may not have on project activity.
And from a supply chain perspective, we are confident in our ability to manage access to critical materials and components.
Although lead times and conversion cycles are stretching, we believe conditions will begin to improve over the next couple of quarters.
We are successfully leveraging our pricing capabilities to offset inflation, and we still expect to remain price cost positive for the year.
At the same time, we are making tremendous progress on our strategic initiatives to accelerate top line growth and improve profitability, including indoor air quality, decarbonization, smart buildings, digital services and our productivity program, and we continue to reinvest in our portfolio, both organically and inorganically.
We believe we are extremely well positioned to outperform throughout the next cycle.
Continuing on Slide 8.
Organic sales accelerated in Q3, up 15% overall, in line with the guidance we provided last quarter as growth in Global Products and our field businesses accelerated.
The strength in Global Products was across the board from continued high level of demand in residential end markets, including both our global HVAC equipment and security products to the anticipated rebound in commercial HVAC and Fire & Security.
Segment EBITA increased 21% versus the prior year and segment EBITA margin expanded 30 basis points to 16.2%.
Better leverage on higher volumes, the benefit of our SG&A actions and strong execution more than offset the significant headwind from the reversal of temporary cost reductions and a modest headwind from negative price cost.
EPS of $0.83 increased 24%, benefiting from higher profitability as well as a lower share count.
On cash, we had another strong quarter.
Free cash flow in the quarter was $735 million, flat versus the prior year despite the planned uptick in capex.
I will review further details of our performance later in the call.
Orders for our field businesses increased 18% year-over-year, accelerating at a faster pace than expected, led by continued strength in retrofit project activity, which we include in install, but also stabilization in new construction activity.
Service orders recovered above pre-pandemic level, up 13%, led primarily by improving conditions for our transactional service business.
Backlog grew 7% to $10 billion with service backlog up 5% and installed backlog up 7%.
Conversion rates in our service backlog continued to accelerate.
Our installed backlog flow is improving, particularly given the rebound in retrofit activity, which turns more quickly.
Turning to our earnings per share bridge on Slide 10.
Let me touch on a few key items.
Operations were a $0.16 tailwind versus the prior year, driven by higher volumes and favorable mix, partially offset by price cost and the reversal of prior year mitigating cost actions.
Just to further emphasize the magnitude of the headwinds from the temporary actions.
Excluding this impact, underlying incrementals in Q3 were just over 30%.
We're on track with our SG&A productivity program, which equated to a benefit of around $0.03.
Since we spoke last time, we have already begun taking some of the necessary actions to achieve the savings related to our COGS program, which will begin impacting the P&L in fiscal 2022.
We are well on-track to achieve our savings targets for fiscal '21 and beyond.
My commentary will also refer to the segment end market performance included on Slide 12.
North America revenues grew 8% organically with solid growth in both service and install.
Service revenues were higher in all domain, driven by a sharp rebound in our transactional service business, which increased nearly 30%.
Installed demand, which is the area of our business that was most impacted by supply chain disruptions, continues to be driven by shorter cycle retrofit and upgrade projects in addition to easier prior year comparisons.
By domain, commercial applied HVAC revenue grew mid-single digits, while Fire & Security increased low double digits in the quarter.
We had another strong quarter in performance infrastructure, which also grew revenues low double digits.
This business has a leading position in the ESCO market, which is well positioned to address customers' decarbonization needs.
Segment margin decreased 70 basis points year-over-year to 14.7% as North America experienced the most headwinds from the reversal of temporary cost given the majority of the action in the prior year related to furloughs and other employee compensation-related expense.
Orders in North America accelerated on a sequential basis and grew 18% versus the prior year with mid-teens growth in Fire & Security and performance infrastructure.
Commercial HVAC orders were up over 20% overall, driven by strong retrofit activity with equipment orders up over 50%.
Backlog to $6.2 billion increased 6% year-over-year.
Revenue in EMEALA increased 17% organically, led by strong recovery in installed activity.
Non-resi construction grew more than 25% in the quarter, with most verticals returning to 2019 levels, led by increased demand for energy-related infrastructure projects.
Fire & Security, which accounts for nearly 60% of segment revenues inflected sharply, growing at a mid-20s rate in Q3 and surfacing 2019 levels.
Industrial refrigeration grew 20% and commercial HVAC and controls grew high single digits.
By geography, revenue growth in Europe accelerated to nearly 25%, while the Middle East declined low double digits and Latin America increased 10%.
Segment EBITA margins increased 250 basis points, driven by volume leverage and the benefit of SG&A actions.
Orders in EMEALA accelerated further, increasing 22% in the quarter with strong growth in Fire & Security and Commercial HVAC.
APAC revenues increased 14% organically with install and service increasing by the same amount.
Commercial HVAC and controls revenue grew mid-teens, primarily driven by the ongoing recovery we are seeing in China.
EBITA margins declined 380 basis points year-over-year to 11.8% as the benefit of volume leverage was more than offset by the significant temporary cost mitigation actions taken in the prior year and geographic mix.
APAC orders grew 14%, driven by continued strength in Commercial HVAC in China and recovery in controls business in Japan.
Economic conditions outside of China remain mixed with uncertainty increasing as ongoing and renewed lockdown restrictions across parts of Southeast Asia, Australia and part of Japan following rise in COVID cases and continued delays in the rollout of vaccines.
Global Products revenue grew 21% on an organic basis in the quarter, in line with what we initially expected despite incremental headwinds related to COVID lockdown in Asia and the short-term supply chain restrictions.
In aggregate, we continue to gain share across most of our portfolio.
Our global Residential HVAC business was up 16% in the quarter, with strong growth in all regions.
North America resi HVAC grew mid-teens in the quarter, slightly ahead of our expectations, benefiting from a stronger sell-through demand, particularly in April and May.
Our JCH Residential HVAC business was up high teens, led by strong share gains in Japan and Taiwan as part of a successful effort to attain the number-one residential share position in those markets.
Although not reflected in our revenue growth, our iSense joint venture grew revenue 44% year-over-year in Q3, expanding our leading shares in China.
Commercial HVAC sales improved significantly up more than 20% with our indirect applied business up more 25%.
Light commercial industry up over 20%, led by the recovery in North America and VRF up high single digits.
Fire & Security products growth was above 30%, led by continued strength in our security business, which grew over 40% in the quarter.
Commercial fire detection and suppression products were up low to mid-20s on easier year comparisons and the stabilization in key vertical markets.
EBITDA margin expanded 140 basis points year-over-year to 20.9% as volume leverage, positive mix increased equity income and the benefit of SG&A actions more than offset the significant temporary cost actions taken in the prior year as well as current price cost pressure.
Turning to Slide 13.
As expected, corporate expense increased significantly year-over-year of an abnormally low level to $70 million.
For the full year, we now expect corporate expense to be in the range of $280 million to $285 million, slightly below the low end of the prior guide.
For modeling purposes, we have included an updated outlook for some of our below-the-line items.
I would point out that amortization expense now reflects the impact of Silent-Aire.
Turning to our balance sheet and cash flow on Slide 14, starting with the balance sheet at the top of the page.
Similar to last quarter, no significant changes versus the prior period other than the net reduction in cash due to the closing of the Silent-Aire transaction.
Our balance sheet remains healthy with leverage of roughly 1.8 times, still below our targeted range of 2 times to 2.5 times.
On cash, we generated $735 million in free cash flow in the quarter, bringing us to nearly $1.7 billion year-to-date.
This is a significant improvement compared to our normal year-to-date seasonality and has been driven by solid trade working capital management and the timing of capex and order payments.
We expect a much lower conversion level in the fourth quarter given the reversal of some timing benefits.
For the full year, we expect free cash flow conversion to be approximately 105%.
During the third quarter, we repurchased a little more than 5 million shares for roughly $340 million, which brings us to around 19 million shares year-to-date, completing our $1 billion program.
We expect to repurchase an incremental $350 million of shares in Q4.
For the full year, we're raising our guidance once again and now target adjusted earnings per share in the range of $2.64 to $2.66.
This puts the midpoint at the high end of our previous earnings per share guidance of $2.58 to $2.65.
Based on our strong performance year-to-date and the continued underlying momentum we are seeing in most of our end markets, we continue to expect organic sales growth in the mid-single digits.
Segment EBITA margins are tracking toward the high end of our most recent range, and we now expect 80 to 90 basis points of expansion for the full year, which includes a 10-basis point headwind related to the acquisition of Silent-Aire.
Based on the full year guide, Q4 adjusted earnings per share is expected to be in the range of $0.86 to $0.88, which assumes mid-single-digit organic revenue growth and 30 basis points of segment EBITA margin expansion.
We made the decision to host the event virtually.
Registration details will be available over the next couple of weeks. | johnson controls international q3 adjusted earnings per share $0.83 from continuing operations excluding items.
q3 adjusted earnings per share $0.83 from continuing operations excluding items.
sees q4 adjusted earnings per share $0.86 to $0.88.
sees fy adjusted earnings per share $2.64 to $2.66 excluding items.
sees 2021 organic revenue growth up mid-single digits year-over-year. | 1 |
On the call today are Signet's CEO, Gina Drosos; and chief financial and strategy officer, Joan Hilson.
Any statements that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially.
During the call, we will discuss certain non-GAAP financial measures.
For further discussion of those as well as reconciliations of them to GAAP measures, investors should review the news release we posted on our site at signetjewelers.com/investors.
First, let me begin by sending our thoughts and prayers to our colleagues and partners who were in the wake of Ida.
We hope you and your loved ones are all safe and sound.
Now on the quarter.
Our performance this quarter reflects continued momentum in our Inspiring Brilliance transformation to maximize jewelry category strength and capture market share over the last year.
Specifically, we are advancing and better integrating our banner value propositions, product newness, always on marketing and connected commerce experiences.
Our team continues to accelerate our transformation and delight new and loyal customers through their passion, dedication and expanding capabilities and talents.
It's an honor to work alongside them.
There are three key messages that I'd like to leave you with today.
First, we outperformed expectations and are raising our fiscal '22 guidance.
Data-driven insights and our bespoke research capabilities enabled our team to quickly identify and make the most of changing consumer trends.
Second, our Inspiring Brilliance strategies are working in an integrated manner.
Our continued refinement of our banner value propositions are serving distinct customers with differentiated product assortments and experiences.
Our Connected Commerce strategy is increasingly enabling more consumers to shop with us whenever, however and wherever they want.
And third, we are continuing to strengthen our culture of innovation and agility.
And our team members are embracing new capabilities with excellence.
By investing in our people and attracting the best talent across industries, our people and culture are becoming an even stronger competitive advantage.
Now let me share some highlights from the second quarter.
We delivered total sales of $1.8 billion this quarter.
That's a same-store sales improvement of 97.4% compared to last year.
We're pleased with this performance but are also mindful that we didn't meaningfully reopen our stores until about two-thirds of the way through the second quarter last year.
A better indicator of our performance is the comparison to two years ago, when our fleet was fully operational.
On that basis, this quarter represents same-store sales growth of 38.1%.
Total revenue was nearly $425 million higher than two years ago despite having roughly 450 fewer stores, a 16% reduction in store count.
This performance points to the importance of both Connected Commerce and our store footprint optimization.
As we continue to transform our operating model, we delivered non-GAAP operating margin of 12.5% this quarter, representing an 860 basis point improvement compared to this time two years ago.
As a result of this strong momentum, our view of the back half is more positive than it was a few months ago, particularly for the third quarter.
We are seeing a delay in the anticipated shift of spending toward travel and experiences, which we believe is primarily related to the COVID Delta variant.
While we continue to put the health and safety of both our employees and customers first, we don't anticipate significant store closures in the back half of the fiscal year.
These factors are why we're raising our guidance today, reflecting second quarter outperformance and third quarter momentum while remaining cautious given potential macro headwinds.
To explain our second-quarter performance, it's important to point out how our Inspiring Brilliance strategies are enabling our team to stay agile and create competitive opportunities.
While category tailwinds existed in Q2, it was our differentiated assortments that resonated with customers, our Connected Commerce capabilities that increased conversion and our always on targeted marketing that all worked in combination to deliver strong growth this quarter.
Recall that the Inspiring Brilliance phase of our transformation is built on four where-to-play strategies: winning in our biggest businesses, accelerating services, expanding accessible luxury and value and leading in digital commerce.
As we aim to win in our big businesses, we focused on leaning into four consumer trends that our data identified early and our team worked to quickly execute against.
The first of these trends is strong consumer confidence.
While this index took a step back in August, it was heightened throughout our second quarter and remains similar to levels earlier this year.
Confidence is highest among millennials and higher-income customers.
Our recent research also shows that 80% of U.S. consumers believe they are the same or better off economically today than they were before the pandemic.
We've responded by providing additions to our assortments that offer higher-quality pieces at higher price points.
The second trend is gifting at higher price points as customers continue to celebrate those closest to them.
We identified this trend early and leaned into it at Valentine's Day and again at Mother's Day.
In the week leading up to Mother's Day, we drove brick-and-mortar same-store sales growth of more than 30% to two years ago, with average transaction value up 18%.
Similarly, growth in eCommerce over the same time period was more than 90%, showing that our Connected Commerce experience is resonating, both in store and online.
The third trend is higher self-purchasing among both women and men.
Customers are seeking ways to express themselves by spending discretionary dollars on better quality pieces that both hold their value over time and reflect their personal style.
open and now available at sales.
This new 60-piece collection is a testament to Serena's self-love and strength and has been met with strong initial customer response.
Another good example is our decision to expand the fashion assortment available through James Allen.
While still a relatively small portion of its overall sales, James Allen's second quarter fashion sales were up more than threefold to this time two years ago.
The fourth trend I'd like to highlight is the rising tide of engagements.
Our research indicates 15% of committed couples or approximately 2.3 million couples plan to get engaged this calendar year, which is up high single digits to a typical prepandemic year.
As a company, we have tremendous expertise in providing customers with education and counsel, both in store and online, which builds trust on such an important decision.
Customers are responding as we saw total sales of our bridal category increased over $150 million or 25% this quarter to two years ago.
While our strategies are working together to respond to these trends, I think the continued refinement of our banner differentiation shines brightest here.
Recall that while our banners are well positioned to serve any customer journey, each of them is best positioned to serve a specific one.
For example, our data analytics on Kay shows that new customers are 700 basis points more likely to be on a milestone gifting and holiday or holiday purchase journey, aligning with Kay's target of the generous sentimentalist.
Meanwhile, Zales continues to refine their approach to attract the bold statement maker, and we can measure our progress.
Zales' new customers in the first half of the year are 400 basis points more likely to be on a self-purchase journey than two years ago.
One of the ways that we've driven this differentiation is through the continued refinement of our assortment.
This includes engagement rings at Kay with the larger center stones and more fancy cuts, higher-quality diamonds and metals available through the Chosen line at Jared or our increasing assortment of diamond pieces at Pagoda.
Alongside our efforts to provide a differentiated and consumer inspired assortment is our focus on a healthy inventory position.
Through a series of integrated initiatives, we've driven a 40% improvement to our overall inventory turn since we began our transformation.
First, we've improved the design and testing phase of our merchandise cycle so that we can lean into trends faster and at a scale that is unmatched in our category.
Second, we are rationalizing our SKUs dynamically with data-driven precision to focus on assortments that resonate most, thereby reducing buildups of sell down or clearance merchandise.
These efforts enable us to lower inventory levels while giving customers higher access to newness.
A clear example here is Kay.
New or high-turn inventory penetration at Kay is now 50% higher than it was two years ago.
I'd also note that we've applied this playbook to our Memo inventory as well, a decision that has led to more effective purchasing and has bolstered our vendor relationships.
Given potential macroeconomic headwinds, these improvements to our inventory and merchandise strategies are important to helping us remain agile.
Services is our second where-to-play strategy, and we're making good progress here as well.
We see an opportunity to grow services into $1 billion business.
Not only do services carry higher margins, they are strategic as they drive trust and long-term relationships.
Trust is key when a customer hands us a treasured piece of jewelry to repair or when they ask us to safely pierce a part of their body or when they act on the counsel of our jewelry consultants to choose and customize the perfect engagement ring.
Every time we earn a customer's trust, we take a step toward building a relationship that will last a lifetime.
And we're working to provide services at every relevant touch point in a customer's purchase journey.
For example, in July, we took another step in the transformation of our financial services.
We now have long-term agreements with strategic credit partners, which lower our costs and provide customers with a broader and more flexible range of payment options.
Customization is also an increasingly important service.
In a recent survey, 36% of retail consumers expressed interest in customizing their products and services and 20% indicated that they're willing to pay a premium.
Over 80% of bridal customers express interest in some level of customization for their engagement and wedding rings.
These insights are reflected in the performance of our Jared foundry experience.
Stores with foundries delivered roughly 10% higher sales than Jared locations without them this quarter.
This unique offering combines on-site jewelers with computer-assisted design software and 3D printing to provide an experience that customers cannot get at most other jewelry stores.
With roughly 50 foundry locations today, we will continue investing in its rollout as we plan to have more than 70 Jareds with foundry experience this fiscal year.
Our third where-to-play strategy is expanding the mid-market by growing accessible luxury and value through the continued differentiation of our banner portfolio.
As an example, take Kay and Jared.
Kay is our broadest reaching banner, positioned squarely in the mid-market.
We've been pushing Jared toward the higher end of the mid-market or what we refer to as accessible luxury.
The traction of this strategy is proving out in our results.
In the second quarter, Jared's average transaction value was 86% higher than Kay's, up from roughly 31% differential this time two years ago.
This differentiation allows our scaled banner portfolio to reach more customers with their ideal assortment and value.
On the value end of the mid-market, we've continued the rollout of our rebranding test, Banter by Piercing Pagoda, that we began in 100 stores at the end of April.
Based on promising results, we expanded to bring the total to 200 stores on August 2.
At the same time, we launched banter.com.
This new mobile-first site represents an exciting opportunity because the target customer is digitally savvy and most likely to shop from their mobile device.
But our eCommerce penetration has historically been among the lowest of our banners.
Results of this new site are still very early, but encouraging.
Online traffic has doubled, and interaction times on the site have increased 25%.
Importantly, we're seeing a lift from both new customers and existing Pagoda customers, unlocking new levels of customer acquisition and growth.
Our fourth and final where-to-play strategy is leading digital commerce in the jewelry industry.
I want to put particular emphasis on this because it is so fundamental to our strategy.
If winning in our biggest businesses is our foundation, then leading in Connected Commerce is our accelerator.
The two together, combined with services and mid-market expansion, are multipliers.
Connected Commerce is not brick-and-mortar or eCommerce or digital.
It's the integration of customer experiences, leveraging in store and online and mobile and ubiquitous delivery as both a mindset and a capability.
It's data-driven and channel-agnostic, and it is seamless.
It brings our people and our technology together in a more powerful way.
In fact, our Connected Commerce capabilities are adding more opportunities to meet our customers through video calls, buy online, pick up in-store services and more.
Customers are also growing more comfortable buying jewelry online.
We recognize that the pandemic was a factor in this shift as 78% of consumers have said that the pandemic made them realize that shopping online is better and easier than their previous perception.
We continue aiming to be at the forefront of this trend by working to provide an innovative digital shopping experience.
Of engaged couples in 2021, roughly 30% said they bought their engagement ring online, which is more than double the amount in calendar 2019.
Customers are also looking for convenience, capabilities like virtual consulting, buy online, pick up in-store and ship from store are changing the way that many customers shop with us.
In Kay, more than 25% of online orders this quarter utilized at least one of these capabilities.
And in Jared, it was over 30% of online orders.
Last quarter, we implemented Google Business Messenger and Apple Business Chat as additional ways for customers to reach our virtual jewelry consultants.
This is important because we know that when our virtual consultants establish a human connection through these conversations or help customers book an in-store appointment, we drive higher rates of conversion.
For example, within Ernest Jones, 20% of our in-store business is now the result of appointments that were made online.
Of those appointments, over 70% results in a sale that averages four times what a walk-in customer spends.
We continue to believe that blending physical and virtual experiences will be a core customer expectation for fine jewelry and a Signet competitive advantage in the years to come.
Now a few words on the potential headwinds ahead.
Our research indicates that younger unvaccinated customers, those aged 18 to 49 and particularly those with young children, are more concerned about COVID variants than older customers.
This growing concern may impact shopping behaviors among younger people.
So we're preparing to meet them wherever and however they want to shop with us across our Connected Commerce ecosystem, including online, curbside pickup, same-day concierge delivery.
That said, we also know that these customers are relatively more comfortable being in malls and shopping centers than on planes, in concert venues and at spas.
So as travel and experiences take a backseat, we're advancing our flexible fulfillment options while also meeting customers' desires to celebrate those closest to them with gifts of significance and lasting value.
Inflation is the other concern that we're seeing in our research.
As prices for essentials increase and as stimulus programs wane, naturally, customers' discretionary income decreases.
However, within jewelry, this trend still plays to our competitive strengths and to our optimized assortments.
Customers, particularly higher-income and engagement customers, will continue to spend discretionary dollars focused on purchases with lasting value.
With our scale and trusted network of vendors, we're able to offer product assortments that provide excellent value across a variety of price points, which also align with our margin goals.
In summary, our ability to capitalize on category momentum with increasingly strong execution of our Inspiring Brilliance strategies as well as remain agile in a time of uncertainty is a reflection of our culture and our people.
In a recent survey, 85% of our team members said they are proud to work at Signet, illustrating the dedication and commitment to performance within our company.
We're unlocking incredible discretionary effort among our team, while also attracting top talent from within the retail industry and beyond.
All of this creates a powerful cycle, capabilities that translate into positive customer experiences, continuing innovation, productive execution and talent advancements.
And it's the strength of our organization and improving agility of our culture that drives my confidence in our near- and long-term performance more than any other factor.
On that note, I'll turn this over to Joan, who will share her insights into what's working and what's ahead.
The team delivered strong results this quarter, working to maximize the jewelry category strength with our new capabilities.
As I talk to our performance, there are three key messages to highlight.
First, we expanded operating margin by leveraging fixed costs, growing merchandise margin and achieving higher labor productivity and additional cost savings.
Second, we are raising guidance to reflect our Q2 beat and a stronger Q3, given current business momentum and the delay of the anticipated shift to experience-related spending, which we believe is primarily due to the Delta variant.
We are maintaining a conservative view of the fourth quarter due to macro uncertainty related to COVID-19 variants and the impact of government support policies on consumer spend.
And third, aligned with our capital priorities, we've expanded our authorized repurchases to $225 million to reflect our confidence in our longer-term growth opportunities and the strength of our balance sheet and cash flow.
Now turning to the quarter.
Our total sales of $1.8 billion reflect growth of more than 100% over last year.
We continue to overcome lower levels of retail industry foot traffic through higher conversion, higher average transaction values and Connected Commerce capabilities.
I'd also note that this quarter reflects the return of brick-and-mortar business for our U.K. banners.
Moving on to gross margin.
We delivered approximately $780 million this quarter or 40% of sales.
This is a 650 basis point improvement compared to the second quarter two years ago.
Leveraging of fixed cost contributed more than 400 basis points of the improvement.
The remaining factors were driven by sustained cost savings and merchandise margin expansion.
A favorable merchandise mix, complemented by increasing levels of service revenue, enhanced discount controls and targeted promotions drove the expansion.
This combination of drivers is an example of the strategy we detailed at our virtual investor event earlier this year.
SG&A was approximately $503 million or 28% of sales.
This rate reflects a 210 basis point improvement to two years ago.
Our data-driven labor model continues to be one of the largest factors in our cost efficiency.
It's worth noting that this model continues to make use of flexible store hours by removing unproductive store operating hours where possible.
In other words, though overall traffic is down, we're increasing traffic per store hour.
This model has delivered a sales per labor hour improvement of more than 70% to this time two years ago, while also contributing to our decrease in employee turnover compared to the same time period.
Non-GAAP operating profit was $223 million compared to an operating loss of $41.7 million in the prior year.
Second quarter non-GAAP diluted earnings per share was $3.57, including a discrete tax benefit of $0.80 per share.
This is due to a release of a valuation allowance against deferred tax assets as our performance has significantly improved since it was recorded.
This compares to prior year non-GAAP diluted loss per share of $1.13 and diluted earnings per share of $0.51 two years ago.
Turning to the balance sheet.
We made significant progress in strengthening our financial health this quarter, and I'd like to offer some additional perspective.
Starting with inventory, we're improving the health of our inventory, both in productivity and margin capture as well as broadening the accessibility of our inventory to customers.
This has resulted in both a 40% improvement to inventory turn and a reduction in overall inventory levels.
To achieve this, we took three key strategic actions.
We reduced the level of end-of-life and slow-turning product through strategic promotions.
We are also leveraging flexible fulfillment capabilities such as ship from store and buy online, pick up in store, driving increased inventory access and visibility for our customers and team members.
We've leaned into our consumer insights, improved design and test cycle to ensure that the new product that we bring in is better aligned with our banner value propositions, thereby reducing the amount of inventory that reaches the sell-down or clearance stage of product life cycle.
Moving on to liquidity.
We have financial flexibility to continue investing in our long-term growth, recently enhanced by the extension of our ABL facility.
Alongside this, we removed customer credit risk from our balance sheet with the recently announced agreements with financial services partners.
We're in a net cash position, including both our long-term debt and preferred share obligations, positioning us well to deliver on our capital priorities.
Our first priority is to invest in the business.
This primarily includes investment in digital capabilities, technology and banner value propositions.
This also includes the evaluation of acquisition opportunities that align with our Inspiring Brilliance strategy, such as Rocksbox, which we announced earlier this year.
Our second priority is to focus on our debt, with the goal of reducing our adjusted debt-to-EBITDA leverage ratio to below three times.
And I'd note that the recent extension of our ABL facility through July 2026 provides us an additional option to address our 2024 senior note and preferred share obligations.
Our third priority is returning capital to shareholders.
Last quarter, we reinstated our common dividend.
And as we announced today, we've expanded our current authorization of share repurchases to $225 million, which we'll evaluate on an opportunistic basis.
Now I'd like to discuss our fiscal 2022 financial guidance.
We are raising our full year guidance to reflect the Q2 beat and current business momentum.
Factor into our view of Q3 is a delay in the anticipated shift to experiences-related spending primarily a result of the Delta variant.
We are maintaining a conservative view of the fourth quarter due to macro uncertainty related to COVID-19 variants and the impact of government support policies on consumer spend.
Building on last year, our back half strategy includes always on marketing, earlier receipt of holiday assortment and a promotional cadence designed to drive earlier holiday shopping into the third quarter to create less reliance on the fourth quarter.
We expect third-quarter sales in the range of $1.26 billion to $1.31 billion, with same-store sales in the range of down 3% to up 1% and non-GAAP EBIT of $10 million to $25 million.
Within Q3 guidance, we've embedded higher marketing and store staff expenses to last year as well as the favorable impact from our recently enhanced credit agreements.
Implied in our guidance is fourth quarter negative same-store sales in the range of low to mid-single digits.
For the fiscal year, we now expect total sales within range of $6.8 billion to $6.95 billion with same-store sales in the range of 30% to 33% and non-GAAP EBIT of $618 million to $673 million.
Our guidance assumes no significant level of store closures resulting from COVID variants.
And as we've already begun acting on our holiday strategy, we assume no meaningful impact to sourcing or fulfillment arising from inflation or pricing environment changes.
As we continue to optimize our footprint, we remain on track to open up to 100 locations and close at least 100.
We've opened 37 locations so far this year and closed 33, including 10 mall closures that were then reopened in off-mall locations.
Recall over the past 18 months, we've evolved our real estate strategy from strict fleet rationalization to fleet optimization.
This quarter has shown the benefits of this approach as our mall and off-mall locations drove similar performance levels.
Lastly, recall that I mentioned expected capital expenditures in the range of $190 million to $200 million.
This represents a narrowing of our previous range of $175 million to $200 million as we continue fueling Connected Commerce.
Further, as we've identified incremental cost savings within gross margin and other indirect spend, we're raising our expected cost savings for the year from a range of $75 million to $95 million to a range of $85 million to $105 million.
Our team continues to be a driving force for this company as their commitment to our strategies delivered strong performance this quarter.
It is an exciting time for Signet as we continue through our transformation, and I'm proud to work alongside such a devoted team. | q2 non-gaap earnings per share $3.57.
q2 sales $1.8 billion versus refinitiv ibes estimate of $1.64 billion.
q2 same store sales up 97.4% to q2 of fy21 and up 38.1% to q2 of fy20.
sees 2022 total revenue $6.80 billion to $6.95 billion.
sees q3 total revenue $1.26 billion to $1.31 billion.
expects to close over 100 stores in fy 2022 and open up to 100 locations, primarily in highly efficient piercing pagoda formats.
sees q3 same store sales down 3% to up 1%; sees fy 2022 same store sales up 30% to 33%. | 1 |
[Technical Issues] meaning of the federal securities laws.
These reconciliations, together with additional supplemental information, are available at the Investor Relations section of our website herbalife.com.
Additionally, when management makes reference to volumes during this conference call, they are referring to volume points.
During the second quarter we delivered worldwide reported net sales of $1.6 billion, growth of 15% compared to the prior year.
Net sales grew by double-digits for the fourth straight quarter.
All three of our core product categories grew double-digits, led by the Energy, Sports and Fitness category, which increased 45% compared to the prior year.
All of our regions, except China, experienced net sales growth in the quarter with four of our six regions increasing by more than 20%.
We will discuss China in detail toward the end of my remarks.
The underlying fundamentals of our business remain strong.
For the third quarter we are guiding reported net sales to be in the range of down 1% to up 5%.
For the full year, we expect net sales growth to be within a range of 8.5% to 12.5% compared to the prior year.
In addition to our net sales and earnings per share guidance, this quarter we have initiated guidance for adjusted EBITDA.
For the full-year 2021, we expect to generate between $875 million and $935 million of adjusted EBITDA, which highlights the ongoing profitability and underpins the cash flow generation of our business.
Alex will provide detail on our new guidance and why we believe this incremental metric is valuable for investors as they analyze our business.
Now let me get into our Q2 performance in more detail.
The North America region grew by 7% in the quarter, primarily driven by continued strong momentum in the US.
It is important to note that the single-digit growth is up against an extraordinarily high prior year comparison period.
However, the two-year stack growth rate of 47% in the US accelerated compared to last quarter's two-year stack.
We have seen significant growth in our US Nutrition Club business as many parts of the country returned to more in-person activities.
Over the first half of the year, we have had an increase of over 2,000 Nutrition Club locations in the US, with the total club count now exceeding 11,000.
While we continue to monitor pandemic conditions, we are currently planning a return to some of our in-person training activities and sales events in the second half of the year, utilizing a hybrid format.
The Asia Pacific region had another quarter of powerful growth, up 38% compared to the prior year.
The region had notable strength in Vietnam, which grew 60%, Malaysia, which was up 45%, Taiwan, which increased 21% and South Korea, which returned to growth with a 19% increase.
Herbalife Nutrition India has emerged as the number one direct selling company in that country based on a recent market research store report.
Our Indian business grew 93% this quarter compared to Q2 of 2020.
Recall that in Q2 2020, our business in India was disrupted by the severe public health-related restrictions imposed in response to the onset of COVID-19.
Over the past year our business in India has adapted well to ongoing pandemic conditions, implementing several successful digital strategies, including a virtual nutrition club model.
Virtual nutrition clubs incorporate many elements of traditional in-person nutrition clubs, but are conducted through virtual platforms such as Zoom or Facebook Live.
Virtual clubs establish a sense of community and a personal sense of connection elements that proved incredibly important during the pandemic.
The virtual club strategy is now being shared as a model of success with other regions around the world.
The EMEA region set a second straight quarterly net sales record with year-over-year growth of 22%.
Strong performances continued to be seen in markets such as Turkey, which was up 63%, Italy, which grew 38%, Belgium, which was up 25%, and Spain, which increased 21% in the quarter.
The United Kingdom delivered 24% growth, which was on top of a challenging comparison of 73% growth experienced in Q2 of 2020.
Although combined new distributor and preferred customer numbers are lower than the peak of Q2 2020, we had significant growth of 56% compared to the more normalized 2019 comparison period.
We have also seen a 27% year-over-year increase in the number of active supervisors, which reflects the continued strength of the EMEA business over the past 18 months and helped drive the record performance.
Mexico grew 23% in the quarter, its first quarter of double-digit growth since 2013.
Net sales growth was aided by a currency tailwind in the quarter.
Our members in Mexico are beginning to adopt the preferred customer program, which was implemented in March.
We'll talk more about preferred customers in a moment.
Additionally, the South and Central American region grew 23% in the quarter.
The region was led by Chile, which grew over 200%, Bolivia, which was up 58%, Guatemala, which increased 57%, and Peru, which was up 20% compared to the prior year.
The region also benefited from the implementation of the preferred customer program, which is now live in eight of that region's markets.
Let me go a little deeper on the preferred customer program, which is one of our key strategic elements.
Segmentation, which for us means bifurcating our member base into two groups, distributors who intend to sell product and preferred customers or as they're known in the US, preferred members who are only product consumers.
The preferred customer program is now live in 25 markets around the world.
These markets represent approximately 70% of our total net sales.
The ability to identify and distinguish preferred customers from distributors provides us with a powerful dataset on each group.
We believe this primary customer data will be incredibly valuable.
We will talk more about our preferred customer program and segmentation in our upcoming Investor Day.
We're also seeing more interest in our business from young adults as approximately two-thirds of new distributors and preferred customers who joined Herbalife Nutrition during the second quarter were Millennials or Gen Z. The ability to run their business through digital platforms and to utilize social media to connect with consumers is appealing to this tech savvy demographic.
As we evaluate future product launches, we have Gen Z and their consumer preferences in mind.
This demographic is particularly interested in sports nutrition, clean label products, and offering such as our recently launched hemp cannabinoid products.
Now returning to China, in China net sales declined 16% compared to the second quarter of 2020.
This year-over-year decline for the quarter was below our expectations.
We'd like to speak about China in more detail to give you a sense of what we're seeing and more importantly, what we're doing about it.
China represented approximately 11% of global net sales and just under 6% of global volume in the second quarter.
We're intensely focused on two key metrics that have decreased recently in China.
One, the number of new service providers joining the business and two, the activity levels of our sales representatives and service providers.
We are taking a number of actions in the market to adapt our business and to turn these two metrics around.
First, we are continuing to invest in our digital platform.
We recognized in 2019 that our powerful digital platform was going to be a crucial component of our efforts for the China market.
Since we began our digital transformation, we have formed partnerships with Tencent and Alibaba to help support our efforts.
We are just now beginning to see the initial results through the increased usage of our tools.
Through the first half of the year, approximately 50% of our business was transacted through our recently launched digital platforms.
Second, many of our service providers are shifting their focus to a newer Nutrition Club model, which includes a smaller scale, more rural location with an increase in daily customer interactions.
This type of Nutrition Club more closely resembles the very successful Nutrition Club businesses we have in many other parts of the world such as our US market.
Third, with the goal of improving the activity and quality of our service providers in China, we elected to modify our qualification requirements.
Historically, in our business, we found that strategic changes to qualification methods often create short-term disruption, but eventually, lead to long-term positive results.
Fourth, beginning this month, we believe we've secured the ability to expedite the business licensing processes for our new service providers, where they can obtain their license significantly faster than getting their license on their own.
We anticipate this accelerated business licensing timeline will lead to incremental new entrants.
Overall, we believe these initiatives will improve the number of new entrants joining the business and create a more active base of service providers in the long term.
While below our expectations, China's volume has been more stable sequentially from month-to-month this year.
The China comparisons continue to be difficult for Q3, but they actually get much easier toward the end of 2021 and into early 2022.
And we expect China to be additive to the total company growth within the next year.
Lastly, let me add that although at its current level China is a relatively small part of our overall business, we believe it offers significant growth opportunity long term and we remain firmly committed to the market.
So we've set a date for our Virtual Investor Day, which will take place on September 14th at 8:00 AM Pacific Time.
We look forward to sharing a deep dive on our company, on our strategy and on many of the initiatives that we have underway to drive continued growth.
Second quarter net sales of $1.6 billion represents an increase of 15% on a reported basis compared to the second quarter in 2020.
This was the largest quarterly net sales result in company history.
The growth was broad-based as over 50 of our markets grew by double-digits or more.
We had net sales growth in four of our five largest markets, consisting of the US, which grew 6%, China, which was down 16%, India, up 93%, Mexico, up 23% and Vietnam up 60%.
Currency was a tailwind to net sales in the quarter, representing a benefit of approximately 520 basis points, excluding Venezuela.
Reported gross margin for the second quarter of 79.2% decreased by approximately 60 basis points compared to the prior year period.
The decrease was largely driven by unfavorable country mix, primarily from China representing a smaller portion of our overall company sales.
Second quarter 2021 reported an adjusted SG&A as a percentage of net sales were 32.6% and 32.9%, respectively.
Excluding China member payments, adjusted SG&A as a percentage of net sales was 26.6%, approximately 30 basis points unfavorable compared to the second quarter of 2020.
This was largely due to a return to more normal levels of advertising promotion and sales event spending, which was significantly disrupted during the second quarter 2020.
For the second quarter, we reported net income of approximately $144.2 million or $1.31 per diluted share.
Adjusted earnings per share of $1.52 was a beat of $0.15 above the top end of our Q2 guidance.
Our expected year-over-year currency benefit for the second quarter should have been approximately $0.10 lower than originally projected, which translates to our actual currency adjusted earnings per share exceeding the top end of our guidance range by $0.17.
This resulted in the largest quarterly adjusted EBITDA result in company history for the second quarter in a row, with adjusted EBITDA of approximately $262 million.
Combined with the prior record in Q1, we have generated over $500 million of adjusted EBITDA during the first half of the year.
We are issuing guidance for the third quarter 2021, as well as updating our full-year 2021 guidance.
For the third quarter, we estimate net sales to be in the range of down 1% to up 5%, which includes an approximate 200 basis points currency tailwind.
The third quarter 2021 represents the most challenging comparison period of the year as we are comping 22% growth in Q3 of 2020.
Looking back over the past four quarters, the two-year stack has range between approximately 19% and 28%.
This quarter's guidance implies a two-year stack of 21% to 27% growth.
Third quarter adjusted diluted earnings per share is expected to be in a range of $1.05 to $1.25.
Adjusted diluted earnings per share includes a projected currency benefit of $0.06 compared to the third quarter of 2020.
John described earlier the strategic initiatives we have in place to return China to growth.
With that said, our expectations for China have come down in 2021.
This is reflected in our updated net sales guidance of 8.5% to 12.5% growth on a reported basis.
Despite the reduction from China, the midpoint of our guidance still implies double-digit net sales growth for the year.
Currency remains a tailwind and we now project an approximate 220 basis point tailwind due to currency for the full year compared to the expected 200 basis points benefit from a quarter ago.
We are updating full-year 2021 guidance for adjusted earnings per share to a range of $4.70 to $5.10.
Despite the reduction to the midpoint of our sales guidance, the midpoint of our adjusted earnings per share range is increasing by approximately $0.05.
This raise to the midpoint of our adjusted earnings per share guidance is primarily driven by the Q2 beat, partially offset by lower sales expectations in China for the remainder of the year.
For the full year, our guidance includes a projected currency tailwind of approximately $0.15 per diluted share, which is $0.03 higher than the currency benefit included in our prior guidance.
Incrementally, we are initiating adjusted EBITDA guidance for the third quarter and full-year 2021 of $205 million to $235 million and $875 million to $935 million, respectively.
We believe this incremental metric will be helpful to investors as they analyze the profitability and cash flow generation potential of our business.
Now we will turn to our cash position, capital structure and our share repurchase activity.
Through the first half of the year, we have generated $287 million of operating cash flow.
This was lower than our cash flow generation in the prior year period.
However, for the full year we continue to anticipate cash flow will be stronger than the $629 million we generated in 2020.
At the end of the second quarter, we had $838 million of cash on hand.
During the second quarter, we completed approximately $98 million in share repurchases.
Our expectation is that we will complete approximately $200 million of share repurchases over the remainder of the year, resulting in over $900 million of share repurchases for the full-year 2021.
During the quarter, we completed a $600 million offering of 2029 senior notes at a rate of 4.875%.
We used a portion of the net proceeds from the offering to redeem all outstanding $400 million 2026 senior notes that paid a coupon of 7.25%.
Given the favorable rate differential of approximately 240 basis points, we were able to raise nearly $200 million more debt at effectively the same interest payment.
This transaction resulted in a charge of approximately $25 million from the loss on the extinguishment of the 2026 notes.
This one-time charge was excluded from our adjusted results.
Also, just last Friday, we announced a repricing and upsizing of our term loan A and revolver credit facilities.
The borrowing margins of both facilities were reduced by at least 25 basis points in a new pricing grid to 2.25% or lower.
The revolver was increased by approximately $48 million to $330 million with the term loan A increasing by approximately $41 million to $286 million.
The amendment and incremental commitment from our bank group demonstrates their confidence in our current and future business outlook.
We also incorporated into the term loan A and revolver facilities a sustainability linked pricing grid relative to certain ESG KPIs.
These KPIs include our use of virgin plastic materials, reductions in greenhouse gas emissions and female diversity in our senior management ranks.
Herbalife Nutrition is proud to demonstrate our commitment to an ESG strategy that is measurable through financial incentives. | compname reports q2 sales of $1.6 bln.
q2 sales $1.6 billion versus refinitiv ibes estimate of $1.57 billion.
q2 earnings per share $1.31.
sees fy sales up 8.5 to 12.5 percent.
q2 adjusted earnings per share $1.52.
sees fy 2021 adjusted diluted earnings per share guidance range $4.70 - $5.10.
sees q3 adjusted diluted earnings per share $1.05 to $1.25. | 1 |
Please see the Events section of our Investor Relations homepage for a full list.
Our actual results may differ significantly from the matters discussed today.
When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items.
When you hear us say adjusted, that means excluding noncomparable items.
When you hear us say organic, that means excluding the impact of FX and net M&A.
We will also refer to our market.
When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the market.
We encourage you to follow along with these slides during our discussion.
We're very pleased to share our results today for the first quarter of 2021 and provide an overall company update starting on Slide number five.
I'm very proud of our strong start of the year despite the components supply headwinds.
With just over $4 billion in sales, our first quarter revenue increased over 18% organically.
This compares to a market being up less than 13%.
So our outgrowth was about 570 basis points for the quarter, which was ahead of our expectation and our guidance for the year.
We saw strong outgrowth in North America and Europe.
Our earnings per share increased year-over-year due to the impact of our higher revenue.
Our incremental margin performance was in line with our expectations, with an even strong free cash flow of $147 million for the quarter, a good strategy toward our full year guidance.
We also secured additional new business awards for electrified vehicles, which I speak about in a moment.
And finally, during the quarter, we announced our planned acquisition of AKASOL.
The key strategic elements of the AKASOL acquisitions are detailed on Slide number six.
Based on the last couple of years of experience we have in this space, we're believers in the prospect of easy bet resistance and are very familiar with the industry players.
As a leader in this space, AKASOL had been on our radar for a long time as a potential partner.
We're confident that AKASOL is an excellent strategic fit for BorgWarner, and we are really excited about adding their capabilities to our portfolio.
In particular, we're attracted to AKASOL's following strength.
Flexible battery technology across multiple cell architectures, proven technology and products with established manufacturing facilities already in serial production today, strong order backlog of about $2.4 billion, primarily from leading OEMs and a focus on bus, CV and off-highway applications.
We're extremely excited and expect to complete the transaction during the second quarter.
Next I would like to highlight a significant new program win for electric vehicles on Slide seven.
BorgWarner's Integrated Drive Module, or as we call it, our IDM, was selected by a major non-Chinese Asian OEM for its upcoming global S segment electric vehicle production planned to start in mid-2023.
This is a significant program for the company as it is our first IDM award combining BorgWarner's and legacy Delphi Technologies portfolio.
It is a validation of the potential we saw in bringing our two companies together.
And there is more to come.
This IDM features our electric motor, our box and our integrated power electronics.
It operates at 400 volts and has exceptional peak power of 135 kilowatts.
The IDM weight and space are reduced by integrating our gearbox, our 400-volt silicon inverter and our motor.
This results in a maximized power density and functionality.
The IDM also offers a scalable and modular inverter design making it easily adaptable to customer requirements.
This is an important step for the company with a great partner.
Next, on Slide eight, let me summarize our new strategical project charging forward that we unveiled at our Investor Day in late March.
With successful execution of this strategy, we expect to deliver over 25% of our revenue from electric vehicles by 2025 and approximately 45% by 2030.
That compares to under three percent of revenue today.
Project charging forward as three pillars: one, we plan to profitably scale ELVs through our continued integration of Delphi and our ability to capture synergies.
The new IDM win is a great example.
We would also pursue other organic and inorganic actions; two, we intend to expand more aggressively into ECVs.
We will do that by leveraging our strong intimacy with CV customers as well as our position in ELVs.
We're building out a go-to-market product portfolio and operation capabilities organically and inorganically.
Our AKASOL acquisition is a key part of this expansion.
And three, we plan to optimize our combustion portfolio, reducing our exposure by disposing parts of the portfolio that we believe are lower growth that don't ever pass to product leadership or that are not expected to deliver strong margins.
We believe we can fund the EV growth underlying project charging forward, primarily from the capital generated by our existing operations.
This is not a certain change in the company's direction.
It is a logical extension to what we've been building since 2015.
We're excited about the acceleration of the market toward electrification and about the momentum that we are building with our customers.
Next, on Slide nine.
I'm proud to announce that BorgWarner achieved The Great Place to Work certified status for the second consecutive year.
Great Place to Work is the global authority on workplace culture.
This certification validates BorgWarner's positive work environment.
I've said before that the BorgWarner secret sauce starts with our people: to lead, develop and attract the best talents.
We strive to be an employer of choice where we operate around the world.
We cultivate a workplace environment that is collaborative, transparent, inclusive and that promotes continuous learning and excellence.
So let me summarize our first quarter results and our outlook.
The first quarter was a good start to the year, particularly considering the supply challenges currently impacting the industry.
We delivered strong top line growth, and we believe we're tracking well toward our full year margin and free cash flow objectives.
Our first quarter performance has led us to increase our full year revenue and adjusted earnings per share guidance despite a lower industry production outlook, as Kevin will detail.
As we look beyond 2021, I'm extremely excited about our long-term positioning.
We are continuing to take significant steps that we believe will help us to secure our profitable growth well into the future.
We are winning, in line with our expectations in the electric world, both from a component standpoint like inverters and heaters, for example, and also from a latest generation system standpoint with our IDMs. We're focusing on a disciplined inorganic investment approach, like the planned acquisition of AKASOL, which adds great technology to our portfolio while supplementing our growth profile.
Before I review the financials in detail, I'd like to provide a quick overview of the two key takeaways from our first quarter results.
First, our revenue came in stronger than we were expecting going into the year.
This was driven by the fact that we delivered solid outgrowth with both the legacy BorgWarner and former Delphi Technologies businesses performing better than expected.
Second, our margin and cash flow performance in the quarter were strong, driven by the top line results as well as our cost-saving measures.
As we look at our year-over-year revenue walk for Q1, we begin with pro forma 2020 revenue of $3.2 billion, which includes $945 million of revenue from Delphi Technologies.
You can see the foreign currencies increased revenue by about six percent from a year ago.
Then our organic growth year-over-year was over 18% compared to a less than 13% increase in weighted average market production.
That translates to 570 basis points of outgrowth in the quarter, which breaks down as follows: in Europe, we outperformed by mid- to high single digits, driven by growth in small gasoline turbochargers and strong performance in multiple former Delphi Technologies businesses, most notably fuel injection.
In North America, we outperformed the market by high single digits as we saw a nice benefit from the ramp-up of the new Ford F-150 and other new business launches.
In China, we underperformed the market by mid-single digits against very strong outperformance in the first quarter of 2020.
Also keep in mind, Q1 was a very unusual quarter last year in the face of COVID-19, primarily in China.
The sum of all this was just over $4 billion of revenue in Q1, which was a new quarterly record for the company.
Now we do believe that some of the strong outgrowth we delivered in Q1 was a result of the production of build and hold vehicles by our customers in multiple regions of the world.
That means it's likely that some level of our reported outgrowth in Q1 is inflated due to a pull forward of production into the quarter.
This will have an offsetting impact on our expected outgrowth later in the year.
However, our outgrowth for the full year is still expected to be above our prior guidance, as I'll discuss further in a moment.
With all that background in mind, we're pleased with the strong start to 2021.
Now let's look at our earnings and cash flow performance on Slide 11.
Our first quarter adjusted operating income was $444 million, compared to the pro forma $274 million in the first quarter of 2020.
This yielded an adjusted operating margin of 11.1%, which was up compared to the 10.3% margin for BorgWarner only in the first quarter of 2020.
On a comparable basis, excluding the impact of foreign exchange, adjusted operating income increased $145 million on $591 million of higher sales.
That translates to an incremental margin of roughly 25%.
This solid performance was driven by conversion on higher volumes, restructuring savings and Delphi Technology synergies in excess of purchase price amortization.
We are particularly pleased with this performance given elevated supplier costs that we experienced during the quarter.
Moving on to free cash flow.
We're proud of the fact that we generated $147 million of positive free cash flow during the first quarter, which was roughly flat year-over-year despite increased investment in working capital.
As a reminder, our market assumptions incorporate our view of both the light vehicle and on-highway commercial vehicle markets.
As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of nine percent to 12%, which is down from our previous assumption of an 11% to 14% increase.
This reduction to our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production.
Looking at this by region, we're planning for North America to be up 17% to 20%.
We see the largest incremental impact of the semiconductor shortage in North America with our market expectations down approximately 500 basis points from our initial assumptions.
In Europe, we expect a blended market increase of nine percent to 12%, with that range being down approximately 200 basis points from our earlier planning assumption.
And in China, we expect the overall market to be roughly flat year-over-year similar to our previous estimate.
Now let's talk about our full year financial outlook on Slide 13.
Starting with our pro forma 2020 sales, which includes $2.6 billion of revenue from the first three quarters of Delphi Technologies in 2020.
As you know, those revenues were not part of our P&L last year.
But to provide year-over-year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.
You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $0.9 billion to $1.3 billion.
Next, we expect to drive market outgrowth for the full year of approximately 300 to 500 basis points, which is a meaningful step up from our previous guidance of 100 to 300 basis points.
Based on these assumptions, we expect our 2021 organic revenue to increase about 12% to 17% relative to 2020 pro forma revenue.
Then adding a $400 million benefit from stronger foreign currencies, we're projecting total 2021 revenue to be in the range of $14.8 billion to $15.4 billion.
That's up from our prior guidance by about $100 million at both ends of the revenue range.
Even with weaker end market outlook, our stronger revenue outgrowth is driving an overall increase in our revenue guidance from the guidance we gave last quarter.
Also, you should note that we're maintaining a wider-than-typical revenue range at this point of the year due to the wide range of potential production scenarios that I discussed on the previous slide, which stems from the volatility and uncertainty in end markets, arising from the industrywide semiconductor issues.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.1% to 10.5% compared to a pro forma 2020 adjusted operating margin of 8.3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance includes $70 million to $80 million of incremental benefit in 2021.
That puts us right on track to achieve 50% of our total expected cost synergies in 2021.
And based on our year-to-date performance, we believe that we're tracking at the high end of this range.
Based on this revenue and margin outlook, we're expecting full year adjusted earnings per share of $4 to $4.35 per diluted share, which is an increase from our prior guidance of $3.85 to $4.25 per diluted share.
I would point out that this guidance now assumes a 31% tax rate versus our prior guidance of 32% as a result of the successful execution of certain international tax planning initiatives.
And finally, we continue to expect that we'll deliver free cash flow in the $800 million to $900 million range for the full year.
This is flat with our prior guidance as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income.
This would still represent a record annual free cash flow generation for the company.
That's our 2021 outlook.
On the acquisition front, we believe we remain on track to complete the AKASOL acquisition in the second quarter.
We've now received regulatory approvals in all required jurisdictions.
The tender offer is in progress with the final acceptance period expected to be completed later this month and then with the closing shortly thereafter.
AKASOL represents an important part of Project CHARGING FORWARD as it represents approximately 20% to 25% of the estimated 2025 revenue from acquisitions underlying our plan and it significantly increases our exposure to the ECV space.
As it relates to portfolio optimization, we continue to target combustion-related dispositions with annual revenue of approximately $1 billion to be executed over the next 12 to 18 months.
The process for these dispositions is under way.
We would expect to update you on our progress there as we get closer to executing those transactions.
So let me summarize my financial remarks.
Overall, we had a really solid start to the year despite the industry supply headwinds.
We delivered 570 basis points of market outgrowth, an 11.1% adjusted operating margin and $147 million of free cash flow.
And we increased our full year revenue and earnings guidance despite moderating our industry production assumptions.
Looking beyond our near-term results, we're taking the necessary steps to accelerate the company's progression toward electrification.
The AKASOL acquisition and today's IDM announcement are great examples of our progression.
And importantly, we're executing our strategy from a position of financial strength.
Ultimately, we expect that the successful execution of our strategy will drive value creation for our shareholders. | sees fy sales $14.8 billion to $15.4 billion.
for full-year 2021, net sales are expected to be in range of $14.8 billion to $15.4 billion.
borgwarner - full year 2021 free cash flow is expected to be in range of $800 million to $900 million.
borgwarner - expects its weighted light and commercial vehicle markets to increase in range of approximately 9% to 12% in 2021. | 1 |
Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect actual results may differ significantly from results expressed or implied in these communications.
In addition, when -- we may use certain non-GAAP financial measures in this conference call.
The format of the call will be open remarks and announcement by Jose followed by a financial review from George.
These discussions will be followed by a Q&A session and we expect the call to last about 60 minutes.
We had another great quarter and a lot of good things to talk about today.
Today I will be reviewing our fourth quarter and full-year results, as well as providing my outlook for 2021 and the markets we serve.
And I hope in pray that you and your love ones are healthy and state.
The safety of our team members has been our top priority.
And as I reflect on the unprecedented challenges during 2020, I am incredibly proud of the men and women of MasTec.
Our operations have exhibited tremendous resiliency during the pandemic.
And as I look forward to 2021 and beyond, I am extremely excited about various significant growth opportunities as we provide critical power, communications and other infrastructure services to our customers.
I am honored and privileged to lead such a great group.
The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great quality project at the best value.
These traits have been recognized by our customers and it's because of our people's great work that we've been able to deliver these outstanding financial results in the challenging environment and position ourselves for continued growth and success.
Now some fourth quarter highlights.
Revenue was $1.6 billion for the fourth quarter.
Fourth quarter adjusted EBITDA was $262 million, and fourth quarter adjusted earnings per share was $1.75.
For the full year, 2020 revenue was $6.3 billion, 2020 adjusted EBITDA was $810 million, and 2020 full year adjusted earnings per share was $5.11.
And finally, cash flow from operations for the year was $937 million a record level.
In summary, we had an excellent quarter and another great year.
On our third quarter call in October, we talked about our longer-term goals and our future business mix.
Considering the impacts of the pandemic on the oil and gas industries, we laid out a path to achieving an annual revenue target of $10 billion with double-digit margins.
One of our key highlights of 2020 and was our ability to grow non-oil and gas revenues by almost 12% and non-oil and gas adjusted EBITDA by over 40% despite the pandemic.
Our guidance that we provided today reflects continued diversification, as we expect our non-oil and gas business to grow approximately 20% in revenues and approximately 45% in EBITDA in 2021.
While we didn't lay out a time line for our $10 billion revenue target in the third quarter, the visibility within our end markets has continued to improve.
In just a matter of months since our last call, we believe the size and the scale of growth opportunities has significantly expanded.
I believe the recent events in Texas, demonstrates the need for significant investment in both infrastructure and continued power generation diversification.
We believe MasTec's diversification with capabilities in transmission grid and substation construction, power distribution maintenance, renewable construction including wind, solar, biofuels and battery storage coupled with our capabilities around gas-fired plant construction with its associated infrastructure uniquely positioned MasTec to benefit from continued and renewed investments in the power grid.
These opportunities coupled with the growing investments in communication networks from both large carriers and smaller rural focused operators provide MasTec with significant growth opportunities in 2021 and beyond.
In addition to our organic growth opportunities, we are seeing a growing number of potential acquisition targets.
Acquisitions over the years have been a source of significant growth for MasTec.
While we've been less active over the last few years, we believe the right companies can help us fully capture our current market opportunities.
Subsequent to year-end in the first quarter, we closed on two acquisitions.
The first company focuses on integrity work and maintenance work related to gas distribution and the second company is a fully integrated infrastructure contractor specializing in transportation projects.
Included in today's 2021 guidance, revenue contribution for these two companies is about $300 million.
In addition, we remain active and are focused primarily on clean energy, power grid services, telecommunications and infrastructure companies.
Now I'd like to cover some industry specifics.
Our communication revenue for the quarter was $569 million.
EBITDA margins came in better-than-expected at 11.1% and were up 300 basis points year-over-year.
For the year, revenues were $2.5 billion and margins were 10.7%, a 270 basis point improvement over last year.
Fourth quarter and second half of the year communication revenues were impacted by a slowdown of our largest two customers in this segment.
With the recent 5G spectrum auctions now complete, we expect revenue acceleration throughout 2021.
While the first quarter of 2021 will be sequentially similar, we are encouraged by our customers' capital plans discussed this earnings season.
A key highlight for us in 2020 was our ability to diversify our customer base within our Communications segment.
Comcast became MasTec's third largest customer in 2020 growing over 100% from 2019 and our T-Mobile business also grew significantly in 2020 with sequential growth in the fourth quarter of approximately 60%.
We're also very excited with recent developments with rural operators.
The rural digital opportunity fund or RDOF which is a follow-up to the Connect America Fund will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in unserved rural areas.
Additionally in October of 2020, the FCC established the 5G fund for rural America which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America.
We entered the rural telecom space in 1997 through an acquisition and have been serving this customer base for nearly 25 years.
I believe we are entering one of the most exciting periods in the history of telecommunications and that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers and for MasTec.
Moving to our Electrical transmission segment, revenue was $126 million versus $116 million in last year's fourth quarter.
Margins decreased year-over-year and were impacted by poor performance on a particular project, which we expect to complete in the first quarter.
We have now begun one of the larger projects we had previously been awarded and expect a much better margin profile in 2021.
Backlog remained strong and improved both sequentially and year-over-year.
We are confident that we can deliver strong revenue growth this year.
Scale in this segment is important for us, as we strive to achieve double-digit margins.
We believe we are well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening.
Moving to our oil and gas pipeline segment, revenue was $600 million.
While we had nice sequential revenue growth, revenues were negatively impacted by the delayed start of some of our larger projects.
Margins for the quarter were again very strong and positively impacted by the reimbursement of delayed project idle equipment cost.
Without associated revenue, these reimbursements had a significant impact on margin.
Backlog in this segment is strong and we expect strong double-digit revenue growth in 2021.
On our third quarter call, we forecasted a longer-term recurring revenue target of $1.5 million to $2 billion a year, assuming a continued depressed oil and gas market.
As a reminder, over the last three years, less than 10% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas.
We continue to see strong demand for integrity services, gas distribution and line replacement activity.
We are focused on continuing to diversify our revenues in this segment.
Moving to our Clean Energy and Infrastructure segment, revenue was $1.5 billion for the full year versus $1 billion in the prior year, a roughly 50% year-over-year increase.
More importantly, EBITDA margins for the year were 5.3%, a 140 basis point improvement over last year.
The size and scope of the opportunities we are seeing in this segment continues to grow.
While the segment has received a lot more attention over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio.
With the new administration and a clear focus on clean energy, we have seen a significant increase in planned clean energy investments from both traditional customers as well as oil and gas companies that are trying to improve their carbon footprint.
For example, earlier this month, energy transfer announced the creation of an alternative energy group focused on renewable energy projects.
As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments.
I'd also like to highlight the diversification within our clean energy and infrastructure segment.
While we got our start and win, today we are capable of meeting any of our customers' demand.
While we've seen a significant demand uptick for solar and biofuels, we believe the recent Texas events will create even more demand for reliable baseload generation including gas-fired plants.
In the first quarter, unrelated to the events in Texas, we began construction on a gas-fired plant in Alabama that is replacing an existing coal plant.
This plant will be among the world's most fuel-efficient and lowest emission natural gas plants.
It is important to note that while this plant plans to run on natural gas, the turbine we are installing is capable of eventually burning a mixture of natural gas and green hydrogen, thereby establishing power generation flexibility.
This is another market that has tremendous potential for MasTec.
While George will cover 2021 guidance in detail, I'd like to highlight that our 2021 guidance reflects strong 24% revenue growth.
With all of our segments expected to approach double-digit top line increases when compared to last year.
We expect both revenues and EBITDA in 2021 to be at record levels.
To recap, we had another great year, while times can be challenging and uncertain, opportunities always arise from these challenges.
Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them, in that lies our opportunity.
Our greatest strength has been to understand the trends in our industry and our customers' needs.
Our ability to provide services whether existing or new has always been a strength.
I'm excited for what the future holds for MasTec.
Keep up the good work.
Today I'll briefly cover our fourth quarter and annual 2020 financial results including cash flow, liquidity and capital structure as well as our initial guidance expectation for 2021.
As Mark indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, while fourth quarter 2020 revenue was slightly below our expectation at $1.63 billion, earnings margin exceeded our expectation with fourth quarter 2020 adjusted EBITDA at $262 million or 16% of revenue, a 370 basis point increase when compared to the fourth quarter of last year.
This capped a strong year for MasTec, despite the negative impact of the COVID-19 pandemic with annual 2020 adjusted EBITDA of $810 million and strong adjusted EBITDA margin rate of 12.8%, a 110 basis point improvement over last year.
It is worth noting, that 2020 results show significant strength and growth in our non-oil and gas segment results.
With 2020 revenue growing approximately $470 million or 12% and, 2020 adjusted EBITDA for these segments increasing $90 million or 43% when compared to 2019.
We expect this trend to continue and accelerate in 2021.
We ended 2020 with a new record level of cash flow from operations of $937 million this allowed us to reduce our net debt levels during 2020 by $481 million to approximately $880 million which equates to a book leverage ratio of just over one.
With this level representing one of the best leverage metrics ever recorded by MasTec.
In summary, our capital structure is in an extremely strong position, allowing us to fund any and all worthwhile future growth opportunities.
Now I will cover some detail regarding our 2020 segment results and guidance expectations for 2021.
Fourth quarter 2020 Communications segment revenue of $568 million decreased 16%, compared to the same period last year.
And this level was slightly below our expectation, primarily due to lower activity levels of Verizon One Fiber project activity.
Fourth quarter 2020 Communications segment adjusted EBITDA margin rate exceeded our expectation at 11.1% of revenue, a strong 310 basis point improvement compared to the same period last year.
Annual 2020 Communications segment revenue was approximately $2.5 billion with an adjusted EBITDA, at $270 million or 10.7% of revenue.
Annual 2020 adjusted EBITDA for this segment increased $61 million or 29%.
And adjusted EBITDA margin rate grew 270 basis points, when compared to 2019.
These increases were achieved despite the impacts of the COVID-19 pandemic which negatively impacted both, top line revenue and operating results.
Looking forward to 2021, we expect that annual Communications segment revenue will grow approaching a double-digit range and approximate $2.8 billion with continued 2021 adjusted EBITDA margin rate improvement approximating 75 basis points to 100 basis points over 2020 levels.
As Jose indicated in his remarks, the US Telecommunications market is rapidly evolving.
Trends include, multiple activities to support 5G development, including upcoming initial deployment of recently auctioned C band spectrum, expanding small cell deployments and necessary fiber backhaul investments.
It also includes, expanding fiber to the home deployments to support growing telecommuting and tele-learning initiatives that have accelerated during the COVID-19 pandemic, increasing 5G home deployments and upcoming high-speed Internet expansion into rural communities across the country to the rural digital opportunity fund.
We expect these trends will develop and accelerate over the course of 2021.
With a slow first quarter, in which, revenue will approximate our fourth quarter 2020 level, followed by increasing levels of year-over-year revenue growth each quarter thereafter.
Importantly, this ramping trend provides continued future revenue growth opportunities in 2022, as these trends are expressed over a full year period.
Fourth quarter 2020 clean energy and infrastructure or clean energy segment revenue was $345 million, generally in line with our expectation.
Annual 2020 clean energy revenue was $1.53 billion, an increase of $492 million or 48% compared to 2019.
Fourth quarter 2020 clean energy adjusted EBITDA was $11 million, or 3.2% of revenue and annual 2020 clean energy adjusted EBITDA was $80 million or 5.3% of revenue, generally in line with our expectation.
Fourth quarter 2020 adjusted EBITDA rate fell slightly below the annual 2020 rate of 5.3%, primarily due to fixed costs on seasonally lower fourth quarter revenue.
At 5.3% of revenue annual, 2020 Clean Energy adjusted EBITDA margin rate increased 140 basis points compared to 2019.
Looking forward to 2021, we expect to continue to experience a very active bidding market in the Clean Energy and Infrastructure Space.
We anticipate that 2021 Clean Energy revenue will grow in the high 30% range and approach $2.1 billion in 2021, with continued 2021 adjusted EBITDA margin rate improvement of approximately 125 to 150 basis points over 2020 levels.
Fourth quarter 2020 oil and gas segment revenue was $600 million, a 30% sequential growth over the third quarter, representing the first 2020 quarterly period in which this segment exhibited revenue growth over 2019, as we initiated project activity on selected large projects that will extend into 2021.
That said, fourth quarter revenue was slightly below our expectation, as selected large project activity started later in the quarter due to regulatory delays.
Annual 2020 oil and gas segment revenue was approximately $1.8 billion, a decrease of $1.3 billion when compared to 2019, again due to regulatory delays in large project activity, as previously discussed.
Fourth quarter 2020 oil and gas adjusted EBITDA was $196 million or 33% of revenue and annual 2020 oil and gas adjusted EBITDA was $511 million, a $123 million decrease when compared to 2019.
Looking forward to 2021, we expect increased large project activity, continuing the project activity started in the fourth quarter of 2020.
We estimate that annual 2021 oil and gas segment revenue will grow in the 30% range and approach $2.4 billion, with virtually all this activity in backlog as of year-end 2020.
Given that a larger portion of 2021 oil and gas project activity is expected to be comprised of lower-margin cost-plus activity.
We are moderating our annual 2021 adjusted EBITDA margin rate expectation for this segment to the high teens range.
Fourth quarter 2020 electrical transmission segment revenue was $126 million, generally in line with our expectation.
And annual 2020 electrical transmission revenue was $506 million, a 22% increase over 2019.
Fourth quarter 2020 electrical transmission segment adjusted EBITDA margin rate was below our expectation at 0.6% of revenue, due to inefficiencies and delays on a project that is approximately 85% complete as of year-end 2020.
This project also impacted our annual 2020 electrical transmission segment adjusted EBITDA margin rate, which was 2.9% as compared to 7.1% in 2019.
Looking forward to 2021, we expect annual 2021 electrical transmission segment will show strong revenue growth, somewhere in the high-teens to low 20% range.
With 2021 adjusted EBITDA margin rate improving to the high-single-digits range.
We also believe end market trends in this segment will continue to develop and support future growth as clean energy power generation initiatives require significant transmission grid investment coupled with expanding storm and fire hardening grid needs.
Now I will discuss a summary of our top 10 largest customers for the annual 2020 period as a percentage of revenue.
AT&T revenue derived from wireless and wireline fiber services was approximately 14% and installed to the home services was approximately 4%.
On a combined basis, these three separate service offerings totaled approximately 18% of our total revenue.
As a reminder, it's important to note that these offerings while falling under one AT&T corporate umbrella are managed and budgeted independently within their organization, giving us diversification within that corporate universe.
Comcast, NextEra Energy, Crimean Highway pipeline and energy transfer affiliates were each at 5% of revenue.
Verizon, Xcel Energy, Duke Energy, Iberdrola Group and Enbridge were each at 4% of revenue.
Individual construction projects comprised 64% of our annual revenue with master service agreements comprising 36% and highlighting that we have a significant portion of our revenue derived on a recurring basis.
At year end 2020, our backlog was approximately $7.9 billion, a slight sequential increase compared to $7.7 billion as of the 2020 third quarter and a slight decrease compared to $8 billion as of year end 2019.
Lastly, as we've indicated for years, backlog can be lumpy as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time.
Now I will discuss our cash flow, liquidity, working capital usage, and capital investments.
For the year ended 2020, we generated a record level $937 million in cash flow from operations and ended the year with net debt of $880 million, which equates to a book leverage ratio of 1.1 times.
We ended 2020 with $423 million in cash on hand as well as record liquidity defined as cash plus borrowing availability of approximately $1.6 billion.
We are proud that annual 2020 cash flow from operations reached a new record level and that 2020 free cash flow, defined as cash flow from operations less net cash capex, once again exceeded adjusted net income.
We believe this performance highlights the strength, resilience and consistency of MasTec's cash flow profile.
During 2020, we reduced our net debt levels by approximately $481 million while still investing approximately $170 million in share repurchases and strategic investments.
We ended 2020 with DSOs at 86 days down four days compared to 90 days last year and generally in line with our expected DSO range in the mid to high-80s.
As we begin 2021, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity.
This combination gives us full flexibility to take advantage of any and all potential growth opportunities to maximize shareholder value.
Regarding our spending on equipment, annual 2020 net cash capex, defined as cash capex net of equipment disposals, was approximately $177 million and we incurred an additional $114 million in equipment purchase under finance leases.
We anticipate lower levels of capex spending in 2021 at approximately $100 million in net cash capex, with an additional $120 million to $140 million to be incurred under finance leases.
As we have previously indicated, as our end market operations shift, with non-oil and gas segments becoming a larger portion of our overall revenue, our capital spending profile should reduce as the Oil and gas segment has historically required the largest level of capital investment.
Moving on to our initial 2021 guidance.
We are projecting annual 2021 revenue of $7.8 billion with adjusted EBITDA of $875 million or 11.2% of revenue and adjusted diluted earnings of $5 per share.
As we have previously provided some color as to 2021 segment expectations, I will briefly cover some other guidance expectations as highlighted in our release yesterday.
We expect annual 2021 interest expense levels to approximate $58 million with this level including approximately $110 million of first quarter 2021 acquisitions, while excluding any potential additional M&A, strategic investments or share repurchase activity that may occur over the balance of 2021.
We expect to maintain a strong cash flow profile in 2021 with free cash flow once again exceeding 2021 adjusted net income despite expected working capital requirements related to our planned 24% revenue growth in 2021.
For modeling purposes, our estimate for 2021 share count is 74 million shares.
We expect annual 2021 depreciation expense to approximate 4.2% of revenue inclusive of first quarter 2021 M&A activity and capital additions.
Included in this expectation is an increased level of 2021 oil and gas segment depreciation expense when compared to 2020 as we are utilizing conservative depreciation life and salvage value estimates on recent capital additions to protect against potential market uncertainties.
We expect an annual 2021 other segment equity and earnings from our equity interest in Waha pipeline operations will approximate 2020's level.
We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of approximately 1.1% of overall revenue.
We expect that net income attributable to non-controlling interest will approximate 2020 levels and cadence.
And lastly, we expect that annual 2021 adjusted income tax rate will approximate 25%.
Our first quarter 2021 revenue expectation is $1.65 billion with adjusted EBITDA of $172 million or 10.4% of revenue and earnings guidance at $0.80 per adjusted diluted share.
First quarter results typically represent our lowest earnings level of the year due to winter weather seasonality and a transition into new customer capital budgets.
Notable first quarter 2021 expectations include segment revenue levels expected to generally approximate fourth quarter 2020 levels with first quarter 2021 oil and gas segment revenue expected to significantly grow and approximate $600 million due to expanded cost plus project activity.
Our first quarter 2021 expectation also includes expected negative productivity impacts of recent winter weather storm disruptions across Texas and other parts of the country.
In terms of some additional color on the expected timing of 2021 consolidated revenue performance, we expect first half 2021 consolidated revenue to grow at a mid-teens growth rate with second half 2021 consolidated revenue growth rate accelerating to the high 20% to low 30% range and our annual 2021 revenue growth expectation is 24% over the prior year.
When modeling 2021 revenue, it is worth noting that oil and gas segment revenue after a strong 2021 first quarter will moderate during the 2021 second quarter and revenue during this period is expected to approximate second quarter 2020 levels as select large project activity slows due to spring season road frost bands before then accelerating again in the third quarter once work resumes.
Regarding our expected timing of 2021 consolidated adjusted EBITDA margin rate performance, we expect first half 2021 adjusted EBITDA margin rate will be in the high 10% range with second half 2021 adjusted EBIT margin rate in the high 11% range, with our annual adjusted EBITDA guidance at 11.2% of 2021 revenue. | sees q4 adjusted earnings per share $1.33.
q3 revenue rose 42 percent to $2.4 billion. | 0 |
Those factors are described in Sally Beauty Holdings' filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer.
Chris will start by offering some thoughts on our very respectable fourth quarter.
He will also touch on our thoughts about the current economic environment and our outlook on fiscal year 2021 and finish with our focus on our key focus and investments in fiscal year 2021 as we move toward the completion of our transformation plan.
Aaron will then discuss our fourth quarter and full-year financial results, touch on our cash liquidity and also provide some perspective on fiscal year 2021.
Your efforts have turned us into an agile operator with real strength in both digital and physical retail.
And you have set us up well for the future.
I could not be more proud of our team and what they accomplished in spite of the countless challenges we experienced in fiscal year 2020.
During our last earnings call, we discussed the nimbleness and agility displayed by our teams and associates during the third quarter.
As our business responded to store closures and consumer uncertainty, our our teams quickly pivoted to launch new e-commerce capabilities and service models.
In June, we saw strong sales as a majority of our stores reopened.
As we moved into July and the fourth quarter, we continued to see strong sales with the business normalizing.
Of course, the environment continued to evolve around us as exemplified by California shutting down salons in many counties for parts of July and August.
All in, we delivered enterprise positive same-store sales of 1.3% with strength in retail, helping to compensate for soft, but still positive same-store sales in the wholesale business.
Here are some of the key highlights regarding our fourth quarter.
Our Sally Beauty retail business in the U.S. and Canada delivered same-store sales growth of 3.7% for the quarter.
We saw continued strength in our core category of hair color, where we continue to gain share in the retail and pro channels.
For the fourth quarter, hair color was up over 22% in Sally Beauty's U.S. and Canadian retail business, with unit growth and increased AUR.
We also saw strength in the nail category for Sally Beauty's U.S. and Canadian retail business, which was up 11%.
We continue to see solid stream and growth in our global e-commerce business.
We delivered the highest gross margin in SBH history, driven primarily by the U.S. and Canadian retail business and our strategy of Fewer, Deeper, Bigger promotions.
We grew adjusted earnings per share over the prior year by 9%.
We ended the quarter with less debt and a strong balance sheet.
And we continued our focus on cost controls, cash management and liquidity, and generated over $131 million in free cash flow.
Operationally, we also continue to invest in our business and launch new programs.
Following our fast launch of Ship-From-Store and Same-Day Delivery in Q3, we launched 'Buy Online / Pickup In-Store' at Sally Beauty and it will reach all U.S. stores nationwide within a few weeks.
We completed the national rollout of our new Private Label Rewards Credit Card Program to both Sally and BSG customers in the U.S. In just the first month, we had approvals for over 80,000 new card members with a slight weighting to the professional stylists over the retail consumer.
We launched the second addition of Cultivate, which offers financial support, product distribution and mentorship for female-owned beauty brands.
We executed a number of small acquisitions on the BSG side, gaining brand distribution rights, a small number of stores and new customers.
We expanded our Ship-From-Store capabilities to 2,400 stores in the U.S. and nine provinces in Canada.
And we successfully placed our new North Texas distribution center into service in August.
Now, let's turn to our thoughts on the current economic environment and our outlook for next year.
Looking ahead to fiscal 2021, we will have to remain agile as our consumers continue to deal with the impacts of COVID-19.
While our business is certainly defensive and more resilient than many retail peers, we expect an increased level of volatility, particularly in the first half of the year.
Regardless of COVID-19, we remain confident in the direction we are headed, the investments we have made in our transformation plan over the past few years, and the resiliency of our categories.
As we stated on our last earnings call, we feel we are well-positioned to handle the uncertainty of the near term due to three key factors.
First, our businesses are on trend.
The Sally Beauty business is the industry leader of professional color for home use, and is perfectly aligned with the increasing DIY trends.
Our customers can find all of their needed solutions or products for hair, nail and skin either online or in our stores.
Additionally, they can find How-To content on our digital sites, starting with Hair Color 101 all the way through more complex application techniques.
Alternatively a consumer can talk to a Sally associate at a store, who has been trained in hair color.
We plan to retain and build on the new customers who have discovered us as they experiment with DIY hair and nails and try out new exciting colors.
And we are ready to serve our traditional customers with more convenient service options as they become increasingly comfortable with returning to stores over time.
On the BSG side, while the salon business seems to be recovering more slowly, we are the industry leader in stylists' safety with our largest assortment of PPE including hand sanitizer, barbicide, gloves, masks and case.
In addition, we have added more convenience -- we have more convenient store locations, more DSC's that are now digitally enabled and many of which are now trained and certified in salon safety protocols.
And now we offer improved delivery service options to ensure we are convenient and safe for our professional customers.
We will continue to build on this leadership position.
Second, we have the ability to operate effectively in an environment that will continue to be impacted by COVID-19.
Customers and team members can feel confident in our stores, which have instituted the protocols required to operate safely.
We have proven that we can rapidly evolve our service model to provide our customers with more choice on how they interact with us and more access to our inventory chainwide.
Third, we are sitting in an excellent liquidity position, with strong cash flow and cash on the balance sheet.
Aaron will discuss this more during his remarks.
Finally, I will spend a few minutes talking about the key projects and investments that we will focus on in fiscal year 2021.
First, we will continue our digital transformation by optimizing the guest experience and service offerings such as 'Buy Online / Pickup In-Store', which is rolling out across all Sally stores in the U.S. in November, and optimizing the impact of digital to the income statement by addressing operating changes, which will lead to cost savings.
We will also replatform the BSG digital experience focused firmly on the pro and add further fulfillment options for BSG in the second half of fiscal year 2021.
Second, now that we have completed the rollout of our Private Label Rewards Credit Card Program in the U.S., we will be intensely focused on growing and optimizing the portfolio and program.
On the Sally side, the program will enhance the existing Sally Beauty Rewards loyalty program by adding additional reward points to the customer spend.
Additionally, the Sally e-commerce site is already set up to provide instant credit for online applications and accessibility to shop with their card online.
On the BSG side, card benefits include an additional 3% discount on purchases and adds better flexibility for stylists and pros to manage their cash flow and business.
Through benchmark data, we know that private label credit card holders typically spend more per transaction, as well as having better retention rates.
Therefore, our focus will be on driving activations while increasing basket size and share of wallet.
This also translates to the P&L benefits related to interchange relief from traditional bank cards, as well as adding royalties from new account openings.
Third, as a significant part of our company's history, growth, and current assortment, our Sally Beauty division is partnered with over 25 black-owned brands in our current textured hair category.
In fiscal year 2021, we have committed to growing these successful partnerships and expanding our offering to additional black-owned brands across both the Sally Beauty and BSG businesses.
Fourth, now that we have JDA, our new merchandising and supply chain platform, and our new North Texas distribution center, both up and live on a limited scale, our focus will be on expanding both of these initiatives.
Once fully rolled out, JDA will improve product assortment by store location, improve out-of-stocks and greatly improve visibility and forecasting of inventory.
Once fully functional, the North Texas DC will be our first distribution center that services all channels for both business segments and will deliver the benefits of increased speed to market, lower operating costs and will reduce the demand on our other DCs in our network.
In summary, while we continue to operate in an uncertain environment, at Sally Beauty Holdings, we believe we are a stronger company with even greater ability to deliver long term sustainable growth, driven by our enhanced capabilities and how we connect with our customers digitally, through our loyalty and credit card programs and expanded differentiated offerings, our enhanced infrastructure and omnichannel capabilities, and increased talent base, all of which are supported by a strong balance sheet and cash flow.
The bottom line, the challenges we faced in 2020 has simply made us better.
They pushed us to accelerate our digital transformation to simplify and focus our business strategy and build a team that is prepared to win in a transformed retail environment.
I am delighted to be here to talk about the great work that the Sally Beauty Pro-Duo and Beauty Systems Group teams accomplished during the fourth quarter.
Consolidated same-store sales went up.
They increased by 1.3%.
Consolidated revenue was $958 million for the quarter, a decrease of less than 1% from the prior year.
The increase in same-store sales, led by our Sally Beauty U.S. and Canadian retail business was offset by COVID-19's modest impact on parts of our Beauty Systems Group business during the quarter, and a smaller store base with 23 fewer stores compared to the prior year.
Finally, we saw a favorable impact from foreign currency translation of approximately 20 basis points on reported sales.
During the quarter, brick-and-mortar traffic was choppy and was down from the prior year due to the lingering impact of COVID-19, but average basket remained up due to an increase in units per transactions and an increase in average unit retail, which happened alongside an increase in units in our core differentiated category of hair color.
As expected, customers are generally making fewer trips but buying more when they do come in and shop.
In contrast, we did see increased traffic to our digital channels.
At the start of the quarter, even with the vast majority of our store network back open, our global e-commerce business grew rapidly.
For the fourth quarter, e-commerce sales were $63 million, representing growth of 69% over the prior year, led by our Sally U.S. and Canadian e-commerce platform which delivered growth of over 113%.
Last quarter, we mentioned that during the peak of the COVID crisis, we had new e-commerce customers in our online U.S. retail channel that had signed up for our Sally Beauty Rewards loyalty program.
Retaining these new customers was obviously a key focus for us and in the fourth quarter, we saw repeat purchases from approximately 60% of that new customer group.
Similarly, last quarter we saw opportunity from competitor disruptions in the pro-channel where BSG saw 40,000 new hair color customers walk into our stores during the quarter.
During the fourth quarter, we saw repeat purchases from approximately 50% of those new customers.
Let's turn now to gross margin, which is a simple story.
It went up dramatically.
Consolidated gross margin for the quarter was 51.1%, which is the highest gross margin rate in at least eight years.
This represented a 150 basis point increase as compared to the prior year.
The improvement was expected and is a signal of our increasing retail fundamental capabilities.
It was driven primarily by better coordination and execution of fewer promotions across all businesses and an intentional positive mix shift toward higher margin categories like hair color in the quarter, but partially offset by a reduction in vendor allowances from fewer promotions and reduced inventory purchases.
Consolidated gross profit for the fourth quarter was $489.1 million, an increase of approximately $10 million from the prior year.
As a percentage of sales, selling, general and administrative expenses were 38.3% compared to 37.7% in the prior year, driven primarily by higher e-commerce delivery expenses, which were expected and are something that we're working speedily upon, continued transformation investments and the deleveraging impact of lower sales volume compared to the prior year.
GAAP operating earnings and operating margin in the fourth quarter were $119.7 million and 12.5%, respectively, compared to $116.1 million and 12%, respectively in the prior year.
After excluding charges related to the company's previously announced restructuring efforts in both years and COVID-19-related income in the current year from a Canadian wage subsidy, adjusted operating earnings and adjusted operating margin were $120.3 million and 12.6%, respectively compared to $115.3 million and 11.9%, respectively in the prior year.
Both GAAP and adjusted diluted earnings per share in the fourth quarter went up.
GAAP diluted earnings were $0.62 per share and adjusted diluted earnings were $0.63 per share, both compared to $0.58 in the prior year, representing growth of approximately 7% and 9%, respectively as compared to the prior year.
Stronger gross margin rate, lower income tax expense and a lower average share count all contributed, partially offset by modestly higher selling, general and administrative expenses, and an increase in interest expense.
In the fourth quarter, the company had net earnings of $70.2 million compared to $69 million in the prior year, an increase of 1.7%.
Adjusted EBITDA was modestly higher at $146.6 million in the quarter compared to $144 million in the prior year.
Adjusted EBITDA margin also increased to 15.3%.
Now, turning to segment performance.
Global Sally Beauty segment same-store sales increased by 1.7% for the fourth quarter.
The Sally Beauty business in the U.S. and Canada, which represent 80% of the segment sales for the quarter had a same-store sales increase of 3.7% in Q4.
Europe had a decrease in same-store sales for the quarter, while Latin America had a significant decline in same-store sales, given approximately 15% of the stores were closed for more than half the quarter due to COVID-19.
Our global Sally Beauty segment generated revenue of $577 million in the quarter, an increase of about 1% compared to the prior year, driven primarily by the increase in same-store sales, a favorable foreign exchange impact of approximately 40 basis points, partially offset by 42 fewer stores compared to the prior year.
Our global Sally Beauty e-commerce business continued to show strength with growth of 86% in the quarter, led by our U.S. and Canadian e-commerce platforms, which delivered growth of 113%.
For the quarter, gross margin for the accounting segment landed at 57.6%, an increase of 180 basis points compared to the prior year.
We saw Sally Beauty business in the U.S. and Canada also hitting a record gross margin level of 61%.
Segment operating earnings were $103.9 million in the quarter, an increase of 10.6% compared to the prior year, for all the reasons that I've just discussed.
Segment operating margin increased to 18% compared to 16.4% in the prior year.
Now turning to our Beauty Systems Group segment.
Total segment same-store sales increased by 0.6% for the quarter.
While we had higher expectations for the quarter from Beauty Systems Group, there were a number of headwinds impacting comp sales.
First, the COVID-19-related shut-downs of California salons in many counties in July and August had an unfavorable impact of approximately 90 basis points on the segment's same-store sales.
We also tested a variety of techniques in stores, which will set us up for success in subsequent quarters.
Net sales for the segment were $381 million in the quarter, a decrease of 3.3% compared to the prior year.
The decline in non-comp sales was driven by COVID-19.
COVID-19 and the necessary social distancing guidelines forced the cancellation of a significant trade show at which BSG sells goods.
It also constrained the reopening and velocity of customer appointments at our national chain customers.
We also saw the creation of full service back orders during the quarter resulting from some inventory gaps.
Finally, we saw an unfavorable foreign exchange impact of approximately 10 basis points.
BSG's e-commerce platform grew by 55% for the fourth quarter driven by consistent demand throughout the quarter.
BSG's gross margin increased by 60 basis points to 41.2% in the quarter, driven primarily by fewer promotions, but partially offset by lower vendor allowances.
Segment operating earnings for BSG were $50.6 million, a decrease of 14.4% compared to the prior year, driven primarily by the decrease in net sales, but partly offset by the increased gross margin rate.
Segment operating margin declined to 13.3% compared to 15% in the prior year.
Let's talk about cash.
We generated a lot of it.
During the fourth quarter, the company delivered cash flow from operations of $153 million, an increase of 31% compared to the prior year.
Payments for capital expenditures in the quarter totaled $21 million as we continued to invest against our business transformation.
Investments in the quarter included further work on our digital capabilities and e-commerce platforms, and optimizing our supply chain through our JDA and North Texas distribution center efforts.
Free cash flow was $131 million in the quarter, which represented a 67% increase as compared to the prior year.
I should note that we saw a significant cash benefit from a reduction in inventory, which carried over from Q3 into Q4.
The combination of our efforts to manage cash, purposeful SKU rationalization as part of our merchandising transformation, and some soft supplier disruption put us in a position where our inventory levels came down too far, and we are acting during Q1 to fix that.
More on that to come.
During the fourth quarter, the company used a portion of its cash to reduce its debt levels by $445 million, including paying off its outstanding balance on its revolving line of credit by $375 million, the entire FILO loan balance of $20 million and $50 million of the fixed portion of its Term Loan B. The company did not repurchase any shares during the quarter.
In addition, the company also completed a small acquisition in Quebec, Canada, which added 10 stores, 17 direct sales consultants and exclusive distribution rights to premier professional hair color and hair care brands such as Wella Professional and Goldwell.
At the end of the fourth quarter, the company remains in a very strong liquidity position with $514 million cash on the balance sheet and a zero balance on its $600 million revolving line of credit.
Generally, the company ended the quarter with a leverage ratio of 2.88 times, reflecting our significant cash balance.
For comparison purposes, the leverage ratio that we often cite, as defined in our loan agreement, where the impact of cash on hand is capped at $100 million for net debt calculation purposes was 3.79 times.
Turning to our consolidated full year financial results.
For the full fiscal year, consolidated same-store sales decreased by 8.1% due almost entirely to COVID.
Consolidated net sales were $3.51 billion, a decrease of 9.3%, driven primarily by the impact of COVID-19 shut-downs, operating 23 fewer stores and an unfavorable impact from foreign currency translation of approximately 10 basis points.
Global e-commerce sales grew by 103% compared to the prior year, once again led by our U.S. and Canadian e-commerce platforms, which delivered growth of 184%.
GAAP diluted earnings per share for the full fiscal year were $0.99, a decline of 56.2% compared to the prior year, driven primarily by the disrupted operations caused by COVID-19.
Adjusted diluted earnings per share, excluding COVID-19 net expenses in the current year and charges related to the company's transformation efforts in both years, were $1.22, a decline of 46% compared to the prior year.
For the full fiscal year, cash flow from operations was $427 million, an increase of 33% compared to the prior year.
Net payments for capital expenditures totaled $111 million.
Operating free cash flow was $316 million, an increase of 39% compared to the prior year.
For the full fiscal year, the company repurchased 4.7 million shares at an aggregate cost of $61.4 million.
Let's turn now to observations on fiscal year 2021.
Whether it is lingering COVID-19 concerns or how long it will take the economy to fully recover or possible follow on from the November elections, fiscal year 2021 will certainly present its share of twists and turns.
We can already see this in the current operational status of the fleet.
All stores in the United States and Canada are currently operating.
However, stores in the few metropolitan areas, like El Paso, can only operate as curbside locations.
Additionally, we are seeing occupancy restrictions in parts of New Mexico and Colorado.
Europe has been more aggressive.
We have seen stores in Belgium, Northern Ireland and Wales closed due to local restrictions, only to reopen shortly afterwards.
Currently, of our 450 stores in Europe, approximately 180 stores are completely closed due to COVID-19 restrictions with the remaining stores either fully open or operating curbside, where permissible.
The majority of the closures currently are in England and France.
The result is we are seeing e-commerce accelerate again in Europe, similar to what we saw back in the third quarter.
Given all of this, we are not able to provide detailed financial guidance for fiscal 2021.
However, the company can offer a couple of broad observations.
Without adjusting for the impact of COVID restrictions, which are impossible to predict, the company would expect that sales in 2021 should be higher than 2019, even with the fewer stores in the fleet.
While we can't predict COVID, we are far better prepared than we were in fiscal '19 or even in March of fiscal 2020.
Regarding our store fleet, the company has revised its short-term plans with respect to new stores.
The company now expects that net store count will be approximately flat for the year, with a small number of new stores being added to the footprint, which will be offset by a similar number of store closures as we optimize core locations.
The company will, however, take advantage of the current leasing environment and relocate approximately 70 stores.
Remodels were mostly put on hold for the time being.
We expect our digital business to continue to grow and are continuing to invest in that area.
The company expects continued strength in gross margins, particularly in the first three quarters compared to last year, and particularly in Sally Beauty U.S. and Canada.
The company expects SG&A investments will, on a full-year basis, rise to reflect our continued investments, particularly in labor and e-commerce distribution.
However, the company is working hard on offsets to those investments and use it as an area of opportunity with more work for us to do.
The company expects to continue to generate strong cash flow, so also expect to be back-end loaded, given the company's significant upfront investment in inventory that I referenced earlier.
Finally, let's address capital allocation.
Our priorities are relatively unchanged.
The company will invest in this business.
As I noted earlier in Q1, this will take a formidable investing in new inventory.
We will also continue our business transformation, though, with some efforts to scale back to reflect the uncertain environment until a vaccine is available.
We will continue to hold significant cash on our balance sheet while we monitor how COVID-19 plays out over the first and second quarters.
As we grow increasingly confident that the environment has stabilized to our satisfaction, we will consider deploying additional excess cash to reduce our debt levels in the direction of moving our leverage ratio to 2.5 times.
That all being said, as we look at the stock price versus our underlying business fundamentals, we may smartly consider share repurchases from time to time.
We have not repurchased any shares so far this fiscal year. | q4 gaap earnings per share $0.62.
q4 adjusted earnings per share $0.63.
will not be providing formal guidance at this time.
will provide perspective on outlook for coming quarters during earnings conference call.
qtrly positive same store sales growth of 1.3% for enterprise; up 3.7% for sally beauty u.s. and canada.
$445 million of debt reduction in quarter, with ample liquidity remaining.
to rollout 'buy online / pickup in-store' at all sally u.s. retail stores in november.
expanding 'buy online / pickup in-store' to beauty systems group stores in second half of fiscal year 2021. | 1 |
Actual results may differ.
Also in the remarks today, Mike, Chris and Tom will refer to certain non-GAAP measures.
Sales of $2.2 billion were up from $2.0 billion in the second quarter of 2020.
Diluted earnings per share of $3.20 was up significantly from $1.30 in the second quarter of last year and pension adjusted earnings per share for the quarter was $3.05.
New contract awards during the quarter were approximately $1.2 billion, resulting in a backlog of approximately $48 billion, of which approximately $24 billion is funded.
And Chris will provide some color on a few of the key awards for the quarter during his remarks.
Shifting to activities in Washington, we are pleased that the congressional markup process for fiscal year 2022 has begun in earnest, following the release of the President's budget request in May.
Of note, the budget requests continued recapitalization of the nation's strategic ballistic missile submarine fleet and supported funding for CVN 80 and CVN 81 forward class aircraft carriers, two Virginia-class submarines, one DDG 51 Arleigh Burke-class destroyer and LHA 9.
We were also pleased that a second DDG 51 class destroyer was included as the number one priority on the Navy's unfunded requirements list for fiscal year 2022, and we look forward to working closely with the Congress during the FY '22 markup process to urge support for the second DDG and other critical priorities, including the efficient production of amphibious warships.
In closing, slide four provides some key takeaways from the recently announced agreement to acquire Alion Science and Technology.
The team is preparing for closing of the transaction, and we are very excited about the addition of Alion to the HII family.
Alion is a perfect complement to our existing capabilities in the technology-driven defense and federal solutions space.
The solutions and products they provide are directly in line with the strategic focus that we have articulated for our Technical Solutions business and it enhances our technical capabilities and customer access in high-growth national security markets, including C5ISR, military training and simulation and next-generation technologies and solutions.
We firmly believe that Alion offers significant growth potential and represents an investment in capabilities that support the evolving DoD national security requirements, which, in turn, are expected to generate significant long-term sustainable value for our shareholders, our customers and our employees.
This was another solid operational quarter, and I'm very pleased with the consistent progress being achieved across our shipbuilding and technical solutions programs.
With that, let me share a few key contract awards and programmatic highlights from the business segments for the quarter.
At Ingalls, the team received a contract modification from the U.S. Navy for $107 million to provide additional long-lead time material and advanced procurement activities for amphibious assault ship LHA 9, which increases current funding on this ship to approximately $490 million.
Regarding the potential bundled acquisition of LHA nine with LPD 32 and 33, discussions are ongoing with the customer.
We believe that a bundled acquisition continues to be the most cost-effective method, a procurement of these critically important ships.
In addition, Ingalls was awarded a contract with a potential total value of $724 million over seven years for planning yard services in support of a variety of in-service amphibious class ships, including the LPD 17 San Antonio class and LHA six America class.
Shifting to program status, LHA eight Bougainville is making steady progress through the structural erection and initial outfitting phases of construction with cost and schedule performance in line with our expectations.
On the DDG program, the team successfully launched the first Flight III Arleigh Burke class guided missile destroyer, DDG 125, Jack H Lucas in June.
And DDG 121, Frankie Peterson Jr. is expected to conduct sea trials later this year.
On the LPD program, LPD 28 Fort Lauderdale is on track to conduct sea trials during the fourth quarter and LPD 29 Richard M. McCool Jr. continues to achieve production milestones in support of launch early next year.
At Newport News, there were no significant contract awards to highlight for the quarter, so I will go right on to program status.
CVN-79 Kennedy is approximately 83% complete, and the team remains focused on compartment completion and key propulsion plant milestones.
CVN 73 USS George Washington is approximately 90% complete, and the team remains focused on achieving key test program milestones to support redelivery to the Navy, which is planned for next year.
On the DCS program, the team completed shipment of the final module of SSN 797 Iowa during the quarter.
In addition, SSN 794 Montana remains on track for delivery to the Navy later this year, and SSN 796 New Jersey remains on track to achieve the float-off milestones as planned in the second half of this year.
And finally, on the submarine fleet support program, SSN 725 Helena is on track for redelivery to the Navy later this year.
At Technical Solutions, contract awards of REMUS 300 unmanned underwater vehicles during the quarter to the U.S. Navy and Royal New Zealand Navy affirmed the flexibility and modularity of these units.
TS was also recently awarded a $273 million cost plus fixed fee indefinite delivery, indefinite quantity contract to support maintenance and planning for the overhaul and repair of equipment and systems associated with the Navy aircraft carriers and West Coast Navy surface ships.
In addition, TS was awarded a contract with a 1-year base period and four 1-year options with a total potential value of $346 million to provide a variety of aircraft and operational support services for USAFRICOM, included planning, management, maintenance, logistics and airlift airdrop services and emergency medical care.
Execution within Technical Solutions remains consistent with expectations except for delays in awards in our unmanned business for critical new programs, which we expect to be resolved by the end of the year.
As I close, note that we have included upcoming key program milestones on slide five.
There are no changes from what we have previously provided other than designated those milestones that have been completed with the checkmark.
Today, I'll briefly review our second quarter results.
This was primarily due to the growth of Newport News and Ingalls and was partially offset by a decline at Technical Solutions due to the portfolio shaping actions we have taken.
Segment operating income for the quarter of $169 million increased $174 million compared to the second quarter of 2020 and segment operating margin of 7.6% compared to a segment operating margin of negative 0.2% of the second quarter of 2020.
The prior year results were negatively impacted by the Virginia-class submarine program performance as well as impacts related to COVID-19.
Operating income for the quarter of $128 million increased by $71 million from the second quarter of 2020 and operating margin of 5.7% increased 293 basis points.
These increases were primarily driven by the segments I just mentioned, partially offset by a less favorable operating FAS/CAS Adjustment.
The tax rate in the quarter was approximately 19.9% compared to 18.5% in the second quarter of 2020.
The increase in the tax rate was primarily due to adjustments related to research and development tax credits recorded in the second quarter of 2020.
Net earnings in the quarter were $129 million compared to $53 million in the second quarter of 2020.
Diluted earnings per share in the quarter were $3.20 compared to $1.30 in the second quarter of 2020.
Excluding the impacts of pension, diluted earnings per share in the quarter were $3.05 compared to a loss of $0.49 per share in the second quarter of 2020.
Cash from operations was $96 million in the quarter, and net capital expenditures were $73 million or 3.3% of revenues resulting in free cash flow of $23 million.
This compares to cash from operations of $201 million and $75 million of net capital expenditures or free cash flow of $126 million in the second quarter of 2020.
Cash contributions to our pension and other postretirement benefit plans were $12 million in the quarter, principally related to postretirement benefits.
During the second quarter, we paid dividends of $1.14 per share or $46 million and repurchased approximately 95,000 shares at a cost of $20 million.
Ingalls revenues in the quarter of $670 million increased $48 million or 7.7% from the same period last year, driven primarily by higher revenues on the DDG program and amphibious assault ships partially offset by lower revenues on the NSC program.
Ingalls operating income of $80 million and margin of 11.9% in the quarter were up from the second quarter of 2020, driven by the recognition of a capital investment related incentive for the DDG program that was recognized in DDG-125 as well as higher risk retirement from the LHA 8, LP 28 and LP 29 ships.
Newport News revenues of $1.4 billion in the quarter increased $241 million or 21.5% from the same period last year due to higher revenues in both the submarine and aircraft carry construction.
Newport News operating income of $76 million and margin of 5.6% in the quarter were up year-over-year, primarily due to the impacts related to the Virginia class performance and COVID in the prior year period.
Now to Technical Solutions on slide 10.
Technical Solutions revenues of $237 million in the quarter decreased 25.9% from the same period last year mainly due to the divestiture of the oil and gas business and the contribution of the San Diego shipyard through a joint venture in the first quarter of this year as well as lower volumes in unmanned systems, partially offset by increases in volumes in the Defense and Federal Solutions.
Technical Solutions operating income of $13 million in the quarter compares to income of $9 million in the second quarter of 2020.
This increase was primarily driven by higher equity income related to our ship repair partnership with Titan as well as improved performance at Defense and Federal Solutions and Nuclear Environmental Services, partially offset by lower volumes in the unmanned systems.
Finally, a perspective on the outlook of the shipbuilding for the remaining part of the year.
We continue to see limited opportunities for risk retirements in the third quarter with the remainder of the milestones weighted toward the end of the year.
Given the strong performance in the first half of the year, we now expect that the shipbuilding margin for the full year will be in the 7.5% to 8% range.
We continue to expect the Alion acquisition will close in the coming weeks and that we will incur approximately $25 million of onetime pre-tax transaction and financing-related expenses in 2021.
We completed the syndication of the term loan component of the acquisition funding earlier this week, and more details of the specifics are available in the 10-Q.
We will provide a more comprehensive update on our 2021 outlook for Technical Solutions on our third quarter call following the closing of the acquisition.
As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. | compname reports q3 earnings per share $0.07.
q3 earnings per share $0.07.
qtrly earnings per share $0.07. | 0 |
On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
We're off to a strong start in 2021 with solid execution in our first quarter that highlights our ability to strike an effective balance between capturing demand in this robust housing market and measurably increasing our margins.
We are poised for profitable returns-focused growth this year based on a number of factors, most notably, our backlog, both its composition and size, the success of our newly opened communities and a compelling lineup of planned openings for the remainder of the year.
As to the details of the quarter, we generated total revenues of $1.14 billion and diluted earnings per share of $1.02, up 62% year-over-year.
Our housing revenues were at the low end of our guidance range due to the weather disruption in Texas which shifted some deliveries from our first quarter into our second quarter.
Texas is our largest market by units and the severe weather shut down our operations for roughly 10 days in mid-February.
We resumed activity in our communities by the last week of the month and nearly all of the impacted homes have already been delivered.
Our profitability was substantially higher year-over-year with a more than 400 basis point increase in our operating income margin to 10.4%, excluding inventory-related charges.
This result was driven by several key factors.
First, strong demand for our personalized products at affordable price points and our success in balancing pace and price; second, operating leverage from increasing our community absorption rate and the resulting higher revenues; third, the ongoing benefit from the cost containment efforts we put in place last spring; and finally, the continuing tailwind from lower interest amortization.
Our profitability per unit grew meaningfully to over $41,000 in the first quarter, 73% higher than in the prior-year period.
These results are also generating a healthy level of operating cash flow to fuel the expansion of our scale.
In the first quarter, we increased our land investments by 37% year-over-year to roughly $560 million.
We grew our lot position by approximately 3,000 lots since year-end to nearly 70,000 lots owned and controlled and maintained our option lots at 40% of our total.
We own and control all the lots we need to support our growth target for 2022.
And although we remain opportunistic in seeking additional lots that can provide deliveries next year, we are now primarily approving land acquisition for deliveries in 2023 and beyond.
We are achieving our objectives in growing our lot count with a higher-quality portfolio of assets and increasing our returns all at the same time.
A healthy tension exists within our divisions as they work to expand their business while staying on strategy.
We have experienced land teams in our markets who have strong local relationships with land developers and sellers and we continue to see good deal flow that meets our investment criteria.
Although every acquisition is different requiring a tailored set of assumptions regarding the sub market, the number of lots, the type of product we plan to offer and the price point, we are generally underwriting our deals to a monthly absorption of between four and five.
We're being prudent with our investment yet opportunistic with pace and price based on market conditions once each community opens.
Our long-standing approach has been to underwrite in today's dollars and as such our land deals reflect our current ASPs as well as our current costs and assume no future price appreciation or cost inflation.
Geographically, we remain in close proximity to where we've been investing in land over the past couple of years entering neighboring submarkets in order to grow our scale but without moving to the more remote submarkets of each city.
Our Las Vegas business provides a good example of this strategy.
This division has increased its annual deliveries by almost 50% in the last three years and has achieved the number one ranking in the market.
We have a large business in Henderson and in Inspirada and we are well established in Summerlin.
To expand further we are investing more heavily in the Northwest and Southwest areas adjacent to our existing submarkets which still offer good schools, shopping and amenities at more affordable prices.
In terms of deal size, we continue to acquire lots that typically represent a one to two-year supply per community, consistent with our approach over the past several years.
We remain on track with respect to our 2021 and 2022 community count goals that we shared with you in January as we execute on our growth plan.
In the first quarter, we successfully opened 22 new communities out of the approximately 150 openings we anticipate for this year.
As we look to the remainder of 2021, we continue to expect a sequential increase in our ending count each quarter and year-over-year community count growth in the fourth quarter.
We remain well positioned to extend this growth into 2022 and still expect year-over-year community count expansion of at least 10% next year.
Our monthly absorption per community accelerated to 6.4 net orders during the first quarter, a year-over-year gain of 39%.
We achieved this sales rate, even as we raised prices in the vast majority of our communities and managed lot releases in order to balance pace, price and starts as we optimize each asset.
Municipalities have increased our capacity for processing permits, heightening our ability to accelerate our starts, which were up 40% year-over-year in the first quarter.
Going forward, we expect to continue matching starts to our order rates.
While we remain sensitive to affordability levels, throughout the past year we have utilized price as our primary mechanism to manage our sales pace and to cover construction costs, which are under some pressure right now.
That being said, our ASP expectation for this year reflects only mid single-digit percentage growth year-over-year.
This modest increase in our blended ASP reflects our effective approach to our community locations and product positioning to help maintain affordability.
We are targeting the median household income in each submarket and with our built-to-order approach we provide the consumer flexibility in floor plan size and price, enabling them to quickly adjust their purchase decision if interest rates increase further.
We strive to position our communities below the new home median price and at a reasonable premium to an older resale home.
Each of our division is aligned with this strategy and in some cases, we are finding that we are actually below median resale levels as well, given the steeper appreciation in price that the existing home market has experienced.
We offer floor plans below 1,600 square feet in approximately 75% of our communities.
However, the median square footage of our homes in backlog is almost 2,100 square feet which is consistent with the median footage of homes we delivered in 2020.
Buyers are not adjusting the size of the homes they are purchasing nor have they reduced their spend in our design studios, which tells us that even with the uptick in rates affordability remains favorable.
As to overall market conditions, supply remains tight with existing home inventory down nearly 30% year-over-year.
Resale home availability is sitting at record low levels representing two-month supply and further below that level in many of our markets.
This combined with the under production of new homes over the last decade has resulted in supply being virtually non-existent.
In terms of demand, mortgage rates while higher relative to where they were in January, are down year-over-year and remain attractive generally around the low 3% range for a 30-year fixed-rate mortgage.
Most notably, demographic trends are favorable especially with respect to first-time buyers as over 70 million millennials are in their prime homebuying years with an even larger Gen Z cohort right behind them now entering their homebuying age.
As a result of all these factors, but particularly the strong demographics, we believe demand will stay healthy for the foreseeable future.
Net orders in the first quarter grew 23% year-over-year to nearly 4,300, a solid result given the strength in net orders that we experienced in the prior year's first quarter.
Net orders increased as the quarter unfolded reflecting typical seasonal trend and remained at high levels exiting the quarter.
We produced double-digit growth in each of our four regions as demand for our affordable price points remained robust across our footprint.
We continue to observe trends in our underlying order data that are consistent with the patterns that emerged in the second half of last year.
Buyers favored a personalized built-to-order home and millennials represented our largest segment of buyers.
The increasing presence of this cohort in our order activity is naturally translating into a higher percentage of deliveries to first-time buyers at 65% of our deliveries in the first quarter up 11 percentage points year-over-year.
The pent-up demand among first-time buyers and their ease of mobility is an advantage for us given our expertise in serving these buyers along with our location, products and price points.
We offer features in our homes that today's consumers value.
A prime example of these features is our advanced energy efficiency which helps to lower the total cost of homeownership.
We lead the industry in building ENERGY STAR certified new homes having delivered more than 150,000 of these homes to date as well as over 11,000 solar-powered homes.
As a result of our leadership, we were the only national homebuilder to be named to Newsweek's 2021 list of America's Most Responsible Companies in recognition of our leading ESG practices.
We were the first national builder to publish an Annual Sustainability Report and we are excited to share our latest achievements in the 14th edition of our report which is scheduled for release in conjunction with Earth Day next month.
Our backlog value grew substantially in the first quarter to $3.7 billion.
The 9,200 homes we have in backlog together with our first-quarter deliveries represent about 85% of the deliveries that were implied in our full year outlook we provided in January.
With housing market conditions still healthy, our ability to manage starts with sales and reasonable build times, we are confident that we can exceed our original volume expectation for this year.
This is driving our full-year revenue guidance higher, which Jeff will discuss momentarily.
On the mortgage side, our joint venture, KBHS Home Loans, continued its strong execution for our customers.
Our JV handled the financing for 79% of our deliveries in the first quarter, up 8 percentage points year-over-year, producing a significant increase in its income.
Consistent with the past few years, conventional loans represented the majority of KBHS volume and the credit profile of our buyers remained very healthy with an average down payment of about 13% and an average FICO score of 724 which is striking considering our high percentage of first-time buyers.
As we continue to accelerate our revenue growth over the balance of this year, we expect our income stream from the JV will grow as well.
We are positioned for remarkable 2021 and achieving our objectives of expanding our scale and improving our profitability while driving a meaningfully higher return on equity which we now anticipate will be above 18%.
I'd like to take a moment to recognize the outstanding team of individuals that are producing our strong results.
We were gratified to be recognized by Forbes in its 2021 list of America's Best Midsize Employers, again the only national builder receiving this honor.
In closing, we remain mindful that the pandemic is still present.
However, we are encouraged by the progress we are making as a country to emerge from it.
We are energized by how our year is shaping up and look forward to updating you on our progress.
I will now cover the highlights of our 2021 first quarter financial performance, as well as provide our second quarter and full-year outlook.
We are very pleased with our first quarter results with higher housing revenues and considerable expansion in our operating margin driving a 62% increase in our diluted earnings per share.
In addition, strong net orders in the quarter combined with our substantial beginning backlog resulted in a 74% year-over-year increase in our quarter-end backlog value supporting our raised revenue and margin outlook for 2021.
In the first quarter our housing revenues of $1.14 billion rose 6% from a year ago, reflecting increases in both homes delivered and the overall average selling price of those homes.
Looking ahead to the 2021 second quarter, we expect to generate housing revenues in the range of $1.42 billion to $1.5 billion.
For the full year, we are forecasting housing revenues in the range of $5.7 billion to $6.1 billion, up $150 million at the midpoint, as compared to our prior guidance.
We believe we are well positioned to achieve this top line performance supported by our first quarter ending backlog value of approximately $3.7 billion and our expectation of continued strong housing market conditions.
In the first quarter, our overall average selling price of homes delivered increased 2% year-over-year to approximately $397,000 reflecting variances ranging from a 5% decline in our West Coast region to an 11% increase in our Southwest region.
The West Coast decline was mainly attributable to product and geographic mix shifts of homes delivered.
For the 2021 second quarter we are projecting an average selling price of approximately $405,000.
We believe our overall average selling price for the full year will be in the range of $405,000 to $415,000, a relatively modest year-over-year increase and a result of our focus on offering affordable product across our footprint.
Homebuilding operating income for the first quarter increased 90% to $114.1 million from $60.2 million for the year-earlier quarter.
The current quarter included inventory related charges of $4.1 million versus $5.7 million a year ago.
Our homebuilding operating income margin improved to 10% compared to 5.6% for the 2020 first quarter.
Excluding inventory related charges, our operating margin for the current quarter increased 430 basis points year-over-year to 10.4%, reflecting improvements in both our gross margin and SG&A expense ratio which I will cover in more detail in a moment.
For the 2021 second quarter, we anticipate our homebuilding operating income margin, excluding the impact of any inventory related charges, will be in a range of 10% to 10.5%.
For the full year, we expect this metric to be in a range of 11% to 11.8%, which represents an improvement of 310 basis points at the midpoint, as compared to the prior year.
Our 2021 first quarter housing gross profit margin improved 340 basis points to 20.8%.
Excluding inventory related charges, our gross margin for the quarter increased to 21.1% from 17.9% for the prior-year quarter.
This improvement reflected the favorable impact of selling price increases outpacing construction cost inflation, increased operating leverage on fixed costs and lower amortization of previously capitalized interest.
Assuming no inventory related charges, we are forecasting a housing gross profit margin for the 2021 second quarter in a range of 20.5% to 21.1%.
We expect our full year gross margin, excluding inventory related charges, to be in a range of 21% to 22%, an improvement of 70 basis points at the midpoint compared to our prior guidance and up 190 basis points year-over-year.
Our selling, general and administrative expense ratio of 10.7% for the first quarter reflected an improvement of 110 basis points from a year ago, mainly due to the continued containment of costs following overhead reductions implemented in the early stages of the COVID-19 pandemic, lower advertising costs and increased operating leverage from higher housing revenues.
We are forecasting our 2021 second quarter SG&A ratio to be in a range of 10.4% to 10.8%, a significant improvement compared to the pandemic impacted prior-year period as we expect to realize favorable leverage impacts from an anticipated increase in housing revenues.
We still expect that our full year SG&A expense ratio will be approximately 9.9% to 10.3%, which represents an improvement of 120 basis points at the midpoint compared to the prior year.
Our income tax expense of $26.5 million for the first quarter represented an effective tax rate of approximately 21% and was favorably impacted by excess tax benefits from stock-based compensation and federal tax credits relating to current-year deliveries of energy-efficient homes, the cornerstone of our industry-leading sustainability program.
We currently expect our effective tax rate for both the 2021 second quarter and full year to be approximately 24%, including the impact of energy tax credits relating to current-year deliveries.
Overall, we reported net income of $97.1 million or $1.02 per diluted share for the first quarter compared to $59.7 million or $0.63 per diluted share for the prior-year period.
Turning now to community count.
Our first-quarter average of 223 was down 11% from the corresponding 2020 quarter primarily due to strong net order activity driving accelerated community close-outs over the past 12 months.
Consistent with our forecast, we ended the quarter with 209 communities, down 16% from a year ago.
We believe our quarter-end community count represents the low point for the year as grand openings are expected to outpace close-outs during each of the remaining quarters.
While we expect this dynamic to result in a sequential increase of five to 10 communities by the end of the second quarter, we anticipate our second-quarter average community count will be down by a low to mid double-digit percentage on a year-over-year basis.
We currently expect continued strong market conditions to drive an elevated number of community close-outs during the remainder of the year resulting in a single-digit year-over-year percentage increase in our community count at year-end.
However, we remain very focused on our goal meaningfully growing our community count.
Given our land pipeline and current schedule of community openings, we are confident that we will achieve at least a 10% increase in our 2022 community count to support further market share gains and growth in housing revenues.
During the first quarter to drive future community openings, we invested $556 million in land and land development including a 43% year-over-year increase in land acquisition investments to $275 million.
At quarter-end total liquidity was approximately $1.4 billion, including $788 million of available capacity under our unsecured revolving credit facility.
We had no borrowings under the credit facility in the 2021 first quarter.
Our debt-to-capital ratio was 38.9% at quarter-end and we expect continued improvement through the end of the year.
We still expect strong operating cash flow in the current year to fund levels of land acquisition and development investment needed to support our targeted future growth in community count and housing revenues.
Given our current community portfolio and backlog, along with expected ongoing strength in the housing market, we continue to expect significant year-over-year improvement in our revenues, profitability, credit and return metrics in 2021.
In summary, using the midpoints of our new guidance ranges, we expect a 42% year-over-year increase in housing revenues and significant expansion of our operating margin to 11.4% driven by improvements in both gross margin and our SG&A expense ratio.
In addition, achieving our new revenue and profitability expectations would drive a return on equity of over 18% for the year.
These expected results reflect our view that continued emphasis on our returns-focused growth strategy will enable us to further enhance long-term stockholder value.
Please open the lines. | kar auction services - for 2021, co expects net income from continuing operations of at least $90 million and adjusted ebitda of at least $475 million. | 0 |
I'll start by talking a little bit about the environment, the economy then we'll get into our numbers.
Since we last talked to you three months ago really three big things have happened in terms of reducing uncertainty and reduced uncertainty is a good thing, always a good thing.
So the first and foremost and probably the biggest news of last year was the vaccine, which came out in November and is now being administered.
Obviously, we had the election uncertainty last time, we're past that now.
We also had the stimulus, which compared to the other two news is small news but nevertheless positive news.
We weren't expecting a stimulus to get done until the new administration takes over.
But I'm glad it was passed a few days -- a few weeks ago.
So with that as I look through 2021 it feels like a year with a very, very strong potential in the second half of the year possibly starting as early as second quarter.
But I do see a slow first quarter as all this good news is great but it actually has to get converted into reality.
The biggest risk obviously still remains vaccine distribution and to some extent a new variant of coronavirus.
There is still some uncertainty around it, but a hell of a lot less than this time 90 days ago.
So we're feeling very good as we put together our budget for the year.
We basically took assumptions that first quarter is always a slow quarter for us, but this year will be slow as well for all the reasons I just stated.
But then pipeline start to build up and we started executing on a growth strategy somewhere in the second quarter, but really bringing it in, in the second half of the year.
Quickly looking back to this quarter, I'm very happy with the results where we announced $0.89 per share or $85.7 million in earnings.
That compares to $0.70 last quarter.
And if you compare to the fourth quarter of 2019, which feels like a 100 years ago, it was $0.91.
So not bad for what we've gone through this year to come out just very close to where we were fourth quarter of 2019 from an earnings per share perspective.
Sorry, NII was $193 million and change, which was $6 million more than our last quarter, about $8 million more than fourth quarter of 2019.
PPNR was down by $10 million compared to the last quarter, but showed a little increase compared to the fourth quarter of a prior year.
Leslie will walk you through this, but there are some unique items in this in the expense category mostly having to do with compensation.
We had reduced our variable compensation accrual quite dramatically in the second and third quarter.
And we've adjusted that back up, not all the way back up, variable competition will still be much lower than in previous years, but just not at the rate as we were accruing in the second and third quarter.
That's one part of that adjustment.
There's some -- we made a change in policy to give rollover pay time off due to the circumstances wherein to our employees that costs a couple of million bucks and then there's an accounting thing, which Leslie will walk you through -- smart enough to walk you through that.
The big story obviously continues to be deposit generation as well as deposit costs.
We had another solid quarter.
Total cost of deposits declined by 14 basis points.
We were at 57 basis points last quarter.
This quarter we ended up at 43 basis points.
And if you look at our stock cost of funds at December 31, we were at 36 basis points.
So in other words we're starting this quarter already at 36 basis points and working our way down from there.
So I feel pretty good that this quarter will be another very strong quarter in terms of reducing cost of funds.
I think we'll end up in the low 30s and on a spot basis I feel pretty confident that we will end up with a two handle.
So that's sort -- the one side but also our average DDA -- non-interest DDA grew by $966 million, which is again very, very strong.
I will repeat what I've always said.
One quarter doesn't make anything.
You should always look at four quarter average or four quarter -- or last 12 month numbers to really get a feel for how the business is doing.
But no matter how you look at it this last four quarters or the last quarter has just been a very, very strong performance in the deposit side.
Our non-interest DDA now stands by the way at over 25%.
And I think a year ago we were at 18%.
Still more work to be done here.
We are expecting this trend to continue into next year and for us to slowly work our way toward 30% DDA.
As we had predicted, risk rating migration has slowed quite significantly.
I think for the first nine months of 2020 there was downward rating migration on $2.1 billion in loans.
This quarter it was $169 million.
Provisioning came down very, very materially.
In fact, we have a net recovery of a small number of $1.6 million.
Also we had reported back in the summer, $3.6 billion in loans that were on deferral, if you remember.
That number is now down to $207 million or about 1% of total loans.
We do have $587 million in loans that were modified under the CARES Act.
As you know, under the CARES Act, we don't -- these don't show up as TDRs.
But nevertheless these modifications by the way are mostly IL modifications or 9 months to 12 months.
A lot of these modifications are in the CRE, the hospitality portfolio, the hotel portfolio.
And we believe that most borrowers who are going to come to us for temporary relief or deferral have been identified at this point.
NPLs ticked up a little bit to $244 million, which is about 1.02% of loans but excluding the government guarantee sort of SBA loans that are in this bucket if you take that out, it's about 80 basis points.
In our C&I sub-segment, actually NPLs declined.
The net charge-off rate was stable at 26 basis points for the year.
Let's talk a little bit about NIM.
NIM was 2.33% for the quarter, I think last quarter was 2.32%, so 1 basis point improvement.
Total loans grew by $87 million and deposits grew $899 million total of which $219 million was non-interest DDA.
These are spot numbers.
What I gave you earlier was average DDA.
Book value is now up at $32.05, which is higher than what it was at this time last year, it was $31.33.
Capital position is strong.
The board met yesterday and reinstated our share buyback program.
If you remember when we started we still had about $45 million left.
So, that hardly has been unfrozen.
And then, the board wants us to get to this and then we'll meet again to talk about additional repurchases.
Capital is -- CET1 is at 12.6% at holdco, it's 13.9% at the bank, and we, of course, declared our usual $0.23 per share dividend.
Strategy for return to work; let me talk a little bit about this and going forward, not much has changed in terms of our positioning for return to what we still are working remotely and we expect to do that for at least the next two or three months and then make a decision beyond that at that time.
There have been multiple other cases in the company as you would expect in this quarter than in previous quarters, but none that are serious enough to have impacted any of our operations.
The strategy going forward again, we're waiting very anxiously for economic activity to pick up and for us to start participating in the next business cycle, which as we speak at the beginning right about now.
The focus will stay the same, which is to build a relationship-based commercial bank with a focus on small and middle market businesses, stay focused on building core business through non-interest DDA, identifying niche markets that the big guys don't pay much attention to, investing in technology and innovation and not just in branches and locations.
The game has really become about technology and solving customer pain points through innovation.
Also we haven't lost sight of all the initiatives we had in 2.0.
That was not just an exercise in time that you do and then forget about.
It really was about changing the culture and we will keep pushing forward on that front as well.
We did launch a new initiative earlier last year.
It's called iCARE, which stands for Inclusive Community of Advocacy Respect and Equality.
It is something that -- have been in the works since summer of last year, when we really announced it inside the company about two, two and a half months ago and gotten a very positive feedback.
It really is our effort as an organization to push and build a culture that celebrates and intentionally promotes diversity within the bank.
This is not just words.
This is, we're putting our money where our mouth is and taking on initiatives.
We think if we can do our bit and move things in the right direction by an inch and everyone does that, it will make a big difference in society.
So we're very excited about this.
Our employees are very excited about this and more to come on this in the future.
Let me see here.
Let me turn this over to Tom.
And he will walk you through a little more on the business side before Leslie gets into the numbers.
So let me start with deposits and a little bit more detail on the deposit book.
As Raj mentioned, total deposits grew by $899 million for the quarter and non-interest DDA grew by $219 million for the quarter.
So the deposit mix continues to improve.
We allowed higher cost deposits to run off this quarter, which we continued to do for the last few quarters as time deposits declined by $1.1 billion for the quarter.
A little bit more detail on cost of funds.
So the total cost of funds plus cost of deposits declined to 43 basis points this quarter.
On a spot basis, the APY on total deposits was 36 basis points at December 31, which was down from a spot of 49 basis points at September 30, when compared to last year at December 31 it was 142 basis points.
So they continued progress there.
The spot rate on interest bearing deposits was 48 basis points as of December 31 compared with 65 basis points at September 30 and 171 basis points a year ago.
So we're seeing reductions in cost of deposits across all lines of business across all products that continues to be a very broad-based trend.
As we think about December 31, 2020, we had $1 billion of CDs in the book at an average rate of 1.61% that had not yet repriced since the last Fed cut in March of 2020.
So in the first quarter of this year, we have a significant amount of that just under $800 million that will reprice in this quarter.
Additionally, some CDs that matured and repriced early in the cycle will also reprice down again at their next maturity date.
So there's a very significant difference between what these will reprice at our current rates or running about 25 basis points.
So we right now continue to see good healthy pipelines and opportunities for core deposit growth across all business lines.
It's always a little bit more difficult to size deposit pipelines and timing of treasury management relationships coming onboard, but we continue to expect growth in non-interest DDAs at the levels that we're seeing now.
It's likely we'll see more time deposits run off at the same time as the mix of the overall book will continue to improve.
We are seeing some of the maturing CDs move into money market category as well, but obviously at significantly lower rates.
Switching to the loan side, as Raj mentioned in aggregate, total loans grew by $87 million in the fourth quarter and operating leases declined by $13 million.
Just a little bit more detail on some of the segments, the residential portfolio grew by $408 million in the fourth quarter, of that $330 million was in the Ginnie Mae EBO segment.
Mortgage warehouse continued to perform well.
Total commitments grew by $90.5 million for the quarter and we ended the year at a little over $2.1 billion in mortgage warehouse commitments so the entire quarter and year was obviously very strong in the mortgage warehousing area.
In the aggregate, commercial real estate loans declined by $89 million for the quarter, multi-family declined by $171 million of which $151 million was in the New York market.
So beyond that, we had overall expansion in other segments of the real estate business, obviously.
If we look at loans and operating leases in aggregated BFG, including both franchise and equipment, we're down this year by -- down for the quarter by $124 million, given the COVID impact on the BFG portfolio in particular especially the franchise.
We've been focusing our efforts over the last couple of quarters really on portfolio management and exposure reduction versus new production.
So if we look into 2021 a bit and kind of break down sort of what we see happening in the different business lines.
We expect to see continued strong growth in the Ginnie Mae, EBO, and mortgage warehousing businesses.
We expect to see the C&I business start to return to a more normalized growth mode as the economy picks up and the vaccines and so forth are distributed.
We're seeing that as a high-single-digit growth for 2021 predominantly in the back end of the year.
We're forecasting a low-single-digit decline in CRE for 2021.
We continue to have some concerns about valuations in certain segments of the portfolio.
Clearly the hotel and retail segments will be challenged for a good portion of this year.
Small business lending is an area we expect to see good growth in 2021.
We've invested a lot of our technology and time and expanding small business area.
And in the franchise area, we expect to see that continue to run off probably in the 20% kind of range in 2021 as we continue to work through that.
Pinnacle is expected to decline slightly mid-single digits but that may turn around if there are changes in corporate tax rates with the competitive landscape right now from an interest perspective.
Switching a little bit to the -- give you an update on PPP, I think the overall PPP process is going well.
We're in the forgiveness stage of -- on 3,500 loans that we originally made in round one to PPP, that's going very smoothly.
We probably have about 700 loans so far that have been forgiven and we expect that to continue in the first quarter of 2021.
And we're participating in the Second Draw program to eligible businesses who were given First Draw PPP loans that just recently opened and we'll be open for clients in that phase.
We're expecting maybe a 50% to 60% Second Draw request from clients that we had in the First Draw.
So overall, I think PPP is going well.
Some additional comments around loans that we've granted deferrals and I'd refer you to slide 16 in the supplemental deck for more detail around this as well.
So starting commercial, only $63 million of commercial loans were still under short term deferral at December 31.
$575 million of commercial loans had been modified under the CARES Act.
So taken together this was $638 million or approximately 4% of the total commercial portfolio as of December 31.
Not unexpectedly the portfolio segment most impacted has been the CRE Hotel segment, where $343 million or 55% of the segment has been modified as of December 31.
I would remind you that the majority of our hotel exposure is in Florida.
The majority is in leisure properties.
And so those are the segments that we're expecting to see rebound a bit more.
And over the last few months, we've seen occupancy tick up to much better levels than we had seen a few months previous to that.
And so we see in that segment more travel and leisure coming up and we also see some surveys that we've read recently about companies returning more back to the business travel segment as well.
Our hotel book isn't really a business travel segment, but overall, we see the travel markets improving as we get into further deeper into 2021.
On the franchise side, 8% or $46 million of the franchise portfolio was on short-term deferral or had been modified as of December the 31 compared to $76 million or 12% that were on short-term deferrals as of September 30 and 74% that were granted initial 90-day payment deferrals.
$48 million or 67% of our cruise line exposure has been modified under the CARES Act of December 31.
Almost 80% of the total commercial deferrals and modifications and almost 60% of the total loans risk rated substandard or doubtful are from portfolio segments that we had initially identified as -- meeting of heightened monitoring due to potential impacts from the pandemic.
So it continues to be those same segments that we're seeing all of this activity and we don't at this point see really any level of difficulties coming from other segments than the ones that we had at first identified.
On the residential side, excluding the Ginnie Mae early buyout portfolio, $144 million of loans are on short-term deferral, an additional $12 million had been modified under a longer-term CARES Act repayment plan at December 31.
This totaled about 2% of the residential portfolio.
Of the $525 million in residential loans that were granted at initial payment deferral, $144 million or 27% are still on deferral, while $381 million or 73% of those loans have now rolled off.
Of those that have rolled off, $362 million or 95% are now making regular payments while only 5% or $19 million have not resumed a regular payment program.
Just as a reminder, when we refer to loans modified under the CARES Act we're referring to loans that have been excluded from modifications other than short-term deferrals and these are loans that if not for the CARES Act would likely to be classified as TDRs.
As Raj said most of these have taken the form of 9 to 12 months interest only deferrals.
Within the CRE portfolio we're still seeing overall good rent collections in the office market.
Depending upon the geography we're seeing 90% or so in the New York market, 97% in Florida.
So we think the office collection rate is still running very well.
Multi-family collections are running 90% in New York and about 96% in Florida and for our larger retail loans we're seeing -- sort of low 90% rates in the retail space.
Little bit more on what I mentioned earlier on hotel occupancy in the Hospitality segment.
All of our properties in Florida are now open.
And two of the three properties that we have in New York are open.
In Florida, we're continuing to see improvement in occupancy.
We saw about a 46% average occupancy rate for the quarter.
December is obviously a stronger travel month in Florida and we're coming into the better part of the season.
In December, we saw occupancy rates in some areas as high as the 60% range.
But generally we saw upper 40s to low 50s.
So the Hotel segment is gradually showing some improvement there.
A little bit more detail about what we're seeing in the franchise space and in the fitness space.
So as we've said before when we look at concepts where there's significant drive through delivery capability those tend to be doing well.
Things like pizza, chicken other more popular QSR concepts are doing very well.
Many are posting now double-digit same-store sales increases.
In-dining concepts are obviously still struggling a bit and that's where we see some softness.
Certain segments are a little bit divided depending upon whether those concepts in certain locations have delivery type economic models or whether they're in malls or things like that.
Those are a little bit up and down.
But overall we're seeing improvement within the franchise area.
Fitness has taken some steps forward, since our last call.
At this point all of our stores are open with the exception of those that are in California, particularly those around the Los Angeles area.
So basically 90% of our stores are open at this point.
They're not all operating in a 100% level, but this is the highest rate of openings that we have seen since the pandemic started.
So with the exception of just California, at this point of 280 stores that we have 90% of them are open.
So that gives you I think a good sense of what we're seeing in the restaurant and the fitness area.
So I'll start with everybody's favorite subject, CECL and the reserve.
Overall the provision for credit losses for the quarter was a net credit or recovery of $1.6 million compared to a provision of $29.2 million last quarter.
That $1.6 million consisted of a $1.2 million provision related to funded loans and a recovery of $2.9 million related to unfunded commitments.
The reserve, the ACL declined from 1.15% to 1.08% of loans this quarter primarily because of charge-off, which is exactly what we would expect to happen under CECL, less charge-offs are taken the reserve would come down.
Slide 9 through 11 of the supplemental deck provides some details on changes in the reserve and the composition of the provision and the allowance.
Charge-offs totaled $18.8 million for the quarter, which reduced the reserve.
$13.8 million of this related to the writedown to market of some loans that we sold during the quarter or that were moved to held for sale right at quarter end and those were sold in January.
A $34.1 million and all of the rest of the stuff that ran through the provision, the $34.1 million decrease in the reserve and provision related to the improvement in the economic forecast.
Offsetting that was a $32.8 million increase related to increases in some specific reserves and that risk rating migration.
We had an $11.4 million reduction in the amount of qualitative overlays.
This is exactly what we would expect.
We expect that qualitative overlay to come down as more facts are known about individual borrowers and more that gets captured in the quantitative modeling.
And then we also had an increase of $15.2 million related to more conservative modeling assumptions that we've made around behavior of certain residential borrowers that had been on payment deferral so all of that going in opposite directions kind of netted down to that provision of basically zero for the quarter.
The decrease in the reserve percentage also reflects the fact that Ginnie Mae EBO mortgages are a larger component of total loans and those carry basically no reserve.
Some of the key economic forecast assumptions and I'll remind you this is a really high level look.
The models are really -- processing literally hundreds if not thousands of regional and other economic data points.
But our forecast is for national unemployment at about 6.7% for the first quarter of '21, remaining stable through 2021 and then trending down to 5.4% by the end of 2022.
Real GDP growth reaching 4.1% in 2021 and 4.7% by the end of 2022 and S&P 500 Index remain relatively stable around 3,500 and stabilizing Fed funds rate staying at or near zero into 2023.
The franchise finance portfolio continues to carry the highest reserve level at 6.6%, followed by CRE at 1.5% and C&I at 1.3%.
The reserve on the residential portfolio remained relatively stable quarter-over-quarter.
Reductions resulting from the improved economic forecast were offset by changes in modeling assumptions.
As to risk rating migration on slides 23 through 26 in the deck, we have some detail around this not surprisingly as we continue to move through the cycle and get more detailed information about borrowers.
We did see some additional downward migration this quarter although as Raj pointed out the pace of this has slowed considerably as we would expect and we hope to see some positive tailwinds as the economy continues to improve as we move through 2021 as we're expecting it to.
In terms of migration to substandard accrual, the largest categories were in CRE and that would be in the hotel, multi-family New York and retail segments and we downgraded some of the cruise line credits this quarter.
Overall, in franchise the level of criticized and classified assets actually declined this quarter.
But we did see some fitness concepts move from special mention to substandard.
Non-performing loans increased by about $44 million this quarter, the largest increases being in multi-family.
Residential, as we had some loans come off of deferral and failed to resume a regular payment schedule and a little bit of franchise finance in the fitness segment.
As expected, we continue to see recovery in the fair value mark on the investment portfolio this quarter.
The portfolio is now in a net unrealized gain position of $85.6 million and we expect no credit losses related to any of the securities in that portfolio.
Consistent with the guidance we provided last quarter, the NIM increased by 1 basis point this quarter to 2.33%.
The yield on earning assets declined by 12 basis points and this was -- there's still pressure on asset yields, but this was a much lower -- a smaller decline than we had experienced the quarter before.
So that's good to see.
Obviously, this is just due to run off of higher yielding older assets that were put on in a higher prevailing rate environment.
Cost of deposits declined by 14 basis points quarter-over-quarter.
And as Tom pointed out, I'll remind you that almost $800 million of those time deposits are scheduled to mature and price down in Q1.
We did adjust our variable compensation accruals by $6.6 million as operating results in the back half of the year.
We're far better than we had initially expected.
I would call that a first world problem.
Glad to see those revenues up allowing us to do a little more for our employees in the way of variable compensation.
A $2.2 million accrual for some roll over vacation time that we made the decision to allow our employees due to the COVID pandemic and the difficulty people have had using their vacation time.
And we also had an increase in an accrual related to some RSU and PSU awards that resulted from the increase in the stock price, another first world problem.
So that's kind of what went on in compensation expense.
A little bit of guidance looking forward to 2021, I will preface my remarks by saying this is maybe the most challenging environment in which I've ever had to forecast what was going to happen over the course of the coming year.
So all of this guidance is predicated on a lot of assumptions about the economy, interest rates, tax rates, the competitive environment, the regulatory environment and any of that could change.
But as of now what we see is mid-single digit loan growth more of that concentrated in the back half of the year.
As Raj said, we don't expect much in the first quarter.
And that's excluding run-off of PPP loans by the way that mid-single digits excluding that run off of PPP loans.
Again mid-single digit a little bit higher than loan growth, mid-single digit deposit growth but double-digit mid-teens non-interest DDA growth as we continue to remix that portfolio and let those higher cost rate sensitive customers run off and grow non-interest DDA.
We expect the NIM to increase for the year and we would expect that PPP forgiveness to be largely a first quarter 2021 event so the NIM in the first quarter will get a lift from PPP forgiveness.
I think there's about $11 million worth of unrecognized fees still remaining to flow through that will come through in the first and maybe some in the second quarter.
The provisions, so under CECL in theory, the provision should be related only to new loan production and charge-offs should increase -- should reduce the reserves.
And if the world didn't change that's what would happen.
We have not attempted to forecast changes in the economic forecast but if the economic forecast doesn't change the provision for the year should be modest and it would be higher in the second half of the year as loan growth picks up and any charge-offs taken should reduce the allowance and we would expect net charge-offs to exceed the provision for the year and the reserves to come down.
If our prognostication about the economy is true, we would expect over time if we return to an environment similar to what we were in right before the time we adopted CECL, we would expect the reserve to return back to those levels.
Non-interest income for next year, we do expect to see some increase in deposit service charge and commercial card revenue materialize in 2021 and for lease financing income to stabilize after some decline in the first quarter.
Expenses, overall, in the aggregate we would expect probably a mid-single digit increase and that's going to come from two areas.
One is comp, part of that is just a natural normal merit increases and inflationary salary increases, which we think will resume.
We actually hope will resume in 2021 as the as the economy recovers.
But we do expect it to remain below 2019 levels.
And we also expect technology-related costs to increase as we continue to invest in some important initiatives that Raj alluded to.
Tax rate, we would expect to be around 25% excluding discrete items, if there's no change in the corporate tax rate.
The other -- the one other thing that I will point out to you, we had about 3 million dividend equivalent rights outstanding that expire in the first quarter of 2021.
And that'll add $0.02 to $0.03 per quarter to EPS.
So I just want to make you're aware of that.
There's so much information to give you these days that these calls end up taking way too much time in the first half.
I see a line already. | bankunited q2 earnings per share $1.11.
q2 earnings per share $1.11. | 0 |
Today, we will discuss our recent results and our outlook for 2021.
Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer, as well as George Schuller, our Chief Operations Officer.
Before getting started, I would remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date, February 17, 2021.
These expectations involve risks and uncertainties that could cause the company's actual results to differ materially.
A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com.
Our remarks today also include certain non-GAAP financial measures.
I'll start today by giving a top-line overview of our financial and operating results for 2020 before providing some thoughts on the impacts of our enterprisewide optimization efforts, as well as our path forward.
As we look back on the year from a broader perspective, 2020 introduced personal and professional challenges to each and every one of us.
I'm incredibly grateful to the men and women of our company for staying laser-focused on operating safely and responsibly, continuing to bring forward new ideas for improvement and remaining committed to delivering for our customers, communities and our shareholders during this extremely difficult time.
We'll provide more color on those shortly.
We're taking steps internally to further girth our preparedness for such events.
That said, I continue to believe strongly that our team's prudent management and unwavering commitment to our enterprisewide optimization efforts underpinned longer term transformational benefits that we started to see throughout our operations, and fully expect to positively impact our financial results in the future.
One key factor we simply cannot control, but rather we must manage through, is the weather.
We estimate the weak winter weather season in both the first quarter and fourth quarter of last year negatively impacted our full-year 2020 operating income by approximately $40 million to $45 million.
Other external factors adversely affecting our business during the calendar year included the wildfires in California and drought conditions in South America, both of which impacted demand timing from our Plant Nutrition customers and multiple hurricanes in the Gulf Coast, which required multiple brief but unplanned shutdowns at our Cote Blanche mines.
In addition, our South American Plant Nutrition business experienced stronger year-over-year agriculture sales volumes and, in local currency, achieved a 16% increase in fourth quarter operating earnings versus 2019.
However, the Brazilian currency weakened by approximately 33% during the year compared to the U.S. dollar, which ultimately hurt our bottom-line in terms of U.S. results.
As we look at full year 2020 on a consolidated basis, net income for the year decreased by approximately 5% and adjusted EBITDA decreased by approximately 8% when compared to 2019 results.
On the positive side, we continue to generate strong positive cash flow from operations totaling over $175 million for the full year.
We also took an aggressive approach to managing our capital plan and I'm pleased we were able to come in 13% below the midpoint of our original guidance for a total spend of roughly $85 million for the year.
Our free cash flow for the full year was just over $90 million and we returned at $99 million to shareholders through our dividend program, which reflects our confidence in the company's ability to deliver cash flow through varying economic and weather-related cycles.
As a result, we formally relaunched what is designed to be a targeted and expedient process for the sale of both of our Chemical and Plant Nutrition businesses in South America.
We intend to use the proceeds from these transactions to continue reducing our debt, further enhance our liquidity and continue our focus on meeting our customer demand for our essential products.
Given the sensitive nature of these matters, we will not be fielding any questions on this topic, but we'll provide more information as it becomes appropriate to do so.
With our multi-year runway of ample liquidity, no material debt maturities due for over three years, capital plan flexibility and improving execution capabilities, our near-term priority is to deploy any incremental free cash flow after dividends, whether from organic generation or strategic transactions, toward continuing our deleveraging process and paying down our debt to further enhance our equity valuation.
Now moving to our Salt segment.
Full-year adjusted EBITDA margins increased approximately 3 percentage points to 29% despite our adjusted EBITDA being lower by 2%.
We also saw continued improved production performance at our flagship Goderich mine.
On a full year basis, production tons out of Goderich have increased 17% from 2019 results and production costs are down 16%.
In addition, during the fourth quarter of 2020, the team was able to achieve its highest production month since its conversion to continuous mining and haulage.
These steadily improving production metrics highlight a sentiment you've heard me communicate before that we've not yet reached our full long-term potential at this operating assets.
I am confident our progress will continue as we build out our new mine plan, helping to ultimately secure Goderich's position as the leading salt mine in North America from both a cost and volume perspective.
When coupled with enhancements that are designed to provide long-term flexibility and optionality to our logistics and procurement teams, we set a course to capture significant value during stronger seasonal demand by meeting the needs of current and new customers alike.
Our Cote Blanche mine also demonstrated strong year-over-year operating performance, while managing through four significant hurricane events in 2020.
These storms resulted in approximately 11 lost production days during the year.
The preparations made by our team to protect the site and ensure the safety of our people allowed us to resume production efficiently and effectively after each event.
This culture of resilience that permeated throughout the organization in 2020 is perhaps best reflected in the operational agility of our Cote Blanche team who were still able to achieve their full year-end production targets, despite having navigated a record hurricane year in the Gulf.
In addition, given the recent announcement of a nearby competitor closing its facility, we are carefully analyzing opportunities to capture value for our portfolio by enhancing relationships with our existing customers, while also potentially putting us in a position to cultivate some new relationships.
I'd also like to give a particular call out to our logistics team, which has worked diligently on reshaping our network of partners to maximize efficiencies across our operations, while maintaining strong service levels for our customers.
As I mentioned previously, our Plant Nutrition business, particularly in North America, faced some unforeseen circumstances of its own this past year, including extreme wildfires and drought.
The resulting conditions from those events delayed the harvest of key crops, particularly tree nuts along with the fall fertilizer application season.
Our team worked to ensure we were well-positioned to capture those sales volumes in the fourth quarter, ultimately, delivering strong year-over-year revenue growth of 16%.
Given this strength, we were able to partially offset some of the unexpected higher costs that we experienced during the year.
Our Potassium+ product continues to be the SOP market share leader in North America and recent pricing dynamics have reinforced our confidence that near term underlying demand remains robust.
We anticipate upcoming harvest in certain key markets to be very strong, which further translates into nutrient deficiencies for the soil and the need for our products.
When coupled with much more positive global backdrop for all fertilizers and the recent surge in pricing, we anticipate steady demand from our North American customers in 2021.
I would also like to point out that our micronutrients products line was able to achieve a full-year gross sales record in 2020 since their acquisition.
Our South American Plant Nutrition business continued to achieve measured growth in local currency, with sales revenue up 18% for the full year 2020.
Our customers on the agricultural side have experienced very attractive fundamentals and we anticipate these sales trends to continue in 2021.
But as has been a recurring theme, the weaker currency has hurt our results in U.S. dollar terms.
Against the backdrop of the challenges we've all faced in 2020, I'm even more impressed with the efforts of our employees to engage and execute on our enterprisewide optimization effort.
As a reminder, this effort is focused on five broad value streams, namely; operations, commercial, logistics, procurement and working capital.
I referenced previously, in my comments, some of the early benefits coming through our Salt segment results from certain of these value streams.
In prior quarters, we highlighted our harvest haul project at our Ogden facility in Utah, the salt mines compaction project at Goderich and the progress we're making with employee engagement through our organizational health focus.
I would now like to highlight some optimization benefits we're experiencing in procurement.
In 2020, we completely transformed that department, moving from a decentralized and transactional function to a centralized high-standard team focused on operations excellence through global strategic sourcing mindset and a performance-driven culture.
We implemented a category management function, a team concept built to bring together procurement with all relevant areas within that segment.
Each team in a category is a cross-functional and cross-regional aligned to business needs and extensive engagement with stakeholders.
During its initial year in this new structure, the department executed over 65 initiatives, driving as much as 10% annualized savings in a number of specific procurement categories such as contractor services, packaging raw materials and equipment spare parts.
In addition to cost savings, this new procurement strategy is expected to reduce the risk of supply chain disruption and provide a market advantage when our customers require a more sustainable and responsible supply chain.
This high degree of focus from our team is expected to produce long lasting benefits and help expand our margins.
As we worked to both navigate external challenges and drive internal improvements over the course of 2020, there was no area of focus given more attention than our responsibility to keep our employees safe and healthy.
As many of you have heard me communicate before, our number one priority as a management team is ensuring our employees go home at the end of their shift as healthy as they arrived.
Our focus on this Zero Harm culture has been critical in our ability to navigate the current pandemic.
For the year, we achieved another step change decline in our Total Case Incident Rate or TCIR.
In addition to achieving a multi-year low for our 12 months rolling TCIR average in 2020, we ended the year with an average of 1.53 and I'm happy to share that our TCIR in December was among the lowest of any month in the history of the company, coming in at 1.23.
As a leading indicator for operational success, this continuous improvement in our primary safety metric highlights our commitment to conducting business in a responsible manner that protects the health, safety and security of all of our employees, contractors and the communities in which we operate.
The COVID-19 pandemic remains an ongoing challenge and we continue to take actions to mitigate its impacts.
In addition, we faced another slow start to the winter season in our served markets.
Yet our talented workforce, advantaged assets and efficient procurement and logistics operations continue to perform with excellence through this adversity, supporting our global customers with essential products proving our resilience as an organization.
While our overall financial performance in 2020 was below our expectations, we were aggressive in our efforts to mitigate the various external headwinds we faced.
We now estimate a combined negative impact to our original operating earnings forecast of roughly $67 million due specifically to weak winter weather in both the first and fourth quarters, a Brazilian currency that progressively weakened throughout the year and COVID-19 impacts, including both cost preventative measures at our sites and reduced demand within certain higher-margin end markets.
While these factors were out of our control, be assured, we are acutely focused on identifying steps we can take to help insulate our businesses from the severity of similar impacts in the future.
Again, what has allowed us to effectively navigate through the past year is the underlying resilience of the markets in which we serve with our essential products, the strength of our advantaged assets and the dedication of our employees to drive improvements through the optimization effort.
We've also maintained close contact with our customers and remained on course with our previously communicated strategic priorities.
I continue to be excited about the future prospects of our company and confident of long-term value our team, at Compass Minerals, can deliver.
First, a quick review of our consolidated results.
Our fourth quarter 2020 consolidated sales revenue and operating income, both declined year-over-year as late winter weather coupled with lower highway deicing average gross sales price pressured Salt results.
Lower year-over-year SOP pricing, along with elevated SOP production costs more than offset Plant Nutrition North America sales volumes improvements.
For the full year, sales revenue and operating income were also lower as we dealt with over $100 million in sales revenue impact and more than $40 million of operating earnings and tax due to weak winter weather.
We also had elevated SOP costs and lower SOP pricing, which were partially offset by stronger year-over-year SOP sales volumes.
Looking now at our Salt segment results.
Total sales in the quarter were $228.5 million, down from $310.9 million in the fourth quarter of 2019, largely due to lower weather-driven demand for deicing products and the effects of customer carryover inventories.
Although the snow event activity was similar to last year's December quarter, this year's winter had been slow to develop with most of the fourth quarter snow events occurring at the tail end of December.
This winter weather impact, combined with high customer inventory levels, resulted in lower deicing salt sales to highway, commercial and big-box retailers.
Total Salt segment sales volumes dropped to 23% compared to fourth quarter of 2019.
Within our Salt segment, highway deicing experienced a 25% sales volume decline and consumer and industrial sales volumes dropped 16% year-over-year.
Looking at our sales by end-use, rather than by business unit, most of the volume weakness was attributable to lower deicing demand.
In other words, combined sales of most of our non-deicing products, such as water conditioning, chemical processing and food and agriculture were not impacted by the weather and were generally flat with the prior year fourth quarter, even after taking into account some lingering slack in demand due primarily to COVID-19 challenges.
Highway deicing prices were down 11% versus the prior year quarter at $59.20 per ton.
However, consumer and industrial average selling prices increased 1% to $169.30 per ton as a broad-based price increases across all non-deicing product groups was mostly offset by lower sales mix of our higher priced deicing products.
Operating earnings for the Salt segment totaled $50.2 million for the fourth quarter versus $80.5 million last year, while EBITDA for the Salt segment totaled $67.6 million compared to $96.5 million in the prior year quarter.
Despite the challenging environment I just described, we are pleased to report minimal EBITDA margin compression in our Salt segment this quarter as our enterprisewide optimization efforts helped lower our unit cash costs and tightened our spending control on SG&A, which helped offset lower average selling prices.
When stepping back and looking at our fourth quarter Salt costs, we ended up at $41 per ton, which is flat with the 2019 fourth quarter.
However, on a mix-adjusted basis, our unit cost is about $1.25 per ton lower than prior year.
So we absorbed a 25% decline in year-over-year fourth quarter Salt sales volume and we were still able to decrease our mix adjusted Salt unit costs versus the prior year.
Improved production and logistics costs in our North American highway business for the full year 2020 helped to offset a 12.4% lower salt revenue and resulted in adjusted operating income declining just 6% and an adjusted EBITDA decrease of only 2% year-over-year.
In addition to improved Goderich mine production, we continued to diligently and aggressively implement initiatives across the organization design to ultimately drive revenue higher and costs lower.
These efforts contributed to the expansion of the Salt segment adjusted operating margin to nearly 21% from about 19% last year and, at the same timem driving adjusted EBITDA margin to 29.3% compared to 26.1% for the full year 2019.
While these initiatives are expected to drive sustainable improvements for all segments over time, we continue to be pleased to see these early benefits in our Salt results.
It's also worth noting that these benefits have been muted a bit, given the difficult weather backdrop and the real value creation potential will be more obvious under better business conditions.
Turning to our Plant Nutrition North America segment.
Fourth quarter total sales revenue increased 15.9% from the prior year to $88.7 million.
We achieved this by delivering a 23% increase in sales volumes, partially offset by a 6% lower average selling prices.
As we have discussed in recent quarters, the extreme wildfire conditions in the Western U.S. delayed the start of the fall application season and, as we expected, shifted the timing of SOP sales volumes for the 2020 fourth quarter.
While we always price to drive the appropriate value proposition for our customers, we continue to maintain our market share for our premium Potassium+ SOP product.
Plant Nutrition North America operating earnings and EBITDA for the fourth quarter were pressured by short-term cost increases associated with feedstock inconsistency, unplanned downtime and related maintenance costs at our SOP facility in Utah, which weighed significantly on the quarterly and full-year results.
In turn, our Plant Nutrition North America EBITDA margin compressed to about 20% in the quarter compared to nearly 34% in the prior year, with operating margins declining about 10 percentage points quarter-over-quarter.
Strong full year sales volumes, partially offset by lower sales prices, helped us deliver a 16.2% improvement in 2020 full year Plant Nutrition North America revenue versus 2019.
These revenue results, coupled with the short-term fourth quarter cost pressure and the previously disclosed $7.4 million inventory adjustment in the third quarter, resulted in a $10.4 million decline in operating income and a $14.6 million decrease in full-year EBITDA.
Excluding the inventory adjustment, full-year operating margin would have been 8.1% compared to 10.9% in 2019, while full-year EBITDA margin would have been 25% versus 32.5% last year.
Because the inventory adjustment is non-recurring and our SOP cost pressure is short term in nature, we expect a sharp rebound in the Plant Nutrition North America EBITDA and operating margin percentages in 2021.
Our Plant Nutrition South America segment delivered a 24% year-over-year increase in fourth quarter 2020 revenue and an 18% increase for the full year, both in local currency.
This was driven by increases in average selling prices for both agriculture and chemical solutions products, along with stronger year-over-year agro sales volume.
Fourth quarter agro revenue was up about 29% versus 2019 and up nearly 23% for the full year.
Even more impressive was our fast growing Ag B2C business unit where strong sales volumes and price drove a 37% increase in both our 2020 fourth quarter and full year revenue when compared to prior year, again, all in local currency.
Strong demand began in early 2020 for many of our Specialty Plant Nutrition products due to the very attractive economics for Brazilian farmers and that trend continued as we finished 2020 and moved into the beginning of 2021.
In local currency, our Plant Nutrition South America fourth quarter and full year 2020 operating earnings increased 16% and 35%, respectively, while EBITDA increased in lockstep by 15% and 25%, as well.
While we're obviously disappointed with our fourth quarter and full year 2020 results, it's important to again point out that the combination of weak winter weather, Brazilian currency devaluation and COVID-19 impacts in both mitigation costs and end market deterioration negatively affected our 2020 full-year operating income by nearly $70 million.
Despite this impact, we were able to hold year-over-year adjusted EBITDA margins flat at 21% and generate more than $175 million cash flow from operations and $90 million of free cash flow.
I would now like to shift gears and spend a few minutes on our 2021 outlook.
As a reminder, when we work through our annual planning process, we utilize an underlying assumption of average winter weather and how that would translate through our upcoming bid season.
There are multiple scenarios we run, but at the end of the day, we focus on what we can control and then manage through the consequences of what the weather and other opportunities or challenges bring by adjusting our plan dynamically throughout the year.
We are extremely disciplined in our approach to capital spending and closely monitor the supply and demand dynamics of both the salt market, particularly in North America, and the specialty fertilizer market where our high-value Potassium+ SOP product has a leading market share in North America.
Should those factors dictate a supply response, we feel strongly that we can quickly adjust to make rational economic decisions and still be ready to meet our customers' needs.
We're optimistic about 2021 as we look for normalized sales volumes in our Salt business and the expectation of even better agriculture fundamentals in both North and South America.
The initial benefits of our optimization efforts have started to register throughout our various segments and while we're not providing specific guidance on the expected benefits, we continue to believe that the long-term commercial and operational advantages from these efforts will be meaningful to our bottom-line.
For the full year 2021, we are expecting consolidated adjusted EBITDA of between $330 million and $360 million, which is a year-over-year increase of about 20%.
While the midpoint of our guidance is at the lower end of last year's full-year guidance, it's important to note that weak winter weather impacts, like those in 2020, are never immediately reset as prior bid season pricing almost always has a significant influence on the following years' average selling prices.
Our annual operating plan anticipates approximately $100 million in 2021 capital spending, as well as free cash flow at levels similar to 2020.
We are forecasting a significant increase in Salt volumes as winter weather normalizes in both North America and the U.K., and we're expecting high-single-digit sales volume growth for our Plant Nutrition South America segment.
Within Plant Nutrition North America, we expect to see volumes down slightly compared to 2020 as we continue to monitor the growing season and balance our customer needs, given the recent ramp-up in pricing.
Importantly, we will continue working to offset any 2021 headwinds through a dual focus on value creation and cost containment through our enterprisewide optimization effort.
While our net debt to adjusted EBITDA ratio ended 2020 at about 4.3 times, it is expected to end 2021 below 4 times.
We expect to also continue to make progress improving our balance sheet and maintaining a very strong liquidity position with very little in near-term debt maturities.
In summary, while 2020 has been a year marked by challenges, not only for our company, but globally, our business model worked and our people withstood the test.
We exercised flexibility, managed external factors beyond our control, executed our plan and worked on our long-term strategy, while continuing to return cash to shareholders.
As we enter the new year, we remain focused on keeping our people safe, optimizing our operations, containing costs and delivering our essential products to satisfied customers around the world.
With that, I will ask the operator to begin the Q&A session. | assuming average winter weather activity, expects modest salt segment revenue growth for h1 2021 versus 2020. | 1 |
My name is Matt McCall.
I'm Vice President, Investor Relations and Corporate Development, for HNI Corporation.
Actual results could differ materially.
Let me start by saying our members did a great job of managing through challenging second quarter conditions.
We aggressively managed costs and drove productivity, offsetting much of the impact from lower volumes.
We kept our focus on our customers and also played offense, generating and seizing market opportunities where we could.
Moreover, through this experience, we have developed new and better ways to operate our businesses that will benefit us in the future.
We delivered solid profitability in the second quarter.
Our cost containment efforts, combined with the top line benefits from our diversified revenue streams, the breadth of our price points, our channel reach and our ability to quickly pivot, all contributed to the better-than-expected results.
While we told you in the first quarter call that we expected a loss in the second quarter, the combination of these items helped us deliver a quarterly profit.
Moreover, given our solid results in the second quarter, our year-to-date earnings per share is actually up slightly versus the first half of 2019.
This is a great accomplishment given the many headwinds we are facing and it demonstrates, again, what is unique about HNI.
Last quarter, we told you we had two priorities when it comes to our pandemic response.
First is the health and well-being of all HNI members.
Second is the success is to successfully navigate the pandemic in the short term by supporting cash flow and maintaining our strong balance sheet, while remaining focused on our long-term strategies.
So far, we have successfully navigated both priorities.
We quickly adjusted our facilities and were able to operate safely and effectively to serve our customers.
In addition, as we began returning to our offices, we implemented multiple safety measures to ensure a safe process for all members.
Our members' safety remains paramount.
We also further strengthened our balance sheet.
We generated free cash flow in excess of prior year levels and significantly lowered our already modest debt level.
We have the financial strength and cost structure to successfully weather this crisis and any aftershocks for a prolonged period.
Our financial strength and demonstrated ability to flex costs, we are making two changes.
First, we are restoring salaries to their pre-pandemic levels, 60 to 90 days earlier than initially anticipated.
If you recall, we implemented temporary salary reductions as part of our balanced approach to the pandemic.
Our members overdelivered on multiple fronts in the second quarter.
I'm grateful for their efforts and happy that we are able to restore salary levels about a quarter earlier than originally anticipated.
Second, we are accelerating our investment levels.
I would like to note that these actions are a direct result of our financial position and the efforts of our members.
That notwithstanding, we see opportunities and are using our strong financial position to invest.
I will now share some thoughts on the demand picture across our businesses; what we experienced in Q2, what we are experiencing currently and how we view the future.
First, our Q2 year-over-year order activity.
Here is what we have been seeing recently.
Orders in domestic Workplace Furnishings, excluding our e-commerce business, were down 36% in Q2.
Over the past five weeks, they are down 33%.
We are generally seeing a seasonal uptick in orders, but our year-over-year declines have remained relatively constant and are in line with what we have experienced in previous recessions.
E-commerce orders were up 114% in Q2 and up 87% over the past five weeks.
We are confident this business will still deliver strong growth both in the near and long term.
Residential Building Products orders were up 2% in Q2, and we continue to see positive growth rates over the past five weeks.
We believe the secular trends discussed last quarter, which I will detail again in a moment, are providing consistent tailwinds.
We are keeping an eye on land and labor shortages for builders, which could slow down production.
However, indications are encouraging thus far.
Again, [Technical Issues] revenue streams, price point breadth and channel reach are unique to HNI.
And our recent growth rates reflect these benefits.
Next, as we discussed last quarter, we are seeing several positive trends that should provide near-term and post-pandemic revenue support.
In our Workplace Furnishings segment, we see the potential for multiple supportive secular trends.
First, increased office floor plate resets as organizations work to adjust to the new social distancing environment; second, increased demand for our architectural products platform, which can quickly create physical separation with minimal construction time while maintaining natural life; and third, more demand tied to work from home and from increased smaller satellite office locations.
HNI is uniquely positioned to benefit from these trends given the value orientation of many of our brands.
Generally, these trends will take some time to gain momentum.
Most of them will require a broader and more meaningful return to the office than we are currently seeing.
Customers are generally assessing their options right now and are still in a mode of figuring out next steps.
These trends won't be enough to offset near-term cyclical pressure, especially with the new growth in COVID cases nationally.
However, HNI is particularly well positioned to take advantage of these secular opportunities as they develop.
In our Residential Building Products segment, the positive order trends reflect our strong competitive position in the market and specifically with large national builders.
In addition, trends tied to de-urbanization, elevated nesting and work-from-home trends, record low mortgage rates and low housing inventory, all support positive demand patterns and should provide cyclical and secular support going forward.
We are excited about the cyclical strength, secular opportunities and company-specific initiatives within our Residential Building Products segment.
I will then come back and give some concluding thoughts.
Consolidated non-GAAP net income per diluted share was $0.20.
That was down from the $0.38 we reported in the second quarter of 2019.
Second quarter consolidated organic sales decreased 21.2% versus the prior year.
Including the benefit of acquisitions, sales were down 20.6%.
Consolidated non-GAAP operating income declined $9.4 million versus prior year on a sales decline of $109 million, which means our deleverage rates or decremental margin was 8.6%.
That's well below our targeted range of 25%, which includes the benefits of cost actions.
Given the circumstances, our members did a great job of limiting the impact of declining volume.
In the Workplace Furnishings segment, first quarter sales decreased 24.8% year-over-year.
Despite the top line pressure, we were able to generate $7.8 million of non-GAAP operating income in the segment.
While that is down from the $19.7 million in the prior year quarter, the decremental margin was only 11%.
Sales in our Residential Building Products segment decreased 8.6% year-over-year organically and 6.1% when including acquisitions.
Within the segment, new residential construction revenue declined 5% organically, and sales of remodel and retrofit products were down 15% year-over-year.
Despite the year-over-year sales pressure in Q2, we delivered higher operating profit and expanded operating margin versus the prior year.
Operating profit totaled $14.4 million compared to $13.4 million in the prior year period, and operating margin was 13.1%, up from 11.5% in the second quarter of 2019.
For HNI, overall, second quarter gross profit margin was 36.1%.
This is down 50 basis points year-over-year, primarily due to volume.
Our second quarter non-GAAP tax rate was 32.5%.
This was abnormally high, driven by changes to our full year earnings outlook.
We expect the tax rate to return to more normalized levels moving forward.
I should note that the only difference between second quarter GAAP and non-GAAP earnings per share was tax.
Non-GAAP earnings per share excludes the tax impact from onetime charges that we recorded in the first quarter of 2020.
So overall, our second quarter results again demonstrated the strength of our operating platform.
Let's shift and now talk about our liquidity and debt levels.
At the end of the second quarter, we had $183 million in total debt, which was down $47 million from the first quarter and was $103 million lower than the prior year quarter.
Our gross leverage or gross debt-to-EBITDA ratio was 0.8.
This remains well below the 3.5 times gross leverage covenant in our existing loan agreements.
From a net debt perspective, our leverage ratio of 0.7 is down from 0.8 last quarter and 1.2 in Q2 of last year.
Our teams have done a nice job of managing the balance sheet and generating cash flow.
Free cash flow for the second quarter was $54 million, more than double the $23 million we generated in the second quarter of 2019.
Given our low leverage ratio, free cash flow levels and ability to quickly adapt our cost structure, we expect to maintain our strong financial flexibility in a variety of scenarios.
This means we will remain well within our debt covenants.
We expect to reduce year-end net debt below last year's level, and we project free cash flow will be significantly above our $52 million dividend.
So as we look forward to the rest of the year, the pandemic has limited our visibility and our ability to provide sales and earning guidance.
However, we will share a few thoughts on what we expect.
First, as I just covered, we do feel confident in our ability to generate strong free cash flow and maintain our strong balance sheet under a variety of scenarios.
Second, we expect third quarter sales and profit to track ahead of second quarter 2020 levels, primarily due to seasonality.
Third, we continue to believe 25% is the appropriate deleverage or decremental margin estimate over time.
That's higher than what we just achieved in the second quarter.
We're expecting the impact of salary restorations, investment acceleration and less favorable business mix to pressure decrementals in the second half.
As a result, we expect decrementals to be in the range of 20% for the full year 2020.
In the quarters leading up to the pandemic, investments made in recent years were delivering returns.
You can see evidence in our recent revenue, margin and cash flow trends.
Then this past quarter demonstrated more of what is great about HNI.
Not only were we able to quickly adjust our cost structure to support cash flow on our balance sheet as our Q2 results indicate but we also took additional actions during the pandemic that will be additive to our pre-COVID strategic momentum and support our profitable growth strategic framework.
Our members remain optimistic, nimble and thoughtful, and our pandemic-driven successes will help our businesses going forward. | q2 non-gaap earnings per share $0.20.
compensation for hni members & board are being restored to levels existing prior to reductions announced on april 22.
seeing seasonal uptick in sales, expect q3 sales and profit to track ahead of q2 2020 levels. | 1 |
Today's agenda appears on slide three.
We'll begin with our Chairman and Chief Executive Officer, Tom Williams, providing a few comments and some highlights from the first quarter.
Following Tom's comments, I'll provide a more detailed review of our first quarter performance, together with the revised guidance for the full year fiscal 2021.
Tom will then provide a few summary comments and we'll open the call for a question-and-answer session.
We plan to end the call at the top of the hour.
Please refer now to slide four, and Tom will get us started.
I hope that you, your family and your friends are all safe and healthy.
So before I go through the quarter results, I wanted to highlight slide four, which is really our strategic positioning slide on one page.
It's how we create value for our customers, our shareholders and our people.
And I'm going to highlight some of these through the course of my remarks in the opening slides here.
But really, the output of all these differentiators is really that last bullet.
It enables us to be great generators and deployers of cash over the cycle, which is a proven strength of ours that has only gotten better over the years.
This list is what sets us apart.
It is what enables us to be a top-quartile company.
Hopefully, a company that you'll want to be a shareholder of.
If you go to slide five.
This is one of those competitive differentiators, which is the breadth of our technologies.
This is a portfolio of 8-motion control technologies that are all interconnected and complementary to each other.
It's how we bring value to customers.
It's how we solve problems for our customers.
Our customers see the value in it, too.
It has 60% of our revenue comes from customers who buy from four or more of these technologies.
So if you go to slide six, we'll talk about the quarter.
It was an outstanding quarter, great results really in the face of unprecedented times.
So starting with the first bullet, something that we take great pride in.
We are a top-quartile safety performance company.
In addition to that, we continue to reduce recordable injuries and incidents by 31%.
Organic decline was 13% year-over-year, but that showed nice improvement versus the prior quarter, which was a 21% decline.
So we are pleased to see the progress there.
EBITDA margin was 19.5% as reported or 20.1% adjusted.
That makes two quarters in a row that we've been greater than 20% EBITDA margins we're excited about, and it was 100 basis point improvement versus the prior year.
We did a great job on debt reduction.
We paid down debt in the quarter of $557 million.
And our cash flow from operations was just an outstanding level at 22.8%.
So I call your attention to a little table at the bottom of the page.
And go to that last row, the total segment operating margin adjusted row.
See, we came in at 19.9% for the quarter.
That was 110 basis point improvement versus the prior year.
Our decrementals were just terrific.
If you look at our decrementals on an adjusted basis with acquisitions, they were favorable, meaning that we had less sales and we had more income versus the prior year.
On a legacy basis, so Parker without acquisitions, again on an adjusted basis, was a 14% decremental.
Just great results by the operating team.
So if we go to slide seven.
The deleveraging progress has been just dynamite.
You can see we paid down $2 billion worth of debt in the last 11 months.
We've now paid off 37% of the LORD and Exotic transaction debt.
And you can see the multiples, whether it's on a gross basis or on a net basis, we continue to make nice progress reducing those leverage multiples.
So we're very proud of that.
Moving to slide eight.
These outstanding results are really underpinned by a couple of factors versus the prior period restructuring that we've done, The Win Strategy and the performance enhancements that it's driving and the speed and agility of our pandemic response.
And just for clarification, when you look at these numbers, these are cost-out actions that represent the savings that are recognized in the year as a result of our pandemic response.
The incremental amount is footnoted at the bottom of this page.
That was $210 million year-over-year incremental.
But the big thing that I want to make a point on this page is the shift to more permanent reductions.
And while we didn't put it on here -- we didn't put Q4.
But if you go back and look at your Q4 notes, we were 90% discretionary, 10% permanent.
This quarter, Q1, we are now 30% permanent and moving to a full year of 60% permanent.
If you just go to that full year section of the page and looking at FY '21, see $175 million discretionary.
It's a little bit less than what we showed you last quarter, primarily because our volume is better, and we didn't need to and act as many of those discretionary type of actions.
Most of our wage reductions have been restored to normal effective October 1, with some minor exceptions in countries where those government support supplementary income or short work weeks, which we've continued.
Permanent actions stayed the same at $250 million, and we're right on track to deliver that.
And really, I think this bodes well when you look at the shift to more permanent actions for the remainder of FY '21, it sets us up very nicely for FY '22.
So if we go to the next slide, we talk about our transformation.
And clearly, I'm going to show you a couple of numbers here.
Hopefully, you're going to believe the company is definitely transformed.
And we'll talk about how, and we'll talk about more importantly where we're going to go in the future.
Next page is on the how portion of it.
It's been a combination of portfolio of things we've done as well as just sheer performance improvements.
And on the performance side, it all starts with the Parker business system, which is The Win Strategy; and two major updates that we've made that you're familiar with, which is really propelling our performance.
We simplified the organization from a structure standpoint.
And we acquired three outstanding companies that were accretive on growth, margins and cash flow.
And they're performing very well during the pandemic.
And I think the best evidence, which is the slide you've seen before is on slide 11, which is the transformation across the last five manufacturing sessions on how we've been raising the floor operating margin.
We wanted to put this slide in again because we've updated it based on the latest adjustments, where we include deal-related amortization in our adjustments.
And we did that through all the prior periods.
So the reported in change, that's in gray, and gold is the adjusted.
And you can see that the improvement now is even more pronounced, 1,100 basis points over this period of time.
And obviously, we intend to keep moving in this direction.
If you go to slide 12.
We're going to talk more about the future now and where we're going.
And it's going to be all around Win Strategy 3.0, which we just recently changed in our purpose statement, which is in that blue box then at the bottom.
Both of these changes have created excitement within the company and an inspiration from our people on that higher purpose that we're all trying to live up to.
Slide 13, where I'm going to spend a little bit of time going through 3.0 to give you a little more context and color as to why we think our future performance is going to continue to accelerate.
I'm going to make a comment on each one of these.
So start with simplification.
You've seen what we've done on structural things, and organization design work continues.
Simplification is going to expand into more 80/20 and Simple by Design.
And of course, you're all familiar with 80/20.
For us, it's still early days with lots of upside.
The Simple by Design is the realization that 70% of your cost is tied up in how you design the product.
And what we want for our company is design excellence and operating excellence.
We want both of those things.
And the way you get design excellence is through Simple by Design.
It's going to have three major buckets that's going to be a complexity assessment of our existing and new designs.
We're going to use four guiding principles on how we design products.
We're going to design with forward thinking.
We're going to design to reduce how we use material.
We're going to design to reuse things that we use across the company.
We're going to design the flow.
And we're going to enable all this with the use of AI, which is going to allow our engineers to be able to do these things in a much faster and knowledgeable fashion.
Second bullet is innovation.
In our stage gate process, we call internally Winovation.
So that's taking an idea to launch for a new product.
And we're making three changes there.
One is in metrics, and that's called PVI, product vitality index, another new metric for most of you be familiar with this.
It's the percent of revenue that comes from new products and things that we've launched and commercialized over the last five years.
We're holding people accountable to that, and we're seeing nice progress.
We've also included two key process changes.
One is new product blueprinting, which is an outside-in orientation for engineers.
So it's spending more time with customers and end users to understand their pain points and their needs so that we design and develop better products to solve those.
And of course, Simple by Design is embedded into the new Winovation as well.
Third bullet is digital leadership.
Now we put this on there before the pandemic but, of course, with the pandemic, this is even more important.
We've got four big areas that when we say digital leadership, we mean four things: digital customer experience; digital products, which would be IoT; digital operations; and then digital productivity.
And digital productivity is where we would do include our data analytics and artificial intelligence.
Next bullet is growing distribution.
We just want to continue the great progress we've been making, especially growing international distribution.
The next one is kaizen and kaizen -- our brand at kaizen is unique.
And it's really combining kaizen; our high-performance team structure, which is how we build the company; our natural work teams; and that ownership that creates in our plants, warehouses and the offices; and the use of Lean.
And I would just tell you that COVID has not slowed us down one second on the use of kaizen.
We are continuing to have the same activity and the same results.
We're very pleased with that progress.
On the acquisition front, we want to be the consolidator of choice and continue to buy great companies like you've seen us do the last several years.
And then underpinning all this and supporting this is going to be a new incentive program, which is called the Annual Cash Incentive Program, so ACIP for short.
And we're going to roll this out over the next two years, FY '22 and '23.
We've been piled again over the last two years, '20 and '21.
And it's going to replace return on net assets as our annual incentive.
It's going to have three simple components: earnings, revenue and cash.
So it will be easy to explain, easier for our people to understand.
Those three metrics are highly aligned to total shareholder return.
And this will provide a better linkage to our annual performance.
So we feel very excited to continuing the performance changes we've been making and the performance lift we're going to get with 3.0 that the transformation that you've seen is going to continue in the future.
Moving to slide 14.
You probably saw on Monday, we've made -- Monday this week, we made some important organization announcements.
And the first one, the lady that's sitting right next to me is strategically positioned six feet away from me, though.
Cathy Suever is retiring January 1.
This is part of Cathy's long-term plan.
And she has 33 years with the company and 33 great years.
And that everything she's done, she's excelled in, and she basically helped us a tremendous amount.
Whether it was bad times in recessions or good times with expansions, it's been a big part of the Win Strategy.
And her team -- her and her team did what we did in those acquisitions as a huge led by the finance team and really made a big difference for us.
A great example of values and results, and a great example for the rest of our leadership team.
So this is Cathy's last earnings call.
And I could see she's pretty tore up about that.
But she's going out in style because these are fantastic results to do as your last earnings call.
Now succeeding Cathy on slide 15 is Todd Leombruno, and Todd will be our CFO on January one of next year.
I think a lot of you know Todd.
Todd was Investor Relations and knows the company extremely well, 27 years with the company.
He's been a Division Controller, Group Controller, now Corporate Controller.
And he'll be joining Lee and myself in the office as Chief Executive and CFO.
So Todd, if you want to just make a few introductory comments to everybody?
First of all, I just want to say congratulations to Cathy on a wonderful 33-year career with Parker-Hannifin.
We worked so closely and so well together for so many years.
So we wish you nothing but the best in retirement.
And we look forward to hearing all about your retirement and ventures, and we will stay close.
I couldn't be more humbled and appreciative for this opportunity.
We have a fantastic global team, and we are committed to delivering top-quartile performance and continuing the transformation of the company.
And for the investment community, Tom already mentioned this, but I still remember many of you from my time in Investor Relations.
I look forward to reconnecting and also seeing some new faces very soon.
But Cathy is not retiring yet.
I'd like you to now refer to slide 17, and I'll summarize the first quarter financial results.
This slide presents as reported and adjusted earnings per share for the first quarter.
Current year adjusted earnings per share of $3.07 compares to the $3.05 last year, an increase despite lower sales.
Adjustments from the fiscal 2021 as reported results netted to $0.60, including business realignment expenses of $0.12; integration costs to achieve of $0.03; and acquisition-related amortization of $0.63, offset by the tax effect of these adjustments of $0.18.
Prior year first quarter earnings per share were adjusted by a net $0.45, the details of which are included in the reconciliation tables for non-GAAP financial measures.
On slide 18, you'll find the significant components of the walk from adjusted earnings per share of $3.05 for the first quarter of fiscal 2020 to $3.07 for the first quarter of this year.
Despite organic sales declining 13% and total sales dropping 3%, adjusted segment operating income increased the equivalent of $0.09 per share or $16 million.
Decremental margins on a year-over-year basis were favorable, demonstrating excellent cost containment and productivity by our teams.
In addition, we realized an $0.08 increase from lower corporate G&A as a result of salary reductions taken during the quarter and tight cost controls on discretionary spending.
Other income was $0.14 lower in the current year because the prior year included higher investment income and gains on several small real estate sales.
Moving to slide 19, we show total Parker sales and segment operating margin for the first quarter.
Organic sales decreased 13% year-over-year.
This decline was partially offset by favorable acquisition impact of 9.1% and currency impact of 0.8%.
Despite declining sales, total adjusted segment operating margin improved to 19.9% versus 18.8% last year.
This 110 basis point improvement reflects positive impacts from our Win Strategy initiatives and the hard work and dedication to cost containment and productivity improvements by our teams.
Moving to slide 20.
I'll discuss the business segments, starting with Diversified Industrial North America.
For the first quarter, North American organic sales were down 14.1%, and currency negatively impacted sales 0.3%.
These were partially offset by an 8.5% benefit from acquisitions.
Even with lower sales, operating margin for the first quarter on an adjusted basis was an impressive 21% of sales versus 19.4% last year.
This impressive favorable incremental margin reflects the hard work of diligent cost containment and productivity improvements and the impact of our Win Strategy initiatives.
Moving to the Diversified Industrial International segment on slide 21.
Organic sales for the first quarter in the Industrial International segment decreased by 7.3%.
This was offset by contributions from acquisitions of 9.1% and currency of 2.9%.
Operating margin for the first quarter on an adjusted basis increased to 19.2% of sales versus 17% in the prior year, an impressive incremental margin of 66.5%.
The teams continue to work on controlling costs and utilizing the tools of our Win Strategy.
I'll now move to slide 22 to review the Aerospace Systems segment.
Organic sales decreased 20.1% for the first quarter partially offset by acquisitions, contributing 10.8%.
Significant declines in the commercial businesses, both OEM and aftermarket, were partially offset by higher sales in both military OEM and military aftermarket.
The diversity of our aerospace portfolio, which includes business jets, general aviation and helicopters, is providing some additional balance against the current market pressures.
Operating margin for the first quarter was 18.1% of sales versus 20.4% in the prior year for a decremental margin of 43.5%.
Realigning the businesses to current market conditions and strong cost controls are helping to offset the less profitable mix imposed by the pandemic and the lower volumes.
On slide 23, we report cash flow from operating activities.
Cash flow from operating activities increased 64% to a first quarter record of $737 million and an impressive 22.8% of sales.
Free cash flow for the current quarter was 21.5%.
And with a drop in net income of just $17 million, the free cash flow conversion from net income jumped to 216%.
This compares to a conversion rate of 118% last year.
The teams remain very focused and effective in managing their working capital and consistently generating great cash flow.
Moving to slide 24, we show the details of order rates by segment.
Total orders decreased by 12% as of the quarter ending September.
This year-over-year decline is a consolidation of minus 11% within Diversified Industrial North America, minus 4% within Diversified Industrial International and minus 25% within Aerospace Systems orders.
Just a reminder that we report the Aerospace Systems orders on a 12-month rolling average.
Looking ahead, the updated full year earnings guidance for fiscal year '21 is outlined on slide 25.
Guidance is being provided on both an as-reported and an adjusted basis.
Based on our current indicators, we have revised our outlook for total sales for the year to a year-over-year decline of 3.5% at the midpoint.
This includes an estimated organic decline of 7.3%, offset by increases from acquisitions of 2.8% and currency of 1%.
This calculated the impact of currency to spot rates as of the quarter ended September 30, 2020, and we have held those rates steady as we estimate the resulting year-over-year impact for the remaining quarters of fiscal year '21.
Please note our revised guide does not forecast any additional demand pressure caused by further shutdowns as a result of a second wave of increasing COVID infections.
You can see the forecasted as-reported and adjusted operating margins by segment.
At the midpoint, total Parker adjusted margins are now forecasted to increase 30 basis points from prior year.
For guidance, we are estimating adjusted margins in a range of 19% to 19.4% for the full fiscal year.
For the below-the-line items, please note a significant difference between the as-reported estimate of $400 million versus the adjusted estimate of $500 million.
In October, as a subsequent event to the quarter, we reached a gain on the sale of real estate of $101 million pre-tax or $76 million after tax that will be recognized as other income.
Since this is an unusual onetime item, we plan to remove this gain as an adjustment to our adjusted earnings per share.
The full year effective tax rate is projected to be 23%.
For the full year, the guidance range for earnings per share on an as-reported basis is now $9.93 to $10.53 or $10.23 at the midpoint.
On an adjusted earnings per share basis, the guidance range is now $11.70 to $12.30 or $12 even at the midpoint.
The adjustments to the as-reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the full year fiscal '21.
Savings from current year and prior year business realignment actions are projected to result in $210 million in incremental savings in fiscal year '21.
Also included in the adjustments to the as-reported forecasts are integration costs to achieve of $18 million.
Synergy savings for LORD are projected to be an additional $40 million, getting to a run rate of $80 million by the end of the year.
And for Exotic, we anticipate a run rate of $2 million savings by the end of the year.
Acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year.
Some additional key assumptions for full year 2021 guidance at the midpoint are sales are now divided 48% first half, 52% second half.
Adjusted segment operating income is split 46% first half and 54% second half.
Adjusted earnings per share first half, second half is divided 45%-55%.
Second quarter fiscal 2021 adjusted earnings per share is projected to be $2.38 at the midpoint.
And this excludes $0.63 or $106 million of projected acquisition-related amortization expense, business realignment expenses and integration costs to achieve, offset in part by the gain on real estate of $0.59 or $101 million.
On slide 26, you'll find a reconciliation of the major components of the revised fiscal year 2021 adjusted earnings per share guidance of $12 even at the midpoint compared to the prior guidance of $10.30.
The teams outperformed our original estimates, beating the first quarter's guidance by $0.92.
With this performance and our continuing efforts to control costs, we are raising our estimated margins, which will in turn generate $0.81 of additional segment operating income over the next three quarters.
This calculates to an estimated decremental margin of 11.4% for the year.
Other minor adjustments to below operating income line items reduces our estimate by a net $0.03.
All in, this leaves $12 even adjusted earnings per share at the midpoint for our current guide for fiscal '21.
So the portfolio, our motion control technologies, gives us a clear competitive advantage versus our competitors.
We continue to transform it with the three acquisitions, and we really feel strongly with the Win Strategy 3.0 in our purpose statement that our best days are ahead of us.
And with that, I'll hand it over to Sonia to start the Q&A. | q4 adjusted earnings per share $1.49.
q4 earnings per share $1.62.
pultegroup - ended q4 with unit backlog of 15,158 homes, which is up 44% over comparable prior year period, valued at $6.8 billion.
qtrly net new orders increased 24% to 7,056 homes; order value increased 33% to $3.3 billion.
qtrly home sale revenues increased 5% to $3.1 billion. | 0 |
Both are now available on the Investors section of our website, americanassetstrust.com.
I am pleased to report that we continue to make great progress on all fronts as we rebound from the impact of COVID-19.
We knew at the onset of the pandemic that we would not be impervious to its economic impact, but we were confident that the high-quality, irreplaceable properties and asset class diversity of our portfolio, combined with the strength of our balance sheet and ample liquidity would help us pull through and maybe even come out on the other side better off than at the beginning.
We continue to be optimistic as we meaningfully rebounded in 2021 and anticipate further growth in 2022 and beyond.
That's why we've aggregated the portfolio comprised of a well-balanced collection of office, retail, multifamily and mixed-use properties located in dynamic high barrier to entry markets, where we believe that the demographics, pent-up demand and local economies remain strong relative to others.
Our properties are more resilient in our view to economic downturns as they are in the path of growth, education, and innovation and importantly can likely withstand the impact of long-term inflation, perhaps even benefit from the benefits of long-term inflation.
Along those lines during the past quarter, we used our liquidity to acquire two complementary and accretive office properties in Bellevue, Washington, a market that we remain very bullish on and in which we expect continued rent growth.
Meanwhile, our development of La Jolla Commons III into an 11 story, approximately 210,000 square foot Class A office tower remains on time and on budget for Q2 or Q3 2023 delivery.
We are encouraged about the leasing prospects in the UTC submarket for high-quality, large blocks of space, where both tech and life science funding continues at record levels and same tenants continue to expand.
But we don't have specific news to share on that front at this time.
The same holds true for our One Beach Street development on the North Waterfront of San Francisco, which we believe to be a unique opportunity for a full building tenant with delivery expected in Q2 or Q3 of 2022.
Additionally, I'm happy to inform you that our Board of Directors has approved the quarterly dividend of $0.30 a share for the third quarter, which we believe is supported by our expectations for operations to continue trending positively.
It will be paid on December 23 to shareholders of record on December nine.
As we look at our portfolio, we are always reminded of the importance of owning and operating the preeminent properties in each of our markets.
That's why we focused on continuing to enhance our best-in-class community shopping centers to promote a better experience for our shoppers with the expectation that this will further strengthen our properties as the dominant centers in our submarkets.
And we understand the importance of modern state-of-the-art amenities in our office projects, which assist our tenants in the hiring and retention of talent in what is currently a very competitive job market.
We feel strongly that consistently improving and monetizing our properties, including incorporating sustainability and health and wellness elements is critical to remaining competitive in the marketplace in order to attract the highest quality and highest credit tenants.
Meanwhile, we are encouraged by our approximately 97% collection percentage in Q3, increased leasing activity across all asset classes, fewer tenant failures and bankruptcies than we expected and many modified leases hitting percentage rent thresholds sooner than expected and are collecting of approximately 96% of deferred rents due during the third quarter, all validating the strategies we implemented during COVID to support our struggling retailers through the government-mandated closures as we are fortunate to have the financial ability to do so.
Briefly on the retail front, we've seen an improved leasing environment over the past few quarters with positive activity engagement with new retailers for many of our vacancies, including recently signed new deals with Columbia Sportswear, Williams-Sonoma, Total Wine and First Hawaiian Bank to name a few, and renewals with Nordstrom's, Petco and Whole Earth among others as well as many other new deals and renewals in the lease documentation process.
Retailers are choosing our best-in-class locations to improve their sales, all the while we remain selective in terms of merchandising our shopping centers for the longer term.
Chris Sullivan and his team have done a tremendous job on that front despite some of the continuing headwinds at our Waikiki Beach Walk retail.
On the multifamily front as of quarter end, we were 96% leased at Hassalo in Portland, and 98% leased in San Diego multifamily portfolio.
All of the master lease units in San Diego that you've heard us discuss previously were absorbed by early August.
Though multifamily collections have been particularly challenging in Portland due to COVID-related government restrictions, we have started receiving meaningful checks from government rental assistant programs to drive down our outstanding amounts owed and expect more checks to come.
We are confident that Abigail's strong leadership at San Diego multifamily and Tania's new energy at Hassalo will drive improvements at our multifamily properties, both operationally and financially.
Last night we reported third quarter 2021 FFO per share of $0.57, and third quarter 2021 net income attributable to common stockholders per share of $0.17.
Third quarter results are primarily comprised of the following: actual FFO increased in the third quarter by approximately 11.4% on a FFO per share basis to $0.57 per FFO share compared to the second quarter of 2021, primarily from the following four items: first, the acquisitions of Eastgate Office Park in Corporate Campus East III in Bellevue, Washington, on July seven and September 10, respectively, added approximately $0.023 of FFO per share in Q3.
Second, Alamo Quarry in San Antonio added approximately $0.017 of FFO per share in Q3, resulting from 2019 and 2020 real estate tax refunds received during the third quarter of 2021, which reduced Alamo Quarry's real estate tax expense.
Third, decrease of bad debt expense at Carmel Mountain Plaza added approximately $0.005 per FFO share in Q3.
And fourth, the Embassy Suites and Waikiki Beach Walk added approximately $0.012 of FFO per share in Q3 due to the seasonality over the summer months.
Let me give you an update on our Waikiki Embassy Suites hotel.
Due to the impact of the delta variant, Hawaiian Governor Ige made a formal announcement on the third week in August that if you have plans or are thinking of coming to Hawaii, please don't come until we tell you otherwise.
It was not a mandate, but it did create a detrimental impact to our visitors to Hawaii and resulted in huge cancellation starting in August and into September.
Our results for Q3 at Embassy Suites hotel were expected to be much higher.
Overall, occupancy, ADR and RevPAR continued to increase on heading in the right direction.
As of October 19, Governor Ige made another formal announcement to begin welcoming all essential and nonessential travel, starting November 1, 2021.
We look forward to welcoming the fully vaccinated individuals and ramping up our visitor industry.
On our Q2 earnings call, I mentioned that Japan, who was then approximately 9% fully vaccinated, is now over 65% fully vaccinated and is expected to hit 80% by November.
All emergency measures in Japan were lifted on September 30 and lifted the intensive antivirus measures.
It marks the first time since April that Japan is free of corona virus declarations and intensive measures.
We expect to start seeing the Japanese tourists beginning to slowly start revisiting the Hawaiian Islands beginning in November, including Waikiki.
Now as we look at our consolidated statement of operations for the three months ended September 30, 2021, our total revenue increased approximately $6.5 million over Q2 '21, which is approximately a 7% increase.
Approximately 43% of that was from the two new office acquisitions.
Same-store cash NOI overall was strong at 14% year-over-year, with office consistently strong before, during and post-COVID and retail showing strong signs of recovery.
Multifamily was flat primarily year-over-year as a result of higher bad debt expense at our Hassalo on eight departments in Portland, but it was still approximately 5% higher than Q2 2021.
As previously disclosed, we acquired Corpus Campus East III on September 10, comprised of an approximately 161,000 square foot multi-tenant office campus located just off Interstate 405 and 520 freeway interchange, less than five minutes away from downtown Bellevue, Washington.
The four building campus is currently 86% leased to a diversified tenant base, which we saw as an opportunity when in-place rents were compared to what we were seeing in the marketplace.
The purchase price of approximately $84 million was paid with cash on the balance sheet.
The going-in cap rate was north of 3% as a result of the existing vacancy.
Our expectation based on our underwriting is that this asset will produce a five year average cap rate over 6% and a strong unlevered IRR of 7%.
Let's talk about liquidity.
At the end of the third quarter, we had liquidity of approximately $522 million, comprised of approximately $172 million in cash and cash equivalents and $350 million of availability on our line of credit.
Our leverage, which we measure in terms of net debt-to-EBITDA was 6.4 times.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.9 times.
As we approach year-end, we are providing our 2021 guidance.
The full year range of 2021 is $1.91 to $1.93 per FFO share with a midpoint of $1.92 per FFO share.
With that midpoint, we would expect Q4 2021 to be approximately $0.46 per FFO share.
The $0.11 estimated difference in Q4 FFO per share would be attributable to the following: approximately a negative $0.025 of FFO per share relating to nonrecurring collection of prior rents at one of our theaters in Q3 that will not occur in Q4 2021.
Secondly, our mixed-use properties are expected to be down approximately $0.037 of FFO per share relating to the normal seasonality of the Embassy Suites hotel and the related parking.
Third, Alamo Quarry is expected to be down approximately $0.02 of FFO per share relating to the nonrecurring property tax refund that was received in Q3 2021 for 2019 and 2020.
And we expect G&A and interest expense to increase and therefore, decrease FFO by approximately $0.02 per FFO share.
Additionally, we plan to issue 2022 full year guidance subject to Board approval when we announce year-end 2021 results in February of 2022.
Historically, we have issued our full year guidance on the Q3 earnings call.
We believe resetting the issuance and cadence of our guidance to the Q4 earnings call going forward is more in alignment with our peers and also gives us more clarity as to the following year guidance.
We will continue our best to be as transparent as possible and share with you our analysis, interpretations of our quarterly numbers.
Our office portfolio grew by approximately 440,000 square feet or nearly 13% in Q3 with the two new office acquisitions.
We brought up these assets on board at approximately 92% leased with approximately 20% rolling through 2022, which provides us with the opportunity to deliver start rates from approximately 10% to 30% over ending rents.
At the end of the third quarter at One Beach, which remains under redevelopment, our office portfolio is approximately 93% leased with 1.5% expiring through the end of 2021, approximately 9% expiring in 2022 with tour and proposed activity that has increased significantly.
Our office portfolio has weathered the storm well.
In the second and third quarters, we executed 57,000 annual square feet of comparable new and renewal leases with increases over prior rent of 9.2% and 14.5% on a cash and straight-line basis respectively.
New start rates for the 2021 rollover are estimated to be approximately 17% above the ending rates.
In fact, we are at least documentation for over half of the space rolling in 2021 as start rates nearly 28% over ending rates.
New start rates for the 2022 rollovers are estimated to be approximately 18% above the ending rates.
We are employing multiple initiatives to drive rent growth and occupancy, including renovating buildings with significant vacancy, adding or enhancing amenities, aggregating and white boxing larger loss of space where there is a scarcity of such blocks and improving our smaller spaces to be move-in ready.
By way of a few examples, we are just completing renovations of two buildings at Torrey Reserve in San Diego.
Those two buildings represent 80% of the total project vacancy.
We now have leases signed or in documentation for over half of that vacancy at premium rates.
We will be completing similar renovations Eastgate Office Park where leasing activity is already robust, but we anticipate taking this property to the next level of quality.
We are adding new fitness and conference facilities at Torrey Reserve, City Center Bellevue and Corporate Campus East III and will be further enhancing the employee's amenities building at Eastgate.
We believe that our continued strategic investments in our portfolio will position us to capture more than our fair share of that absorption at premium rents as the markets improve.
And we have more to look forward to with redevelopments and development.
In addition to One Beach Street and La Jolla Commons previously mentioned by Ernest, construction is nearly complete on the redevelopment of seven Tower Square in the, on our market at Portland, which will add another 32,000 rentable square feet to the office portfolio.
In summary, our office portfolio is on us as we move forward into the rest of 2021 and beyond. | q3 ffo per share $0.44.
qtrly earnings per share $0.08.
collected 89% to date of rents that were due during q3. | 0 |
A copy of these materials can be found in the Investors section at sysco.com.
I'll provide an update on our business transformation.
And finally, I'll provide some color on the current state of our business environment.
Let's get started with our financial results displayed on slide four.
Our top line results sequentially increased each month of the quarter despite the presence of the Delta variant and have continued to improve into October.
Our sequential improvement in sales and volume is a clear statement of our supply chain strength and our ability to win meaningful market share in this climate.
We are pleased with the top line results, and our flow-through to the bottom line exceeded our expectations for the quarter.
This strong start gives us confidence in reaffirming our guidance for the full year.
Key headlines for the quarter include a growing top line that improved sequentially throughout the quarter and continued growth through October, as seen on the right side of slide four.
Q1 represented another period of strong net new business wins for Sysco at both the national and local level.
These customer wins will fuel our success in quarters and years to come.
Customers are responding to Sysco's relative supply chain strength, our new purpose platform and our improving capabilities driven by our Recipe for Growth strategy.
All told, we delivered sales growth of 8.2% versus 2019.
We outperformed our fiscal 2022 growth goal of 1.2 times the market in the first quarter, delivering the strongest growth versus the market in the last 5-plus years.
We believe additional growth is still in front of us at Sysco as our volume is yet to fully recover in certain segments, such as hospitality, business and industry, foodservice management and international.
As these segments recover, additional momentum will be added to our business.
We are preparing now for select segments to further recover in early 2022 by strategically placing inventory and bolstering our staffing levels.
For example, we anticipate that our business and industry segment will see upward momentum in January as select customers plan to reopen their offices at that time.
International travel restrictions are beginning to ease, which should benefit our hospitality sector in specific regions of our business.
Our operational expenses for the quarter increased due to higher volumes, elevated overtime rates and in intentional expenditures that were targeted to improve our staffing health.
We invested in incremental marketing to advertise open positions.
We provided new associates with sign-on bonuses and provided referral and retention bonuses to existing staff.
We anticipate that these expenses will continue in our second quarter and that we can make progress in reducing the level of investment in the second half of our fiscal year.
Our profit flow-through from the top to the bottom line should improve as a result in the second half.
Gross margin for the quarter was impacted by a high rate of inflation, which increased to approximately 13%.
We expect inflation to continue at a similar rate through the second quarter before beginning to taper later in the fiscal year.
Given current trends in the industry, we expect the tapering will begin further into the fiscal year than we had initially modeled.
Our international business continues to show strong improvement.
We have improved from posting a loss in Q3 of 2021 to breaking even in Q4 to making more than $60 million of adjusted profit in our Q1 of fiscal 2022.
It is important to note that our international business is skewed to large contract customers that are still heavily impacted by COVID.
For example, we over-indexed in Europe in the business, industry and travel segments that remain constrained versus 2019 levels.
As such, the relative sales performance in the international sector still lags that of the U.S. segment.
However, it also conveys that we have additional recovery still in front of us internationally.
Our Recipe for Growth strategy will enable our international business segment to improve how we serve local customers over time.
And we anticipate a shift in our customer mix to the more profitable local sector as we progress on our three-year strategic plan.
In summary, we delivered very strong top line results, increased profit per case shipped and experienced elevated operating expenses that increased our cost to serve.
The combination of these results delivered a strong adjusted operating income for the quarter of $685 million and adjusted earnings per share of $0.83.
Both results exceeded our expectations for the quarter and position Sysco to deliver our full year guidance.
Aaron will provide more details on our financials shortly, but we are pleased to be off to a strong start in the new fiscal year.
Topic 2, let's turn to our business transformation, which is highlighted on slide five.
Our pricing project implementation is now substantially complete.
The centralized pricing tool enables Sysco to strategically manage the high levels of inflation we are currently experiencing with disciplined and strategic control.
We can determine, at the customer item level, exactly what level of inflation to pass through.
We can optimize the pass-through to balance profitability and sales growth.
There is no better time than the present to have this powerful capability.
Longer term, the pricing tool will enable us to accelerate sales growth profitably as we optimize pricing to increase share of wallet and increase pricing trust with our customers.
Our work on the personalization engine continues to advance.
This innovative industry-leading program will enable Sysco to further penetrate lines and cases with existing customers and will improve our sales consultants' ability to win new accounts.
We will supplement personalization with increased service levels for top customers through an innovative loyalty program that we will discuss more in future quarterly calls.
Our sales transformation is proving to be very successful as our sales teams continue to win new business at record levels.
As I mentioned in my financial narrative, our local and national sales teams delivered strong wins in the quarter that will help fuel our future growth profitably.
Lastly, we are continuing to improve the efficiency of our organization as we further reduce our structural expenses to fund our strategic initiatives.
Over the past few quarters, we regionalized the leadership structure of our specialty businesses, FreshPoint and SSMG, and we followed the playbook of our U.S. Broadline regionalization and have now implemented the more agile and efficient model for our two main specialty businesses.
As shown on slide six, during our first quarter, we successfully closed on the Greco and Sons transaction, which we expect to deliver over $1 billion in incremental sales to Sysco in fiscal 2022, ahead of our deal model expectations.
More importantly, we plan to leverage the Greco business model to build a nationwide Italian platform that is the best in the industry, which will further deliver incremental sales beyond the $1 billion just mentioned.
In addition to closing the Greco transaction, we acquired a produce distributor in October that will operate as a part of our FreshPoint business segment and will improve our ability to provide fresh produce and value-added fresh-cut capabilities to the Pennsylvania and Ohio markets.
You may not realize that Sysco is the largest specialty produce distributor in the United States vis-a-vis our FreshPoint platform.
Our produce business has a high-growth CAGR and attractive margins.
Growing in the specialty sector is a priority for Sysco, enabling us to gain more share of wallet from customers by combining our Broadline capabilities with the premium service levels, selling skills and product assortment availability of specialty.
Our Recipe for Growth is still in the very early innings, but we can see the benefits of our developing capabilities and the new customers we are winning and the progress that we are making in market share gains.
Importantly, our first quarter results exceeded our 1.2 times market share growth target for fiscal 2022.
More importantly, as the Recipe for Growth matures, the impact on our top line growth will accelerate.
As such, we remain committed to growing profitably 1.5 times the market as we exit our fiscal 2024.
Topic three for today is an update on the state of the business.
During our last earnings call, I highlighted the critical importance of staffing health due to the supply chain challenges that are well documented across all industries.
As covered on bullets on slide seven, we have made progress throughout this quarter in improving our staffing levels.
Our leadership team, top to bottom, has been extraordinarily focused on improving our staffing health.
A good example of our efforts is the execution of our first-ever nationwide hiring event in the second week of October.
We leveraged extensive digital marketing and a streamlined hiring process to net more than 1,000 new supply chain associates to bolster our troops.
When coupled with our year-to-date hiring success, we are making solid progress on increasing our throughput capacity.
Additionally, during the quarter, we opened our first Driver Academy, our first academy classes in session, as we say at Sysco, and we are training our next generation of Sysco drivers.
We are bullish on expanding this program across the country in the coming year, and we are confident it will make a meaningful difference in generating a solid driver pipeline.
From a product availability perspective, although our fill rates still lag our historical standards, we were able to deliver a higher fill rate to customers than the industry average.
We have strong relationships with our key suppliers and a merchant team that is extremely focused on finding and sourcing product substitutions.
I have personally engaged with top suppliers to ensure a solid partnership with Sysco, and I am cautiously optimistic that our suppliers' performance will improve through the remainder of the year and into our fiscal 2023.
Supplier improvement will be a key to improving customer fill rate and customer satisfaction.
Lastly, you may have seen the recent announcement regarding the Department of Labor's Occupational Safety and Health Administration's requirements for employers with 100 or more employees.
I am pleased to inform you that Sysco began a weekly COVID testing regimen in September, and as such, we are already compliant with the majority of the OSHA's stated guidelines.
The safety of our associates and our customers is our #1 priority, and we remain steadfast in protecting our team.
In summary, Sysco continues to lead the industry in how we are supporting our customers during this challenging supply chain environment.
Our Net Promoter Scores are outperforming the Broadline distribution industry, and our ability to serve customers remains best-in-class.
We remain the only national distributor without systemwide minimum orders, and we will endeavor to increase the flexibility and service that we provide our customers in the coming quarters and years.
The impact of our relative supply chain success can be seen in our results.
We sequentially increased sales throughout the quarter and expanded our market share capture.
We now have more than 10 consecutive months of gaining market share, and we are on track to deliver our stated goal for the year, growing 1.2 times the industry.
And our Recipe for Growth strategy will enable us to accelerate, over the next three years, and grow at 1.5 times the industry by the end of our fiscal year 2024.
We are winning in the marketplace, and that would not have been possible without the dedication of our sales, logistics and merchandising teams.
I'm honored to serve these associates and work by their side.
Aaron, over to you.
Our strong first quarter fiscal 2022 financial headlines are: growing demand with sales exceeding Q1 fiscal 2019 by 8.2%; a profitable quarter, exceeding our plans with EBITDA comparable to pre-COVID 2019 levels; aggressive investment by Sysco against hiring a snapback, allowing Sysco to lead the industry in otherwise turbulent times; purposeful investments in working capital to continue to lead in product availability; a strong return to profitability by our international business; and great progress against our balanced capital allocation strategy, including continued investments against the five pillars of our Recipe for Growth and upgrade to BBB of our investment-grade rating by S&P the elimination of all debt covenant restrictions on our ability to repurchase shares or increase our dividend in the future; and a decision that we are announcing today, namely that we have satisfied our internal criteria to commence share repurchase.
In the second quarter of fiscal 2022, we will begin our repurchase of up to $500 million of shares over the course of this fiscal year.
During today's call, I'm going to cover the income statement and cash flow for the quarter, and then I will close with some observations on our guidance for fiscal 2022.
First quarter sales were $16.5 billion, an increase of 39.7% from the same quarter in fiscal 2021 and an 8.2% increase from the same quarter in fiscal 2019.
In the United States, sales in our largest segment, U.S. Foodservice, were up 46.5% versus the first quarter of fiscal 2021 and up 11.6% versus the same quarter in fiscal 2019.
SYGMA was up 11.8% versus fiscal 2021 and up 5.1% versus the same quarter in fiscal 2019.
You will recall that in SYGMA, the increase in sales in the quarter is more modest because of the purposeful transition-out of an unprofitable customer, which we announced in our third quarter fiscal 2021 earnings call, and because during the quarter, some consumers are switching from their favorite QSR drive-up back to some of the excellent sit-down restaurants served by our more profitable U.S. Foodservice segment.
Local case volume, within a subset of USFS, our U.S. Broadline operations, increased 23.8%, while total case volume within U.S. Broadline operations increased 28.1%.
With respect to our international business, restrictions continue to ease across our international operations in the first quarter.
International sales were up 34% versus fiscal 2021 while also improving sequentially over prior quarters to down less than 1% versus fiscal 2019, indicating that we have more upside to come.
Foreign exchange rates had a positive impact of 1.1% on Sysco's sales results.
Inflation continued to be a factor during the quarter at approximately 13%.
The good news is that we continue to manage our profitability well in the inflationary environment.
Let me call out a couple of numbers, and then we'll discuss inflation further.
Gross profit for the enterprise was approximately $3 billion in the first quarter, increasing 33.9% versus the same quarter in fiscal 2021 and also exceeding gross profit in fiscal 2019 by 2%.
The increase in gross profit was driven by year-over-year improvements in volume versus fiscal 2021 and, compared to both fiscal 2021 and fiscal 2019, increases in gross profit dollars per case across all four of our reporting segments.
That's a real sign of health in our business.
While it is gross profit dollars that count, inflation did impact our gross margin rates for the enterprise during the quarter as it decreased 79 basis points versus the same period in fiscal 2021 and finished at a rate of 18.1%.
The rate was flat sequentially with Q4 of fiscal 2021.
The gross margin decline versus the prior year was driven by accelerating inflation and margin changes at our higher-margin U.S. businesses with the larger USFS businesses growing volume at lower margin rates.
We continue to manage the inflationary pressures with both our suppliers and our customers and, thus far, have not seen much pushback on our ability to pass along pricing.
In addition, the fact that we are now substantially complete in our rollout of our Periscope pricing system means that we have more tools than ever before to manage our profitability while being right on price.
Turning back to the enterprise.
Adjusted operating expense came in at $2.3 billion with expense increases from the prior year driven by three things: first, the variable costs associated with significantly increased volumes; second, more than $57 million of onetime and short-term transitory expenses associated with the snapback; and third, more than $24 million of operating expense investments for our Recipe for Growth.
Together, the snapback investments and the transformation costs totaled approximately $81 million of operating expense this quarter and negatively impacted our adjusted earnings per share by $0.12.
Even with those significant snapback and transformation operating expense investments, we leveraged our adjusted operating expense structure and delivered expense as a percentage of sales of 13.9%, an almost 200 basis point improvement from fiscal 2021 and a 64 basis [point] improvement from the same quarter in fiscal 2019.
Doing the simple math, if we removed the transitory snapback investments and the transformation investments I referenced earlier, total opex would have been at 13.4% of sales.
That is a real sign of the power of our earlier cost-out efforts.
To repeat what we said before, during fiscal 2022, our cost-out helps us to cover snapback and transformation costs.
Finally, for the first fiscal quarter, adjusted operating income increased $320 million from last year to $685 million, putting us basically on par with adjusted operating income for fiscal 2019, even with the snapback investments and the transformation investments.
This was primarily driven by a 58% improvement in U.S. Foodservice and strong profitability from international.
Adjusted earnings per share increased $0.49 to $0.83 for the first quarter.
Perhaps pointing out the obvious, if we extract the $51 million of incremental interest expense we are carrying in Q1 of fiscal 2022, resulting from the COVID-related precautionary bonds we issued in 2020, our adjusted earnings per share results for Q1 of fiscal 2022 would have been more in line with our pre-COVID adjusted earnings per share results for Q1 of fiscal 2019.
If you go a step further and exclude both the interest expense and the $81 million of snapback and transformation costs, you really begin to see why we believe that in the long term, Sysco has significant earnings potential.
Now let me share a couple of comments on cash flow and the balance sheet.
Cash flow from operations was $111 million during the first quarter as we responded to rising sales and purposely invested in inventory in support of managing product availability during the snapback better than the industry.
We also purposely invested in longer-lead inventory to support customers such as K-12 schools and healthcare facilities during the snapback, consistent with Sysco's purpose statement.
We also saw manageable changes in receivables levels that we expected to accompany rising sales and arising from the mix of business as Sysco executes its Recipe for Growth.
Our net capex spend was $79.4 million and is ramping up as teams submit business cases for investments against the Recipe for Growth.
We will manage those investments over the course of our three-year plan to ensure our growth.
Free cash flow for the first quarter was $31 million.
At the end of the first quarter, after our investments in the business, payments of the acquisition price for Greco and our dividend payments, we had $2.1 billion of cash and cash equivalents on hand.
In May, we committed to supporting a strong investment-grade credit rating with a targeted net debt to adjusted EBITDA leverage ratio of 2.5 times to 2.75 times, which we continue to expect to hit by the end of fiscal 2022.
Later this year, we plan to pay off the $450 million of notes due in June of 2022 and may, should the circumstances warrant it, take further action against our debt portfolio.
We also paid our increased dividend of $0.47 per share in July and again in October.
Given that we paid our increased dividend starting in July, consistent with our status as a dividend aristocrat, we expect to next address decisions around our dividend per share sometime during calendar year 2022.
As I mentioned earlier, we plan to commence share repurchase activity under the $5 billion share repurchase authority we announced in May at Investor Day beginning in the second quarter.
As I stated a moment ago, that will take the form of the repurchase of up to $500 million of shares by the end of the fiscal year.
Now before closing, I would like to provide you with some commentary on the outlook for fiscal 2022.
As Kevin highlighted, we expect to continue to grow at or above 1.2 times the market in fiscal 2022.
We are operating in a dynamic environment with significant inflation.
While we do expect inflation to moderate by the fourth quarter of fiscal 2022, it may take longer to taper than originally anticipated, though it is hard to predict.
We expect to pass through the vast majority of our COGS inflation.
We are assuming continued heavy snapback and transformation investments in Q2 at levels at least equal to the investments in Q1.
We are reaffirming our earnings per share guidance for the year.
Fiscal 2022 earnings per share will be in the range of $3.33 to $3.53, reflecting the $0.10 increase that we called out last quarter.
As always, our earnings per share guidance does not assume changes to the federal tax rate.
All in all, we have confidence for the rest of the year.
In summary, we've had a solid quarter, and the fundamentals of our business remain strong.
We are excited about the future as we continue to advance Sysco's Recipe for Growth. | sysco delivers strong first quarter results including meaningful market share gains reiterating fiscal year 2022 guidance.
q1 sales rose 39.7 percent to $16.5 billion. | 1 |
Joining us today are Tom O'Hern, chief executive officer; Scott Kingsmore, senior executive vice president and chief financial officer; and Doug Healey, senior executive vice president of leasing.
2020 was an extraordinarily tough year in so many ways for all of us.
Once COVID stormed the U.S. in mid-March, all of our centers closed, and our tenants quit payment.
We quickly adopted significant measures to conserve liquidity, much as we had done during the Great Financial Crisis.
We persevered through those dark days of the second quarter, we got most of our centers opened by mid-summer, and all of our centers opened by early October with no further closures.
It was a herculean effort by the Macerich team, and I'm very proud of their efforts.
There were not a lot of good days, but we battled through it.
Rent collections, for example, during April and May were 35%, that grew to 80% in the third quarter.
And as of today, the fourth-quarter rent collections were at 92% and rising by the week.
2020 was a year of crisis, but we made it through the year, and things are improving by the week.
The COVID daily infection cases are down significantly throughout our markets.
The positivity rate is dropping, and hospitalizations are down significantly compared to a month ago.
We now have two vaccines in distribution with a third on the way.
Currently, 10% of the U.S. population has had at least one dose of the vaccine, and distribution is accelerating.
Not that the COVID battle is over, but it is much, much better than it was even three months ago, some level of normalcies returning, including restaurant dining and going to the mall.
Our shoppers have returned.
In fact, December sales were approaching 85% of pre-COVID levels even in the midst of a surge in COVID cases.
Gradually, restrictions on capacity and indoor dining are being lifted, and that will help both our traffic and our sales.
COVID, among many other things, had the impact of accelerating bankruptcies of dozens of retailers that otherwise likely would have gone into bankruptcy over the next several years but instead, we're accelerated into 2020.
The result is our occupancy level is at 90%, which is the lowest since the Great Financial Crisis.
However, within two years post-GFC, we were back to full occupancy.
We expect a similar recovery post-COVID.
We have worked through most of the bankruptcies from 2020.
And fortunately, the vast majority of those have been reorganizations, not liquidations.
The biggest bankruptcy of the year was JCPenney.
Of our 27 JCPenney locations, only two locations closed, Green Acres and Kings Plaza, both in New York.
I'm happy to report that we have leases out for signature on both of those locations and should be able to make announcements in the very near future.
As you say goodbye to 2020 and gladly watching in the rearview mirror, we are very optimistic about 2021 and the recovery of our business.
Although '21 is going to be a transitional year, it will be much better than 2020 in almost every respect.
Most of the tenant COVID workout agreements will have some impact on us in '21, both in terms of rent relief, as well as higher-than-normal vacancy rates.
That being said, we expect to see occupancy gains in the second half of the year and a gradually improving leasing environment.
Rent collections have improved significantly, up from a September collection rate of 77%, and are now above 90% in the fourth quarter.
January is also trending above 90%.
We have come to agreement on COVID workouts with over 93% of our top 200 tenants.
Leasing activity picked up significantly in the fourth quarter.
Volumes, in fact, were 90% of pre-COVID levels of the fourth quarter of 2019.
We even have a variety of gated attractions that are planning to open this year, including, Candytopia, ModelLand, and the Museum of Ice Cream.
Many of our replacement tenants in the former Sears locations will also open in 2021.
Our 2021 lease expirations are 60% leased today, with the majority of the balance in the letter of intent stage.
Looking at the balance sheet, most of our 2021 loan maturities have been successfully extended, and negotiations are well under way to renew our line of credit, which matures in the third quarter.
Retailer traffic and sales continue to pick up with traffic at 80% of pre-COVID traffic and sales, on average, 85% of pre-COVID levels.
We expect improvements in both traffic and sales as we progress through 2021.
The cost-reductions and cost-containment measures we adopted when COVID hit will be continued into 2021.
And the final point for me, once again, we have been recognized as a leader in sustainability and have achieved the No.
1 Global Real Estate Sustainability Benchmark Ranking in the North American retail sector.
That makes six straight years for that honor.
Highlights of the financial results for the quarter are as follows.
Funds from operations for the fourth quarter was $0.45.
That's down from the fourth quarter of 2019 at $0.98 per share.
Same-center net operating income for the quarter was down 33%, and year to date is down 22%.
As you will see, these results are unchanged relative to what was filed last week on February 1.
Changes between the fourth quarter of 2020 versus the fourth quarter of 2019 were driven primarily by the continuing impact of COVID-19 and are as follows, and the figures I'm citing are at the company's pro-rata share.
One, $38 million decline from COVID-related rent abatements across permanent and temporary leasing revenue line items.
Fourth-quarter abatements were elevated relative to the third-quarter abatements of $28 million, and this was largely due to the protracted summer closures of several large properties in New York and in California.
This resulted in delayed negotiations with tenants at those properties.
Cumulatively for the year, in 2020, we granted $56 million of abatements.
Number two, $19 million of COVID-related decline in common area and ancillary revenues, including specialty leasing and temporary tenant revenue, percentage rent revenue, business development revenue, and parking revenue.
These declines were generally a continuation of what we experienced in the second and third quarters but were exacerbated in the fourth quarter given the seasonal nature of these types of income.
However, looking forward into '21, we do anticipate growth in each of these more transient income line items, assuming conditions at our properties improve as we do expect.
In total, for all of 2020, these line items were down $43 million.
Number three, general top-line revenue decrease is totaling approximately $12 million, driven primarily by COVID-related occupancy decreases.
Number four, $6 million of bad debt expense in the form of reversals of lease revenue for tenants on a cash basis pursuant to GAAP, that was about $5 million, and then bad debt expenses of about $1 million.
As a result of the COVID-related disruption to our business, the bad debt expense line item was significantly elevated in 2020 at $62 million.
This was a $52 million increase versus $10 million of bad debt expense in 2019.
Number five, there was an $8 million decrease from loss or gain on un-depreciated asset sales or writedowns on consolidated assets.
This included a $5 million impairment charge in the fourth quarter of 2020 for undeveloped land that is currently under contract for sale and is expected to close in 2021.
And lastly, offsetting these items, straight-line rent increased $19 million in the fourth quarter.
This was driven by applying straight-line rent averaging to all rental assistance lease amendments executed during the fourth quarter.
So to summarize some of the major impacts of COVID that impacted real estate NOI in 2020, and again, all these figures are at the company's share, we highlight the following: number one, $56 million of one-time retroactive abatements of rent.
These concessions were granted to local business owners and entrepreneurs, to restaurants and other food uses, and then selected cases to national tenants in order to secure near-term lease expirations and to achieve other landlord favorable concessions.
Number two, a $43 million of decline in common area and ancillary revenues, percentage rent and temporary -- or excuse me, and parking revenues.
Again, these are transient line items, and we would expect those to bounce back.
And number three, we wrote-off an extra $52 million of bad debt expense relative to 2019.
Plus, in addition, we had another $11 million of rent that was reversed for tenants that are accounted for on a cash basis.
So when you add all that up, collectively, it's roughly $162 million of pandemic-driven NOI decline just among those three categories.
2021 FFO is estimated in the range of $2.05 per share to $2.25 per share.
While certain guidance assumptions are provided within our supplemental filing, I'd like to provide some further details.
This guidance range assumes no further government-mandated shutdowns of our retail properties.
We are not providing same-center NOI guidance at this time given continued expected impacts of COVID-19 in early 2021.
But we do anticipate growth in the same-center NOI starting in the third quarter of '21.
And in fact, at this time, we expect strong double-digit growth in the second half of 2021.
Anticipated progress on vaccination efforts, continued fiscal stimulus from the federal government, significant pent-up demand from our market consumers, and softer comparables in the last half of the year informed this thinking for ramped up growth later in 2021.
In terms of FFO by quarter, we estimate the following cadence: 21% in the first quarter, 24% in 2Q, 25% in 3Q, and the balance 30% in the last quarter.
We view 2021 as a transitional year as we pivot away from the disruption and widespread closures caused by COVID during 2020.
We do expect that the first-quarter '21 will include lingering effects of COVID, including from retroactive rent adjustments relating to 2020.
Trough occupancy appears to have been contained to roughly 88%, which we estimate to be at the end of the first quarter.
And we do believe there's an opportunity to grow occupancy later part in the year and certainly over the coming years, which should fuel future operating growth.
Again, more details of the guidance assumptions are included in the company's Form 8-K supplemental financial information.
Now, on to the balance sheet.
As addressed in detail within our recent filings, over the last few months, we have successfully extended four secured mortgage loans, totaling over $660 million for extension terms ranging up to three years.
Those loans included mortgages on Danbury Fair, Fashion Outlets of Niagara, FlatIron Crossing, and Green Acres Mall.
We do anticipate securing similar extensions on remaining mortgages that mature in 2021, including from Green Acres Commons, for which we are currently working on a two-year extension.
In November, the company financed the previously unencumbered Tysons Vita, this is a residential tower at Tysons Corner.
The loan is a $95 million mortgage loan, bearing fixed interest at 3.3% for 10 years.
At closing, this generated $45 million of incremental liquidity to the company, and there is some incremental funding capacity remaining under this line item.
As mentioned in our recent filings, we continue to make progress on the renewal of our line of credit.
Cash on hand at year-end was $555 million.
As Tom previously noted, collection efforts are now over 90%.
This improved collection environment is a direct byproduct of the extensive efforts by a vast many within the company to negotiate thousands of agreements with our retailers.
I can tell you, we are extremely proud of those efforts, as Tom has already noted.
As a result, we do anticipate further improvement in collections into 2021.
And in addition, we estimate the collections of both contractually deferred and delayed rent collections in 2021 that relate to 2020 billed rents in the approximate range of $60 million to $75 million.
During 2021, we expect to generate over $200 million of cash flow from operations, and this is after recurring operating and leasing capital expenditures and after dividend.
This assumption does not include any potential capital generated from dispositions, refinancings, or issuances of common equity.
This operating cash flow surplus will be used to delever the balance sheet, as well as to fund our development pipeline.
And as for development, we expect to spend less than $100 million in 2021, excluding further development expenditures on One Westside, which recall, is independently funded by a construction loan facility.
In the fourth quarter, much of our focus, again, was working with retailers to secure rental payments and improve our collection rates.
Looking at our top 200 rent-paying national retailers, we now have commitments with 176, which is up considerably from last quarter.
But more importantly, we now have received payments, or we've worked out deals totaling 93% of the total rent these top 200 pay.
And as a result, our collections continued to improve.
As of today, collection rates increased to 89% in the third quarter and 92% in the fourth quarter of 2020.
Occupancy at the end of the third quarter was 89.7%, that's down 110 basis points from last quarter and down 4.3% from a year ago.
This is primarily due to store closures from the unprecedented amount of bankruptcies and early abandonments that occurred throughout 2020.
Temporary occupancy was 5.9%, and that's down 50 basis points from this time last year.
Trailing 12-month leasing spreads were a negative 3.6%, and that's down from 4.9% last quarter and down from 4.7% in 2019.
Average rent for the portfolio was $61.87 as of December 31, 2020, and this represents a 1.3% increase compared to $61.06 as of December 31, 2019, and a 0.7% decrease compared to $62.29 at September 30, 2020.
2021 lease expirations continue to be an important focal point.
And to date, we have commitments on 60% of our expiring square footage, with another 40%, or the balance, in the letter of intent stage, disregarding tenants who have closed or have indicated they intend to close.
In the fourth quarter, we signed 217 leases for 900,000 square feet.
This represents 80% more leases and 1.5 times the square footage when compared to the third quarter of 2020.
This also represents 90% of the square footage that we signed in the fourth quarter of 2019.
Noteworthy leases signed in the fourth quarter include Athleta at Danbury Fair, Louis Vuitton at Scottsdale Fashion Square, Swarovski at La Encantada and Los Cerritos, Madison Reed at SanTan, four renewals with Sephora at Eastland, FlatIron Crossing, Vintage Faire, and Pacific View, as well as a five-store package with Charming Charlie's at Green Acres, FlatIron, Fresno, La Encantada, and Pacific View.
Turning to openings in the fourth quarter.
We opened 59 new tenants in 236,000 square feet, resulting in a total annual rent of over $10 million.
Henckels at Fashion Outlets of Chicago.
In the international arena, we opened another three stores with Lovisa at Deptford Mall, Queens Center, and Kings Plaza, along with Quay Australia at Los Cerritos.
In the large-format category, we opened DICK's Sporting Goods at Vintage and Round 1 at Deptford Mall, both in former Sears locations.
The digitally native and emerging brands continue to open bricks-and-mortar stores.
In the fourth quarter, we opened Amazon 4-Star and Madison Reed at 29th Street, Amazon Books at Los Cerritos, and Purple at Tysons Corner.
Now, let's move to 2021 and our pipeline.
Our pipeline remains strong, vibrant, and exciting.
We already have signed leases totaling approximately 494,000 square feet, all scheduled to open in 2021, and this list continues to grow.
Later this year, we look forward to opening an amazing two-level, 11,000-square-foot flagship Dior store at Scottsdale Fashion Square, the first and only Dior in all of Arizona.
And joining Dior will be Louis Vuitton Men, further marking Scottsdale Fashion Square as the one and only true luxury destination in the market, and the state for that matter.
Primark is well under construction and will open its highly anticipated 50,000 square foot store at Fashion District Philadelphia in September of this year.
Other impactful openings to look forward to this year include Dave & Buster's at Vintage Faire, Kids Empire, and Madison Reed at SanTan, Tyra Banks' ModelLand at Santa Monica Place, XLanes at Fresno Fashion Fair, San Bernardino County offices at Inland Center, Bourbon & Bones at SanTan Village, Cooper's Hawk Winery at Boulevard Shops, Shake Shack at 29th Street, Uncle Julio's at South Plains, Faherty at Village of Corte Madera, Lucid Motors at Tysons Corner, and Scottsdale Fashion Square and Marine Layer at Broadway Plaza.
And that's just to name a few.
And when we look at deals still in lease negotiation, we have yet another 435,000 square feet to open in 2021, and this number grows daily.
Lastly, I'm often asked during this unprecedented time of bankruptcies and store closures, who's left to fill this space?
What we need to remember is this pandemic only accelerated the demise of those retailers who are already struggling pre-pandemic.
What's not talked about are those retailers who were strong going into the pandemic and actually came out stronger on the other end.
Perhaps it's because they had great product and offered great value or perhaps it's because they had strong omnichannel business and used their online strategy to actually increase customer awareness and acquisition.
Think Lululemon, DICK'S Sporting Goods, Target, Peloton, and Blue Nile, and there are so many others.
Or how about the strong traditional retailers with significant open-to-buys looking to capitalize on some great new available space in some of the best centers in the country?
I'm talking about retailers such as Aerie, Madewell, Free People, Levi's, Sephora, Arhaus, Aritzia, Old Navy, Athleta, just to name a few.
Or brand extensions such as Offline by American Eagle, Gilly Hicks by Abercrombie & Fitch, or DICK's Sporting Goods' new experiential concept.
Or new and emerging brands like Alo Yoga, Faherty, Psycho Bunny, and Tonal or new electric car manufacturers such as Lucid, Polestar, and VinFast.
And we're deep in discussions with all these retailers and many, many more.
However, we know our shoppers want more than just traditional retail.
And that's why we continue to focus on bringing alternative uses to our campuses and not just retail, uses like office, residential, hospitality, medical, wellness, education, fitness, grocery, service, and even storage.
And that's why we continue to refer to our properties as town centers because that's what they're becoming.
They're transformational, and they'll be something for everyone.
And they have to be because that's what our modern-day shopper wants. | compname posts quarterly ffo per share $0.45 excluding items.
quarterly ffo per share $0.45 excluding items.
mall portfolio occupancy was 89.7% at december 31, 2020 compared to 94.0% at december 31, 2019.
sees 2021 ffo per share-diluted $2.05 - $2.25. | 1 |
Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our fourth quarter results, current industry conditions and company-specific opportunities.
Dave will follow with more detail on the quarter's performance and our forward outlook including fiscal 2022 guidance.
And then I will close with some final thoughts.
Overall, we ended our fiscal 2021 with strong fourth quarter performance that exceeded our expectations and highlights our favorable competitive position as the industrial recovery and internal initiatives continue to gain traction.
Our associates' teamwork, dedication and invaluable contributions turned these challenges into opportunities.
This includes being a critical partner across essential industries and now supporting the growth requirements customers face as we enter what could be a prolonged period of favorable industrial demand.
Combined with our strong cost discipline and the resilient nature of our model, we persevered and generated record earnings in fiscal 2021, while remaining fully invested in our long-term strategy.
In a year, unlike any other, we appalled and often exceeded our commitments to customers, suppliers and all stakeholders.
And we now look to build on this momentum going forward.
As it relates to the quarter and our views going forward, I want to reemphasize several key points that continue to drive strong performance across our business.
First, we are seeing sustained demand recovery.
Second, our industry position and strategic initiatives are driving growth opportunities beyond the cycle recovery.
Third, we are benefiting from a leaner cost structure and effective channel execution.
And our final key point, we enter fiscal 2022 in a strong financial position with ample liquidity.
In terms of underlying demand, we saw continued improvement across both our segments as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations.
Combined with the lapping of prior year pandemic related weakness, sales increased nearly 20% on an organic basis over prior year levels and we're positive on a two-year stack basis.
Trends were stronger in the second half of the quarter versus the first half as break fix and maintenance activity continued to ramp.
In addition, we saw the release of larger capital spending during the quarter, including across our Fluid Power and Flow Control segment, where shipments accelerated following strong order activity in recent months with backlog remaining at record levels.
This positive sales momentum has continued into early fiscal 2022 with first quarter organic sales through mid August up by a high teens percent over the prior year across both our Service Center segment and Fluid Power and Flow Control segment.
When looking across our customer end markets on a two-year stack basis, the strongest areas include lumber and wood, food and beverage, aggregates, technology, chemicals, transportation, mining and construction.
We're also seeing improved order momentum across other heavy industries including machinery, as well as stronger demand within our longer cycle specialty flow control market verticals after lagging some in recent quarters.
Importantly, we believe our sales improvement goes beyond the current end market recovery and reflects building momentum across our internal growth initiatives.
In our Service Center segment, we are supplementing our technical scale with more robust analytics, digital solutions and customer development initiatives.
We're also benefiting from past and ongoing talent development initiatives centered on our best team wins culture while our consistent strategy and local presence is strengthening relationships across our customer and supplier base, as they look to execute their growth initiatives with more capable channel partners.
In addition, we're leveraging a growing cross-selling opportunity.
Legacy embedded service center customers are increasingly recognizing our full capabilities across fluid power, flow control, automation and consumable solutions.
We believe this drives greater customer penetration and new business wins as customers adhere to new facility protocols and mitigate supply chain risk.
In our Fluid Power and Flow Control segment, we continue to see strong demand tailwinds across the technology sector, including areas tied to 5G infrastructure, cloud computing and semiconductor manufacturing.
Our exposure across this area has been supplemented in recent years through the ongoing build out of our automation platform, focused on advanced facility automation through machine vision, robotics, motion, and industrial networking technologies.
Related organic sales across this automation offering were up over 30% year-over-year in the fourth quarter with order activity remaining strong in recent months.
Our growing automation offering also aligns with the related trends and solutions we offer across our legacy operations.
This includes areas within fluid power where our capabilities in electronic integration, software coding, pneumatic automation and smart technology applications are driving new growth opportunities as customers increasingly focus on machine technology advancements and data analytics.
Combined with an accelerating demand recovery in longer and later cycle markets such as industrial OE, process flow and construction segment sales were up 8% organically on a two-year stack basis during the fourth quarter with positive trends continuing in recent months.
Overall, the momentum we see building from our industry position and initiatives leaves us optimistic heading into fiscal 2022.
We remain cognizant of ongoing supply chain constraints across the industrial sector, which has been widely conveyed throughout the industry in recent months.
Lead times remain extended across certain product categories driven by component delays and an increase in fulfillment timing.
However, the backdrop does not appear to be getting materially worse and the direct impact to our operations and performance remains relatively modest to date.
Our technical scale, local presence and supplier relationships have been and will continue to be a competitive advantage in managing through current supply chain dynamics and driving share gain opportunities as the cycle continues to unfold.
Our team is also doing a great job of managing broader inflation through price actions, strong channel execution and benefits from productivity gains.
Combined with a leaner cost structure, our EBITDA increased over 46% year-over-year in the quarter.
SD&A expense as a percent of sales was the lowest in 10 years, and EBITDA margins are at record levels.
While we expect ongoing inflationary headwinds going forward, our cost and margin execution provides strong evidence of the company-specific margin expansion opportunity, we continue to see unfolding in coming years.
Lastly, our balance sheet is in a solid position following strong cash generation in fiscal 2021.
We ended the year with net leverage of 1.8 times, the lowest in four years, an ample liquidity heading into fiscal 2022.
Over the past two years, we deployed nearly $340 million on debt reduction, dividends, share buybacks and acquisitions during an uncertain and challenging operating environment, further highlighting the strength of our team and business model.
We also entered fiscal 2022, with an active M&A pipeline across our focused areas of automation, flow control and fluid power that could present additional value creating growth opportunities going forward.
Overall, I'm encouraged by our ongoing execution and position.
These are exciting times at Applied as our differentiated value proposition and growth strategy are engaging our internal team and driving increased recognition across our legacy and emerging industry verticals.
And just another reminder before I begin.
Now, turning to our results for the quarter.
Consolidated sales increased 3.6% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth and foreign currency drove a favorable 1.7% increase.
The number of selling days in the quarter were consistent year-over-year.
Netting these factors, sales increased 19.8% on an organic basis.
While partially benefiting from easier comparisons driven by prior year pandemic related headwinds, we note the two-year stack year-over-year organic change was positive in the quarter.
In addition, average daily sales rates increased 6% sequentially on an organic basis in the third quarter, which was approximately 600 basis points above historical third quarter to fourth quarter sequential trends.
As it relates to pricing, we estimate the overall contribution of product pricing and year-over-year sales growth, was around 80 to 100 basis points in the quarter.
The segment's average daily sales rates improved 4% sequentially from the prior quarter, which likewise was above normal seasonal patterns.
Underlying demand improvement was broad based during the quarter, though end markets such as lumber and forestry, food and beverage, chemicals, aggregates, pulp and paper, and mining reflected the strongest growth on a two-year stack basis.
In addition to the strong sales performance across our U.S. service center operations, we saw favorable growth across our C class consumables and the international operations, which contributed to our top line performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 26.1% over the prior year quarter with our acquisitions of ACS and Gibson Engineering contributing 6.4 points of growth.
On an organic basis segment sales increased 19.7% year-over-year and 8% on a two-year stack basis.
Underlying demand across the segment strengthened through the quarter, with segment sales benefiting from ongoing favorable demand within technology end markets, as well as with life sciences and chemical end markets.
We are also seeing strong order activity across off-highway mobile and industrial fluid power applications, while process related end markets have picked up following a slower recovery in recent quarters.
Lastly, demand across our expanding automation platform continues to show strong organic growth trends.
As we have previously indicated, we see sustained favorable growth dynamics across the segment given various secular tailwinds and company-specific opportunities tied to our leading technical industry position.
Moving to gross margin performance.
As highlighted on Page 8 of the deck, gross margin of 29.4% improved 63 basis points year-over-year.
During the quarter, we recognized a net LIFO benefit of $3.7 million compared to LIFO expense of $0.8 million in the prior year quarter.
The net LIFO benefit relates to year end LIFO adjustments for inventory layer liquidations and had a favorable 52 basis points year-over-year impact on gross margins during the quarter.
Excluding the LIFO impact in both periods, gross margins still expanded year-over-year, reflecting strong channel execution and effective management to supplier cost inflation with price cost dynamics neutral during the quarter.
Gross margins declined sequentially reflecting some normalization from record third quarter performance, as well as timing of price adjustments.
Turning to our operating costs.
Selling, distribution and administrative expenses increased 13.9% year-over-year compared to adjusted levels in the prior-year period or approximately 9% on an organic constant currency basis.
Year-over-year comparisons exclude $1.5 million of non-routine expense recorded in the prior year quarter.
SD&A expense was 20.3% of sales during the quarter, down from 22% in the prior year quarter.
Strong operating leverage in the quarter reflects the benefits of a leaner cost structure following business rationalization initiatives executed over the past several years.
In addition, we continue to realize benefits from our operational excellence initiatives, shared services model and technology investments while bad debt and amortization expense were also lower year-over-year.
These dynamics and our culture of cost control and accountability, positive balance, incremental growth related investments, higher incentive expense and the lapping of prior year temporary cost actions.
Our strong cost control combined with improving sales and firm gross margins resulted in EBITDA growing approximately 46% year-over-year when excluding non-routine expense in the prior year period or 39% when excluding the impact of LIFO in both periods.
In addition, EBITDA margin was 10.6% up 165 basis points over the prior year, which includes a favorable 52 basis point year-over-year impact from LIFO.
Combined with the reduced interest expense and a lower effective tax rate, reported earnings per share of $1.51 was up 89% from prior year adjusted earnings per share of $0.80.
Similar to recent quarters, the tax rate during our fourth quarter included discrete benefits related to stock option exercises.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the fourth quarter was $38.3 million, while free cash flow totaled $34.6 million.
For the full year, we have generated free cash up $226 million, which represented 121% of adjusted net income.
We had another strong year of cash generation in fiscal 2021 following our record performance in fiscal 2020.
Over the past few years, we have generated over $500 million of free cash flow.
While partially reflecting the countercyclical nature of our model, our free cash generation is up over prior peak levels, reflecting our increased scale and enhanced margin profile, as well as ongoing benefits from our working capital initiatives, including cross-functional inventory planning, enhanced collection standard work and leverage of our shared services model, all supported with recent investments in technology.
Given the cash performance and confidence in our outlook, we deployed excess cash through share buybacks during the quarter, repurchasing 400,000 shares for approximately $40 million.
In addition, we paid down $106 million of debt during fiscal 2021, including $24 million during the fourth quarter.
We ended June with approximately $258 million of cash on hand and net leverage at 1.8 times adjusted EBITDA, below the prior level of 2.3 times and the fiscal 21 third quarter level of 1.9 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option combined with incremental capacity on our AR securitization facility and uncommitted private shelf facility, our liquidity remained strong.
Turning now to our outlook.
For fiscal 2022, we're introducing earnings per share guidance in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
Our sales outlook assumes a relatively steady industrial demand environment from current trends.
On a segment basis, the sales outlook assumes high single digit organic growth in our Service Center segment and high single to low double-digit organic growth in our Fluid Power and Flow Control segment.
In addition, based on quarter-to-date sales trends through mid August, we currently project fiscal first quarter organic sales to grow by a mid-teens percentage over the prior year quarter.
From a margin and cost perspective, we assume ongoing inflationary headwinds, including greater LIFO expense in fiscal 2022, as well as normalizing personnel expense, including the impact of our annual merit pay increase effective January 1.
We expect higher LIFO expense will result in gross margins declining sequentially in our first fiscal first quarter following the LIFO benefit we recognized during our fourth quarter.
Based on these dynamics, as well as the lapping of prior year temporary cost actions and the impact of ongoing internal growth investment, we currently project incremental margins and operating income in the low double-digit range for fiscal 2022.
We continue to take a balanced approach to managing our operating cost, while our expense and margin execution in recent quarters, provides strong indication of our potential going forward, including our target of mid-to-high teen incremental margins on average over an up cycle.
In addition, while the macro backdrop has improved over the past several quarters, there remains lingering uncertainty related to COVID-19 transmission rates, labor constraints and supply chain headwinds, which could influence the cadence and trajectory of industrial activity as the year progresses.
We have attempted to capture these variables within our initial guidance, which we believe is prudent as we continue to recover from an unprecedented downturn.
Lastly from a cash flow perspective, we expect free cash flow to be lower year-over-year in fiscal '22 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory at a greater pace in support of our growth opportunities and the recovery.
Over the past several years, we've deployed strategic investments and initiatives that have positioned Applied for stronger growth relative to our legacy trends and improved returns on capital in the coming years.
While near term macro trends continue to face a number of variables as we transition away from an unprecedented downturn, I believe we remain early in a potentially prolonged industrial cycle considering the breadth of tailwinds we see developing today.
These include emerging capex spending following multiple years of under investment, as well as greater industrial production across North America, as customers reduce reliance on long distance global supply chains.
In addition, increasing signs of investment in U.S. infrastructure are promising, which could represent a notable tailwind given our participation in industrial machinery, metals, aggregates, chemicals, mining and construction.
We also enter fiscal 2022 with a record backlog and strong order growth across some of our longer cycle businesses, which have expanded in recent years including Fluid Power, Flow Control and now automation that focus on engineered solutions and tied to our customers core growth initiatives and capital investments.
While supply chain tightness across the industry is partially influencing backlog right now, we see ongoing demand creation as Applied's technical position is called upon to address customers' greater operational and supply chain requirements.
This includes improving demand across our higher margin specialty flow control operations, which should benefit further into fiscal 2022 from pent-up maintenance and service activity, as well as a greater focus on higher environmental and safety standards.
We're also expanding our flow control focus across attractive industry verticals such as life sciences and hygienics.
Further, we'll continue to expand into new and emerging areas of growth across the industrial supply chain.
Of note, following the initial investment and build out of our next generation automation offering, we are now a leading distributor and solutions provider across several product focus areas including advanced machine vision, as well as collaborative and mobile robotic technologies.
We're also investing in digital capabilities that complement our local presence and continue to evaluate and develop new commercial solutions that fully leverage our technical capabilities and application expertise as legacy Industrial Infrastructure converges with new emerging technologies.
Lastly, our cross-selling initiative is gaining momentum, with related business wins increasing and broader teams engaged.
Considering our embedded customer base across our core service center network, an addressable market exceeding $70 billion and growing, we believe this initiative represents a significant opportunity that should expand our share across both legacy and emerging market verticals into fiscal 2022 and beyond.
Overall, these growth initiatives combined with value creating M&A potential, a leaner cost structure, operational excellence initiatives and expansion of our shared services model, provide a strong runway to drive above market growth and EBITDA margin expansion in coming years.
In the interim, we're focused on achieving our financial targets of $4.5 billion in sales and 11% EBITDA margins.
While the timing of these goals remains dependent on the industrial cycle trajectory, I believe they're within Applied's reach and provide the framework for significant value creation as we execute our strategy going forward. | compname reports q4 earnings per share $1.51.
q4 earnings per share $1.51.
sees fy earnings per share $5.00 to $5.40 including items.
sees fy sales up 8 to 10 percent. | 1 |
I'll now discuss the financial results.
We reported revenue of $267 million during the first quarter of 2022, which represents an increase of 16%, compared to $230.1 million during the first quarter of 2021.
The increase was largely attributable to volume increases in our Fenestration segment, combined with higher prices related to the pass-through of raw material cost inflation.
More specifically, we realized net sales growth of 14.5% in our North American fenestration segment, 15.5% in our North American cabinet components segment, and 18.6% in our European fenestration segment, excluding the foreign exchange impact.
We reported net income of $11.2 million or $0.34 per diluted share for the three months ended January 31st, 2022, compared to $7.9 million or $0.24 per diluted share during the three months ended January 31st, 2021.
On an adjusted basis, net income increased by 25.9% to $11.3 million or $0.34 per diluted share during the first quarter of 2022, compared to $9 million or $0.27 per diluted share during the first quarter of 2021.
The adjustments being made to earnings per share are for restructuring charges, loss on the sale of a plant, foreign currency transaction impacts, and transaction and advisory fees.
On an adjusted basis, EBITDA for the quarter was essentially flat year over year at $24.4 million, compared to $24.3 million during the same period of last year.
The increase in earnings for the three months ended January 31st, 2022, was attributable to continued strong demand, operational efficiency gains, and increased pricing.
However, the decrease in margin percentage was driven by inflationary pressures and time lags on material index pricing mechanisms.
Moving on to cash flow and the balance sheet.
Cash used for operating activities was $21.7 million for the quarter, compared to $3.4 million for the same period of last year.
Due to the typical seasonality in our business, free cash flow was negative in the first quarter of this year.
In addition, the value of our inventory increased further due to inflationary pressures, which had a negative impact on working capital.
As a reminder, we usually generate most of our cash in the second half of each year.
Our balance sheet continues to be strong.
Our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA was at 0.4 times as of January 31st, 2022.
We will remain focused on generating cash, paying down debt, and opportunistically repurchasing stock as the year progresses.
However, based on improvements in labor performance, the expected continuation of our pass-through pricing strategy, conversations with our customers, and the latest macro data, we're now comfortable providing the following guidance for fiscal 2022.
Net sales of $1.13 billion to $1.15 billion, adjusted EBITDA of $135 million to $140 million; depreciation of approximately $31 million, amortization of approximately $15 million; SG&A of $115 million to $120 million, interest expense of $2 million to $2.5 million, tax rate of 28%, capex of $30 million to $35 million; and free cash flow of $55 million to $60 million.
While we do expect some level of volume growth in our Fenestration segments for the remainder of the year, note that our current expectation is that revenue growth for the remainder of the year should be driven more by price, as opposed to volume, and we expect margin expansion to be second-half weighted.
From a cadence perspective for Q2, we expect net sales to be up mid to high single digits year-over-year in each segment.
However, due to inflation and the time lag associated with passing on price increases for most of our raw materials, we believe it will be a challenge to realize margin expansion in any segment in Q2.
Looking ahead into the second half of the year, on a consolidated basis, we currently expect mid-single-digit net sales growth year over year in Q3 and Q4.
In addition, due to easier comps and the expected benefit from our pricing strategy, coupled with some volume growth in our fenestration segments, we expect to realize some margin expansion in Q3 and Q4.
Joe's guidance was key during our transition into a pure-play building products company several years ago, and more recently, his mentorship and support proved invaluable, as I transitioned into the CEO role.
I will now discuss results for the quarter and then conclude with a discussion on the macro environment and guidance.
Demand was healthy across all product lines during the first quarter of 2022.
Volume growth in our fenestration segments and higher prices in all segments, mostly related to the pass-through of raw material cost inflation resulted in revenue growth of 16% year over year.
On a consolidated basis, we estimate that revenue growth for the quarter was weighted approximately 10% due to an increase in volume and approximately 90% due to an increase in price.
The first quarter began with continued supply chain challenges and significant labor disruption caused by COVID absenteeism driven by the omicron variant.
However, these issues started to subside toward the end of the quarter.
The rate of raw material cost inflation remains a challenge, as we typically see a 30 to 90-day time lag in passing these increases through to our customers.
Looking at the individual segments, I will start with the North American fenestration.
This segment generated revenue of $146.6 million in Q1, which was $18.5 million or 14.5% higher than prior year Q1.
Strong demand in our IG spacer and screen product lines, volume growth in vinyl fencing components, and price increases across all product lines were the main drivers of the growth.
We estimate that revenue growth in this segment was weighted approximately 45% due to an increase in volume and approximately 55% due to an increase in price.
Adjusted EBITDA of $16.3 million in this segment was essentially flat versus prior year Q1.
The improved pricing, volume-related efficiency gains, and productivity-related improvements were more than offset by inflationary pressures on raw materials, which caused margin erosion of approximately 170 basis points for the quarter.
However, our current expectation is for margin expansion in this segment later in the year, assuming that the rate of inflation subsides.
Our European fenestration segment generated revenue of $58.9 million in the first quarter, which was $9.8 million or 20% higher than prior year.
Excluding foreign exchange impact, this would equate to an increase of 18.6%.
We estimate that revenue growth in this segment was weighted approximately 20% due to an increase in volume and approximately 80% due to an increase in price.
Strong demand in both IG spacers and vinyl extrusions combined with material-related price increases accounted for the strong performance year over year.
These favorable volume-related impacts and pricing actions were more than offset by inflationary pressure on raw material costs and by inefficiencies caused by the COVID-related absenteeism early in the quarter.
As such, adjusted EBITDA came in at $10.4 million for the quarter, which was $300,000 less than prior year and yielded margin compression of approximately 420 basis points.
Similar to our expectations for other segments, we do anticipate that margins will improve, as the year progresses, again, assuming that the rate of inflation subsides.
Our North American cabinet components segment reported net sales of $62.4 million in Q1, which was $8.4 million or 15.5% higher than prior year.
Volumes decreased in this segment year over year, mainly as a result of customers' decisions to reduce overtime hours worked in their plants.
Increases in hardwood index pricing as well as discretionary pricing actions offset the volume and resulted in revenue growth year over year.
Adjusted EBITDA was $2 million for the quarter, which was $1.2 million less than prior year and resulted in margin compression of approximately 280 basis points.
Improvements in lumber yield and labor efficiency were more than offset by a significant increase in hardwood lumber costs during the quarter.
Weather-related challenges in the Appalachian wood region, as well as increases in maple demand, were the main drivers of the increases in lumber costs.
As a reminder, we have material index pricing mechanisms in place, but they typically have a 90-day lag, and we will require a period of flat or declining wood pricing before we're able to catch up on our margin performance in this segment.
As we look forward through the remainder of the year, we feel good about the demand environment across all of our product lines.
In North America, the housing market remains strong, and our customers continue to have high levels of backlog, which we anticipate will slowly dwindle throughout the year.
The rate of inflation and the potential for further interest rate hikes could impact demand at some point in the future, but we do not expect this to occur in the near term due to the high backlog levels.
In Continental Europe and the U.K., the demand environment remains healthy, although consumer confidence could ultimately be impacted if inflation continues to ramp and energy costs continue to increase.
From a Quanex perspective, we have seen enough improvements in our supply chain and stabilization in our labor force to say that the main challenge we now face is the rate of inflation and the ability to pass through price in an expedited manner.
As Scott mentioned earlier, we have enough data points and adequate visibility into our customers' backlog to give us confidence in providing full year guidance.
Again, we expect to generate revenue of $1.13 billion to $1.15 billion and adjusted EBITDA of $135 million to $140 million.
If we execute to plan and are able to post results within these ranges, it will mark the third straight year of record performance for the Quanex team.
Moving on to a more recent tragic subject, which is the Russian invasion of Ukraine.
It is difficult to see these events unfold in real time and watch what you believe to be unfathomable turn into reality.
We have employees and business partners with personal ties to Ukraine and our hearts are with them, their families, and all the Ukrainian people being affected by this pointless and horrific war.
At this point, it is too early for anyone to accurately predict or estimate the impact that this war will have on the European or global economies or what supply chain disruptions or other impacts this may have on our industry.
We anticipate there will be challenges, especially if the situation worsens substantially.
However, at this point, it is much too early to predict or forecast those impacts.
Nonetheless, our team has managed through COVID and numerous global supply chain challenges over the past two years, and we are very confident in our ability to navigate this event as well.
And with that, operator, we are now ready to take questions. | northwest natural holding q3 loss per share $0.61 from continuing operations.
q3 loss per share $0.61 from continuing operations.
northwest natural - reaffirmed 2020 gaap earnings guidance from continuing operations in range of $2.25 to $2.45 per share and guided toward lower end of range. | 0 |
We hope everyone is doing well.
We begin with our Safe Harbor statement.
You should listen to today's call in the context of that information.
Today, we will discuss our results for the quarter and year primarily on an adjusted non-GAAP basis.
For the fourth quarter, the difference between our GAAP results and adjusted results consist of the following item: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquired deferred revenue and related commission expense; and lastly, transaction-related expenses for completed acquisition.
For today's agenda, we'll walk through our 2020 financials and operational highlights.
As we look back on 2020, it was quite a year.
Our businesses performed at a very high level during this period.
Revenues grew 3%, with organic revenue declining a single percent.
EBITDA also grew 3%, and free cash flow grew 16%.
This cash flow performance, $1.7 billion is just astounding.
This is a testament to many things.
Notably, our asset light business model, the intimacy we have with our customers and the high level of skill and execution of our field teams.
This cash flow is just simply a great result.
Perhaps more important, 2020 was a year of forward progress for our company.
We exit 2020 as a better company, a company with higher quality revenue streams, a company with improved future innovation prospects and a company with whose portfolio that was enhanced with $6 billion of capital deployment.
To this end, we saw our software recurring revenues increased mid single-digits in 2020, and were benefited by high levels of retention and an acceleration to the cloud.
We continue to be benefited by having close intimate relationships with our customers.
Most often, our software is mission critical to our customers' operations.
In addition, we continue to strategically invest throughout our portfolio during the year.
Based on our historical experience, we find times of market disruption, the best time to double down on innovation and market investments, which in turn will drive market share gains in the years to come.
Finally, we are able to deploy $6 billion to further enhance Roper's Group of companies' headlines by our Vertafore acquisition.
So when we look back on 2020, we highlight two key themes: First, we grew, cash flow increased 16% in the middle of a pandemic.
And second, the quality of our enterprise continue to improve during the year.
Net-net, we got bigger and better during 2020.
Let's turn to the next slide.
Over the past five years, we highlight that our revenue grew at a 9% compounded rate, EBITDA at 10% and cash flow at 13%.
We continue to grow and compound through macro economic cycles.
Also, during the time period, the quality of our enterprise meaningfully improved.
We are more software-focused with nearly two-thirds of our EBITDA coming from software, with higher levels of recurring revenue.
Conversely, we are much less tied to cyclical end markets today, a little over 15% of our portfolio.
Given our long-term strategy and these factors, we are a low risk enterprise.
We compound cash flow through cycle and do so with multiple growth drivers across both organic and inorganic fronts.
As we look to '21, we will continue our long-term stream of revenue and EBITDA and cash flow compounding.
So with that, let's turn to the next page and discuss the macro backdrop for '21.
As we look to 2021, we are set up for a strong year.
We expect revenue and EBITDA will grow well into the double digits likely in the mid-teens range with organic revenue growth in the mid-single digit plus range.
This is on top of growth in 2020, the compounding continues.
Breaking it down, our software businesses, both in our Application Software and Network segments are well positioned heading into '21.
These businesses enter the year with momentum from strong retention and recurring revenue gains.
They'll be further aided by growth in perpetual license as pipeline and customer activity are anticipated to recover to some extent.
Our non-Verathon medical product businesses are expected to return to a more normalized pattern of customer activity as healthcare facilities loosen restrictions.
But since 2020 was well below trend, we expect above trend growth here.
Of note, Verathon has a challenging comp.
However, the reoccurring revenue base will remain strong, given the large volume of capital placements in 2020 and continued growth of their new single-use Bronchoscope business.
We expect Neptune to recover and growing nicely as our customers especially in the Northeast US and Canada gain access to residential locations.
We expect our industrial and process tech businesses to continue their quarterly improvements and return to growth after two years of macro headwinds.
Finally, 2021 will be meaningfully aided by the contribution from our 2020 cohort of acquisitions.
To this end, we continue to work with a very full and high-quality M&A pipeline.
We are committed to deleveraging, but we also remain active in building and maturing our pipe.
So as I think back over the nearly 10 years I've been with Roper, I cannot think of a better set of tailwinds heading into a year.
Clearly, lots to do and lots of execution in front of us, but we have a strong momentum heading into '21.
Turning to page eight, while looking at our Q4 income statement performance.
Total revenue increased 8%, as we eclipsed $1.5 billion of quarterly revenue for the first half.
Organic revenue for the enterprise declined 2% versus prior year.
EBITDA grew 7% in the quarter to a record $552 million.
EBITDA margin was down 40 basis points versus prior year at 36.6%.
Tax rate came in at 19.9%, a little lower than last year's 21.6%.
So all-in, this resulted in adjusted diluted earnings per share of $3.56, which was above our guidance range.
Turning to page nine, reviewing the Q4 results by segment.
Neil will discuss the full-year 2020 segment performance in more detail later, so just touching on some of the Q4 highlights here by segment.
Application Software grew 35% with the addition of Vertafore.
Organic for the segment was minus 2% with mid single-digit recurring revenue growth continuing.
Sharp declines in our CBORD & Horizon businesses, serving K-12 and higher education impacted the segment as many schools unfortunately remain closed.
For Network Software & Systems, plus 2% organic growth with our software businesses, putting up a very solid plus 4% organic.
The TransCore was flat versus prior year.
For Measurement & Analytical Solutions, plus 1% organic growth, as we start to see some sequential recovery at Neptune in our Industrial businesses.
Segment margins were impacted a bit by the acceleration of some product and channel investments at Verathon as we discussed coming into the quarter, and it's really been exceptional year for Verathon overall.
Lastly, for Process Technologies, a 21% organic decline, with margins holding up well at 31.3%.
And once again here, we started to see some early signs of improvement after a couple of years of declines.
So turning to page 10, looking at net working capital.
Honestly, the slide mostly speaks for itself, ending the quarter with negative 8% net working capital as a percentage of Q4 annualized revenue.
While there are certainly some seasonal trends, primarily around timing of the software renewals.
They do typically benefit our Q4 performance.
You can see here a meaningful improvement versus 2018, improving from negative 3.4% to negative 8% in 2020.
Our asset light negative net working capital model drives our sustainable high cash conversion and fuels our cash flow compounding.
Our people focus on what we all believe matters and our culture is built around growing the right way.
Top line growth converts to cash flow and we are always mindful of the impact to our balance sheet.
So turning to cash flow.
Cash flow performance, as Neil mentioned, it was really pretty spectacular no matter how you look at it.
Q4 free cash flow of $558 million, was 23% higher than last year and represented 37% of revenue.
This excellent result was driven by the great working capital performance I just discussed, which is really across the enterprise along with meaningful cash contributions from Vertafore and the other recent acquisition.
So for the full-year 2020, we generated $1.72 billion of operating cash flow and $1.67 billion of free cash flow.
So to repeat, that's $1.7 billion of free cash flow in 2020.
Truly a great year.
Full-year free cash flow growth was 16% and our free cash flow conversion from EBITDA was a robust 84%.
So really tremendous cash flow performance, and it was broad based and very durable.
So turning to page 12, updating on our balance sheet.
As Neil mentioned earlier, we ended the year with total capital deployment of approximately $6 billion, which included the EPSi acquisition that closed during the fourth quarter on October 15th.
We were able to take advantage of attractive market conditions to complete and opportunistically fund this acquisition with a combination of internally generated cash flow proceeds from March 2019, Gatan divestiture and investment grade leverage.
Overall, cost of financing was approximately 1%.
Looking ahead, we plan to rapidly reduce leverage throughout 2021, taking advantage of our pre-payable revolver, which has a current balance of approximately $1.6 billion.
Our solid investment grade balance sheet supports long-term cash flow compounding, which we are well positioned to continue.
Let's turn to our recap for 2020.
To help orient you to this page, we're comparing our full-year outlook from last April to that of what actually happened.
It's worth reminding everyone that we felt our businesses and our business model had the level of recurring revenue, customer intimacy and the business leadership required to guide in the face of the COVID uncertainty, both in terms of supply and demand.
In aggregate, we thought our full-year organic revenues would be plus or minus flat, and we came in at down minus 1%.
The TransCore New York project is the primary reconciling item between being down a touch and being flat or slightly up.
And more on this in a minute.
We guided DEPS to be between $11.60 and $12.60 and came in at $12.74.
Looking back on this, we are very proud of our team's ability to look forward and operate through the uncertainty of last year.
Also, there is no better example of the durability of our model than this past year.
With that, let's walk through the macro drivers across each of our four segments.
Relative to Application Software, this segment played out as anticipated and was up 1% on an organic basis for the year.
Specifically, we saw recurring revenue up mid single-digits, aided by very strong retention rates as well as an acceleration to the cloud.
As a reminder, recurring revenue in this segment is about 70% of our revenue stream.
Perpetual revenues, about 10% of this segment's revenue were under pressure as expected.
We saw this revenue stream down mid-teens as new logo opportunities and wins were pushed and delayed.
That said, cross-selling activity remain active for much of 2020.
Relative to services revenue, we anticipated some pressure tied to shifting to remote installs and having fewer new implementations, which are tied to new perpetual transactions.
For 2020, we saw mid single-digit declines here principally tied to fewer new deals.
Our teams did a wonderful job shifting to remote installs, a trend we anticipate will continue in large part on the back side of the pandemic.
As it relates to our Network segment, we expect the organic revenue for the year to be up mid singles to double-digits when, in fact, we grew 3% for the full year.
Our Network Software businesses performed as anticipated, with recurring revenues growing low single-digits, again, benefited by high retention rates and high levels of recurring revenue.
This segment underperformed our expectations primarily due to TransCore's New York congestion infrastructure project timing.
In April, we expected approximately $75 million more in revenue from this project than actually occurred in 2020.
More on this when we turn to the segment overview.
But we expect this $75 million of pushed revenue to be recognized in '21.
It's also worth noting that the number of toll tag shipped last year were at historic lows, given the lower traffic volumes, but this was anticipated.
For our MAS segment, we've talked all year about this being the tale of four situations, Verathon, other medical products, Neptune and Industrial.
For the year, again back in April, we felt this group would be flat to up mid single-digits on an organic basis.
We posted 1% growth.
We feel very good about the execution across this group of companies.
The primary reconciliation factor is a slower recovery ramp tied to our non-Verathon medical product businesses and Neptune.
Specifically, we anticipated unprecedented demand for Verathon innovation product family.
For the year, Verathon grew substantially as COVID accelerated the further adoption of video intubation as the preferred technology.
Our other medical product businesses, which grow mid single-digits like clockwork were down mid single-digits for the year tied directly to lower elective procedure volumes and limited hospital capital spending.
Interestingly for Neptune, we highlighted municipal budget uncertainty in April.
This proved generally to be a non-factor, as municipalities budgets were approved and available.
However, the impact of the lockdowns, especially in the Northeast US and Canada had a prolonged impact on our customers' ability to do routine meter replacements.
As a result, Neptune was down low double-digits for the year, slightly worse than our initial expectations.
Finally, for this segment, we expected sharp industrial declines and that is what happened with these businesses being down low-double digits for the year.
That said, we are seeing sequential quarterly improvements across both Neptune and our Industrial businesses.
Finally, and as it relates to our Process Tech segment, we expected to be down 20% to 25%, and we were logging in it down 21%.
This played out as we anticipated with much lower energy-related spending, project timing pushes and the inability to get field service resources into customer locations.
So this is the play-by-play rewind for 2020.
Now let's turn to the segment pages for a bit more detail.
For Application Software, where revenues here were $1.81 billion, up 1% organically, with EBITDA of $772 million.
The broad macro activity for this segment has remained quite consistent for much of 2020.
Specifically, we continue to see accelerating demand for our cloud solutions.
This bodes well for our long-term recurring revenue growth and customer intimacy.
At a business unit level, Deltek's GovCon business continues to be super solid and grow very nicely.
But we did see some headwinds relative to their offerings that target the consulting, marketing services and AEC space.
That said, recent customer activity and top of funnel activity suggest some market following is occurring.
Aderant and PowerPlan delivered flat EBITDA in a year with nice recurring revenue gains.
We experienced very nice growth across our lab software group, again doing our part to help fight the COVID war.
Strata delivered double-digit organic growth and completed a strategic acquisition in EPSi.
Notably, the combined business will analyze roughly half of the US hospital spend.
Finally, our two businesses that serve the education space, CBORD and Horizon declined double digits in the year, simply due to having a customer base that was shut down.
A decent amount of revenues in these businesses are tied to student volumes.
Importantly, we acquired Vertafore last year, they're are off to a great start with strong earnings and very strong cash flow in the fourth quarter.
Looking to Q1, we see flat to low single-digit organic growth based on continued mid single-digit recurring revenue growth offset slightly by lower perpetual and services revenues given last year's non-COVID comp.
Now let's turn to our Network segment.
Here, revenues were $1.74 billion, up 3% on an organic basis, with EBITDA of $732 million.
Our Network Software businesses performed well during last year, growing low single-digits.
Specifically, DAT was strong growing double-digits.
DAT's network scale and innovation focus continues to enable very solid organic gains.
ConstructConnect grew based on network utilization tied to a tighter construction labor market.
iTrade, MHA and Foundry had some headwinds tied to their end markets being disrupted due to COVID.
That said, each of these businesses had high retention rates and the networks remained very strong.
iPipeline also performed well during their first year being with Roper, and completed two bolt-on acquisitions.
Our non-software businesses struggled a bit during the year, specifically, RF IDeas -- our RF IDeas, our multi-protocol credential reader business did well in our healthcare applications, but was hampered by meaningful declines in their Secure Print market.
For the full year, TransCore pushed about $100 million of revenue out of 2020 and to '21 associated with their New York project.
In addition, EBITDA margins were pressured due to lower tag shipments and a few non-New York project push outs.
As we look to the first quarter of 2021, we see organic revenue, as you can see in the lower right hand box to be down 3% to 5% for the quarter.
An important distinction to highlight, our software businesses will continue to grow in the low single-digit range.
But our non-software businesses driven by TransCore will decline in the high teens range in the first quarter due to much lower anticipated tag shipments and timing of revenue associated with the New York projects.
As a reminder, the first quarter of this year is coming off a mid-teens growth comp from a year ago.
Now let's turn to our MAS segment, revenues for the year were $1.47 billion, up 1% on an organic basis, with EBITDA $508 million.
Verathon was awesome in 2020.
The business grew substantially based on unprecedented demand for their video intubation product line.
Given Verathon's ability to fulfill this demand, we expect our meaningfully expanded installed base of GlideScope is to generate increased levels of reoccurring consumables pull through in the years to come.
In addition, the first year of their single-use Bronchoscope release was successful.
We believe we gained a substantial foothold in the market during the inaugural year of this product category.
Our other med product businesses declined, but they started to see more normalized patient volumes toward the end of the year.
Further, customer interactions are starting to resemble more normal levels of engagement.
Neptune declined low double-digits tied exclusively to our customers in the Northeastern US and Canada, not having access to indoor meters.
Other regions were flat during 2020.
Neptune's market share remained strong throughout the year.
Finally, our industrial businesses were down, but have shown sequential improvements throughout the year.
For Q1, we expect low single-digit organic growth for this segment with similar patterns to that of the fourth quarter.
Now let's turn to our final segment, Process Tech.
Revenues for the year were $519 million, down 21% on an organic basis, with EBITDA of $156 million or 30% of revenue.
Compared versus two years ago, these businesses are down about $90 million in EBITDA and yet maintained 30% EBITDA margins.
As a side note, Roper continue to compound despite these cyclical headwinds.
That said, this segment is pretty straightforward and has been the same story all year.
COVID has negatively impacted our oil and gas and short cycle businesses.
Certainly, low oil prices did not help either.
That said, we have seen some green shoots across this group as capital spending started to improve as we exited 2020.
As we look to the first quarter, we expect declines to moderate in the first quarter to be in the 10% range.
Importantly, we are easing comps as we enter the second quarter.
Also, over the last couple of years, these businesses continue to make product and channel investments to be best positioned to fully capture the cyclical upswing.
The next few years here should be pretty good.
Now let's turn to our guidance and the associated framework.
While this slide is somewhat busy, we wanted to line up for you the key macro differences between our 2021 full-year outlook on a segment basis versus our actual 2020 results.
In aggregate, we expect total revenue to increase in the mid-teens range with organic growth being in the mid single-digit plus area.
As we look across the revenue streams for our Application Software segment, we expect mid singles growth.
Specifically, we expect a slightly improved recurring revenue growth rate aided by last year's recurring momentum and an increased mix toward SaaS.
We expect flat services revenues and mid single-digit plus growth in perpetual as we expect a modest market recovery and easing second half comps.
Similarly, we expect mid single-digit organic growth in our Network segment, with our Network Software businesses growing mid-single digit plus.
We expect TransCore to complete the New York project and see recovering tag sales, when combined, TransCore should grow mid singles for the year.
We expect MAS to grow mid single-digits as well.
Our medical product businesses were exceptional last year, up 20%.
Importantly, the quality of our medical products revenue stream will continue to improve as Verathon's reoccurring revenue streams tied to GlideScope and BFlex continue to gain moment.
As we look to 2021, our medical product businesses are expected to grow low single-digits as elective procedures and hospital capital spending return to more normalized levels throughout 2021.
This return being partially offset by our difficult 2020 COVID comp.
Neptune should be at high single-digits plus with easing restrictions and more access to indoor meter replacements.
And finally, our industrial businesses should recover and grow in the high single-digit plus range after two years of declines.
Our PT businesses are expected to be up high single-digit three-year based on the resumption of deferred projects and field maintenance as well as modest improvements in these end markets.
So all in all, we expect organic revenues to increase mid single-digit plus and total revenue grow in the mid-teens range.
Let's turn to our guidance slide.
Based on what we just outlined, when you roll everything together, we are establishing our 2021 full-year adjusted DEPS guidance to be in the range of $14.35 and $14.75.
Our tax rate should be in the 21% to 22% range.
For the first quarter, we are establishing adjusted DEPS guidance to be between $3.26 and $3.32.
Of note, our guided Q1 adjusted DEPS is roughly 22% to 23% of our full year guidance range and is consistent with our long-term historical DEPS seasonality.
What a year, none of us will ever forget 2020.
Our business performed so very well last year.
We grew revenue 3% in aggregate and only declined a single percent on an organic basis.
EBITDA margins were steady at 35.8%, and cash flow grew 16% to $1.7 billion.
This means we had cash flow margins of 30%.
Given this performance, our business models ability to foresee these best performance, we stayed focused on executing our capital deployment strategy, which resulted in $6 billion of deployment on high quality, niche leading vertical software companies.
There is no doubt the quality of our enterprise improved during 2020.
Something we are incredibly proud to be able to say.
Our recurring revenue grew mid-single digits.
We increased innovation investments and increased the quality of our portfolio with our capital deployment spends.
So as we look to 2021, we feel we are incredibly well positioned.
We expect strong organic growth, that'll be further augmented by contributions from our recent acquisitions.
In 2021, we expect about two-thirds of our EBITDA to come from our software businesses, which provides us all the virtues of an increased mix toward recurring revenues.
We will continue to focus on deleveraging our balance sheet, but we remain committed and focused on our long-term capital deployment strategy.
To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities.
So as we look back over 2020, we are proud of our business models, durability and our leaders ability to successfully navigate last year's uncertainties.
We are proud that we continue to be forward-leaning and strategic.
We are proud that we improved our business last year with an increasing mix of growing recurring revenue and continued innovation focus.
In short, we got bigger and better during 2020.
This was certainly the case in 2020.
So with that, let's turn to our first question. | sees q1 adjusted earnings per share $3.26 to $3.32.
sees fy 2021 adjusted earnings per share $14.35 to $14.75.
q4 gaap and adjusted revenue increased 8% to $1.51 billion.
qtrly adjusted deps was $3.56. | 1 |
Our SEC filings can be found in the Investors section of our website at unum.com.
Net income for the fourth quarter of 2021 included the aftertax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share and a net aftertax investment loss on the company's investment portfolio of $6.8 million or $0.03 per diluted common share.
Net income in the fourth quarter of 2020 included a net aftertax gain from the closed block individual disability reinsurance transaction of $32 million or $0.16 per diluted common share.
A net aftertax reserve increase related to assumption updates of $133.5 million, which is $0.66 per diluted common share; and a net aftertax investment gain on the company's investment portfolio, excluding the net aftertax realized investment gain associated with the closed block individual disability reinsurance transaction of $1.6 million or $0.01 per diluted common share.
So excluding these items, aftertax adjusted operating income in the fourth quarter of 2021 was $182 million or $0.89 per diluted common share compared to $235.3 million or $1.15 per diluted common share in the year ago quarter.
As we wrap up 2021, what we saw in the fourth quarter is a continuation of the good performance of our business model, impacted by the difficult environment of ongoing COVID-related claims.
Before getting to the quarter, I'd like to recognize the extraordinary work of our teams in serving our customers in this challenging time through their empathy, passion and resilience.
Throughout the pandemic, they have not wavered in fulfilling our purpose, while still positioning the company for the future.
As we turn to our financial results, our fourth quarter played out largely as we anticipated, with aftertax adjusted operating earnings per share at $0.89 for the fourth quarter.
I'll come back to the COVID impacts in a minute, but as we look beyond these areas of our business directly impacted by COVID, I'm very pleased with many of our product lines that performed well in the quarter.
Adjusted operating income for the Unum US supplemental and voluntary line this quarter was among the highest in our history, with strong results in the IDI recently issued and voluntary benefit lines, as well as more stable performance in the dental and vision line.
colonial life produced a solid level of income this quarter, with a strong adjusted operating return on equity of approximately 16%.
In addition, adjusted operating income in our international business continues to build momentum and the overall performance in the closed block remains strong.
We saw a favorable benefits experience in both long-term care and individual disability and continued excellent returns from our alternative investment portfolio.
In addition to the favorable returns from the alternative investments more broadly, our investment portfolio is in great shape as we continue to see very healthy credit trends.
Looking at the top line, we are also very pleased with the trend in premium income growth for our core business segments.
This includes the acceleration in year-over-year growth that we have seen in recent quarters.
Premium growth in the fourth quarter on a year-over-year basis was just under 3% for our core businesses in aggregate, with growth of 3% for Unum US, 7% for international businesses and 1% for colonial life.
Persistency levels have remained healthy.
We are also seeing a growing benefit to our top line from natural growth, with strong employment levels and wage growth coming through in our in-force block.
From a benefits perspective, our results were significantly impacted by COVID claims.
We saw continued elevated mortality in the group life business.
COVID-related mortality remained elevated at the national level and the age demographics continued to show a high impact among working-aged individuals.
As in the third quarter, the fourth quarter was due to the Delta variant.
The age demographics are a key driver for our business and there was a slight decrease to 35% of national deaths in the fourth quarter from 40% in the prior quarter.
We will continue to watch this dynamic as new variants like omicron emerge.
In addition, we continue to see pressure on our short-term disability results from the high levels of infection rates and hospitalizations.
These also lead to an increase in leave request volumes, which pressure expenses in the group disability line.
These COVID impacts are clear in our results and will linger into 2022.
But as the impact from the pandemic lessens, we anticipate seeing recovery from the underlying strength of the business.
And finally, our capital position remains in a very, in very healthy shape, even after paying more than $0.5 billion in life claims through the pandemic.
The weighted average risk-based capital ratio for our traditional U.S.-based life insurance companies was approximately 395% to close the year and holding company cash totaled $1.5 billion.
Both of these metrics are well ahead of our long-term targets and relative to year-end 2020, holding company cash remained stable and RBC improved by approximately 30 points.
This is the highest year-end RBC level since year-end 2016 and also reflects the impacts from the C1 factor changes that were implemented in 2021.
In addition, we added $400 million of pre-capitalized trust securities, which gives us contingent capital on top of our pre-existing credit lines.
All of this points to broad financial flexibility moving into 2022.
Steve will get into our total LTC funding actions, but one area to highlight is our First Unum subsidiary, where we have been adding reserves and capital for the last decade.
For the first time in many years, we released reserves at year-end and we're able to pay a dividend to our holding company.
This is an example that the funding needs for LTC can turn, particularly as interest rates move up.
Overall, we wrapped the year with a very strong capital picture.
Looking forward, our outlook in the near term will be influenced by COVID trends, specifically the level of mortality, its demographics and the rate and severity of COVID infections.
We expect improvement in these trends over time, but it has proven difficult to forecast these trends and their impacts.
Our focus remains the same, that is to ensure that we are taking the appropriate actions to rebuild profit margins and the overall level of earnings back to pre-pandemic levels.
This will take several quarters, assuming diminishing COVID-related impacts over time.
An important step in this process is to take the appropriate pricing actions with our new sales and renewals.
That disciplined approach can have near-term implications for sales and persistency, but we have worked hard to be known in the market as a disciplined and consistent price when we work with our customers through these pricing actions.
We experienced that, to some extent, with fourth quarter sales in Unum US, particularly large case and mid-market sales in the group disability and lifelines, but we think it is the appropriate path to take.
As we take these actions, we were pleased with the multiple business lines that showed very good sales trends, particularly colonial life, the Unum US voluntary benefits and individual disability benefits businesses and our international segment.
The breadth of our offerings allow us to manage through challenges in some lines as we look to overall growth.
Looking ahead, we plan to connect with you later in February on the 25th to provide our outlook for the full year 2022 and give you insights into the strategic actions we're taking to deliver on our purpose, to protect more people and position ourselves for good profitable growth.
To wrap up, I'm very pleased with our position as we move into 2022.
It's a testimony to the strength of our franchise that despite the impacts from COVID in the past two years, the primary measure to the top-line growth and capital strength have improved over the course of the year, providing us with optimism for growth and the underpinnings of a strong capital base.
Now, I'll ask Steve to cover the details of the fourth quarter results.
I will also describe our adjusted operating results by segment, excluding the impacts from our GAAP reserve assumption updates that did occur last quarter.
I'll start the discussion of our operating results with the Unum US segment, where COVID again significantly impacted our results this quarter, driving high mortality and a high average claim size in the group life business and higher claims in the group disability business.
For the fourth quarter in the Unum US segment, adjusted operating income was $81.4 million compared to $88.5 million in the third quarter.
Within the Unum US segment, the group disability line reported adjusted operating income of $34.1 million in the fourth quarter compared to $39.5 million in the third quarter.
We saw promising trends in premium income, which increased 2.9% relative to the third quarter and 5% on a year-over-year basis, with increasing levels of natural growth as we benefit from improving employment levels along with rising wages.
The expense ratio was elevated this quarter at 29.9% compared to 28.1% in the third quarter, which reflected higher people-related costs and technology spend to support our digital strategies.
The benefit ratio for group disability and the underlying drivers were generally steady in the fourth quarter relative to the third quarter.
The ratio did improve slightly to 78.3% from 78.9% in the third quarter, primarily driven by a lower level of incidence in the short-term disability line.
While short-term disability results did improve this quarter, STD continues to be impacted by high COVID-related claims and, therefore, remains a drag on the overall profitability of this line relative to our pre-COVID trends.
The LTD line experienced generally stable incidence in the fourth quarter relative to the third and claim recoveries remain strong.
We expect to continue to see an elevated overall group disability benefit ratio as COVID and the current external environment continue to impact our results.
We do feel that COVID is a key driver of the high benefit ratio for the group disability line and that as direct COVID impacts lessen over time, we will see improvement in the benefit ratio back toward prepandemic levels.
Adjusted operating income for Unum US group life and AD&D declined to a loss of $71.7 million for the fourth quarter from a loss of $67.1 million in the third quarter.
This quarter-to-quarter decline was primarily impacted by a decrease in the deferral of acquisition costs in the quarter due to lower expected recoverability in the short term as a result of the losses driven by COVID-related life claims for the full year.
This impacted the quarter by approximately $15 million.
The benefit ratio improved to 98.3% for the fourth quarter compared to 100.6% in the third quarter.
We were impacted by the continued high level of national COVID-related mortality, which was a reported 94,000 in the third quarter and increased to a reported 127,000 in the fourth quarter.
Age demographics continue to show a high impact on younger, working-aged individuals though this impact is lessened in the fourth quarter.
For our group life block, we estimate that COVID-related excess mortality claims declined from over 1,900 claims in the third quarter to an estimated 1,725 claims in the fourth quarter.
Accordingly, our results reflect an improvement to approximately 1.4% of the reported national figure in the fourth quarter compared to approximately 2% of the reported national figures in the third quarter.
We also experienced a higher average benefit size, which increased to around $65,000 in the fourth quarter from just over $60,000 in the third quarter.
And then finally, non-COVID-related mortality did not materially impact results in the fourth quarter relative to the experience in the third quarter.
So looking ahead, the level of composition of COVID-related mortality will heavily influence our group life results.
While we are waiting until later this month to hold our 2022 outlook meeting when we expect to have a more informed view of potential trends for the year, it is clear that first quarter mortality will continue to impact our group life results and we suggest that you follow the national trends as a basis for your projections and estimates.
Now, looking at the Unum US supplemental and voluntary lines, adjusted operating income totaled $119 million in the fourth quarter compared to $116.1 million in the third quarter, both of which are very strong quarters that generated adjusted operating returns on equity in the range of 17% to 18%.
Looking at the three primary business lines.
First, we remain very pleased with the performance of the individual disability recently issued block of business, which has generated strong results throughout the pandemic.
The benefit ratio was generally stable at favorable overall levels from the third quarter to the fourth quarter, with strong recoveries offsetting an increased level of incidents.
The voluntary benefits line reported a strong level of income as well, with a benefit ratio in the fourth quarter declining to 42.9% from 46.6% in the third quarter, primarily reflecting strong performance across the A&H products.
And finally, utilization in the dental and vision line decreased relative to the third quarter leading to an improvement in the benefit ratio to 65.6% compared to 75% in the third quarter.
Now, looking at premium trends and drivers, we were pleased to see an acceleration in premium income growth for Unum US in the fourth quarter, with a year-over-year growth of 3%.
For full year 2021, premium income increased 1%.
The group disability product line had a very positive quarter, with premium increasing 5% year over year, with strong growth in the STD line as well as the benefit of natural growth on the in-force block.
We estimate the benefit we're seeing from natural growth across our businesses to be in the 3% to 3.5% range measured on a year-over-year basis, with different impacts to our various product lines.
To date, we've seen more of a benefit from rising wages overall, with the benefit from higher employment levels being more pronounced in the less than 2,000 lives sector of our blocks than in our larger case business.
Persistency levels were slightly lower year over year, but remain at strong overall levels.
New sales were down for both the STD and LTD lines reflecting the pricing actions we are taking in the market and increased competition.
For the group life and AD&D line, premium income increased 2.1% year over year, benefiting from higher persistency and favorable trends and natural growth.
Compared to a year ago, fourth quarter sales were lower by 4.7%.
Finally, in the supplemental voluntary lines, premium income increased 0.6% in the fourth quarter relative to last year, with strong sales growth in both the voluntary benefits and the individual disability recently issued lines, a year-over-year increase of 8.3% in dental and vision premium income, as well as strong improvement in persistency in the voluntary benefits line.
Now, moving to the Unum international segment.
We had a very good quarter, with adjusted operating income for the fourth quarter of $27.1 million compared to $27.4 million in the third quarter.
The primary driver of our international segment results is our Unum UK business, which generated adjusted operating income of GBP 18.7 million in the fourth quarter compared to GBP 18.4 million in the third quarter.
The reported benefit ratio for Unum U.K. was 81.4% in the fourth quarter compared to 79.2% in the third quarter.
The underlying benefits experience was generally consistent between the two quarters, with favorable experience in group life offsetting a slightly higher benefit ratio in group disability.
The quarter-to-quarter increase in the benefit ratio was largely driven by the impact of rising inflation in the U.K. As we have outlined in previous quarters, the higher benefit payments we make that are linked to inflation are offset with higher income that we received from inflation index-linked yields in the investment portfolio.
Benefits experienced in Unum Poland continued to trend favorably and adjusted operating income was generally consistent from quarter to quarter.
The year-over-year premium growth for our international business segment was also strong this quarter.
On a local currency basis to neutralize the impact from changes in exchange rates, Unum UK generated growth of 5.1% with strong persistency, good sales and the continued successful placement of rate increases on our in-force block.
Additionally, sales in Unum UK were strong in the fourth quarter, increasing 28.1% over last year.
Unum Poland generated sales growth of 43.6%, a continuation of the strong growth trend this business has been producing.
So next, I'll move to the colonial life results.
They remain at healthy levels and in line with our expectations, with adjusted operating income of $80 million in the fourth quarter and $80.1 million in the third quarter.
One of the primary drivers of results between the third and fourth quarters was an improvement in the benefit ratio in the fourth quarter to 52.5% compared to 55.9% in the third quarter.
This was largely driven by lower cancer and life insurance claims.
Offsetting this improvement was a lower level of miscellaneous investment income, with the fourth quarter at an average level for bond calls compared to the unusually high income we saw in the third quarter from calls.
We were pleased to see a continuation in the improving trend in premium growth for colonial life, which did increase 1.1% on a year-over-year basis after being flat to negative over the past four quarters.
Driving this improving trend in premiums is the improvement in persistency and sales activity.
For the fourth quarter, sales for colonial life increased 7.8% compared to a year ago and for the full year 2021, sales increased 16.1%.
Persistency for colonial life ended the year in a strong position, increasing to 79.3% for the full year compared to 77.8% in 2020.
In the closed block segment, adjusted operating income, excluding the amortization of cost of reinsurance related to the closed block individual disability reinsurance transaction and the items related to the reserve assumption update in the prior quarter, was $76.7 million in the fourth quarter compared to $109.8 million in the third quarter.
For both the long-term care and closed block individual disability lines, we saw favorable results relative to our long-term assumptions, but we did see benefits experience continuing to return to more historic levels of performance.
For LTC, the move in the interest adjusted loss ratio to 82.2% in the fourth quarter from 74.8% in the third quarter was driven by less favorable terminations and recoveries, partially offset by lower submitted new claims.
For the closed block individual disability line, the move in the interest adjusted loss ratio to 75.4% in the fourth quarter from 58.2% in the third quarter was driven by higher submitted claims.
Again, the experience for both lines in the fourth quarter remained favorable relative to our long-term assumptions.
Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the closed block segment.
However, we did experience a reduction of approximately $10 million in total miscellaneous investment income from the third quarter to the fourth quarter, with the reduction driven by a lower level of bond calls.
The contribution to income from our alternative asset portfolio remained approximately the same between the two quarters, with improved results from our exposure to real asset partnerships.
Looking ahead, I'll reiterate from our messaging in prior calls with you that we estimate quarterly adjusted operating income for this segment will, over time, run within a $45 million to $55 million range, assuming more normal trends for investment income and claim results in the LTC and closed disability lines.
So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $45.1 million in the fourth quarter and $45.4 million in the third quarter, which are both generally in line with our expectations for this segment.
I'd also mention that the tax rate for the fourth quarter of 2021 was lower than we historically reported at 17.3%, with the favorability as compared to the U.S. statutory tax rate, driven primarily by tax exempt income and various credits.
The comparable full year tax rate of 20.2% is consistent with our expectations and in line with the past two years.
Moving now to investments and net investment income.
Miscellaneous investment income has had a meaningful impact on our financial results and quarterly comparisons.
For the fourth quarter, we saw a decline of approximately $16 million relative to the third quarter, driven by a significant reduction in bond call activity, which was unusually high in the third quarter, but was still elevated above average levels for us in the fourth quarter.
Our alternative investment portfolio remained very strong, generating income of $39.4 million in the fourth quarter compared to $38.2 million in the third quarter.
The closed block segment continues to be the primary beneficiary of the strong performance of the alternatives portfolio, while the reduced level of net investment income from bond call activity primarily impacted colonial's sequential results.
For the full year 2021, miscellaneous investment income generated unusually high levels of income, which we expect to moderate in 2021.
Moving now to capital.
The financial position of the company continues to be in great shape, providing us significant financial flexibility.
insurance companies improved to approximately 395% and holding company cash was $1.5 billion at the end of the year, both well above our targeted levels.
In addition, leverage has again trended lower with equity growth and is now 25.3%.
During the fourth quarter, we successfully added $400 million of contingent capital through pre-capitalized trust securities, with a 4.046% coupon and 20-year tenor, which we view as a cost-effective way to enhance our balance sheet strength and flexibility.
In terms of capital deployment in the fourth quarter, we executed an accelerated share repurchase transaction to buy back $50 million of our shares.
We continue to anticipate repurchasing approximately $200 million of our shares during 2022.
And looking at the capital contribution to support the LTC business, we were really pleased with the improvements in the fourth quarter outcomes.
Capital contributions in the Fairwind subsidiary were $165 million for the fourth quarter and totaled $285 million for the full year 2021, which was a decline from $424 million in 2020.
The recognition of the premium deficiency reserve for LTC, which is included in the Fairwind capital contributions, totaled $346 million after tax for full year 2021.
A portion of the funding for the PDR was generated from the favorable operating earnings in the Fairwind subsidiary and its high capital levels.
Moving to First Unum, given the better position of the LTC Block in that subsidiary, resulting from higher interest rates and the benefit of rate increase approvals for that block during 2021, we were in a position to release $75 million of the asset adequacy reserve after many years of additions to that reserve.
With this reserve release, we were able to take a $30 million dividend out of First Unum in the quarter, the first in several years.
Finally, we have a small portion of our LTC business in the provident life and accident subsidiary.
And with the increase in interest rates and repositioning our investment portfolio, the premium deficiency reserve in that block was reduced by $66 million after tax.
To summarize, we experienced favorable outcomes for LTC contributions given the improved interest rate environment, recent underlying performance of the block and rate increases on the in-force block.
So in closing, I wanted to give you an update on our progress in adopting ASC 944 or long-duration targeted improvements.
As I mentioned in October, this accounting pronouncement applies only to GAAP basis financial statements and has no economic, statutory accounting or cash flow impacts to the business.
We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023 and began to communicate some qualitative information with the filing of our third quarter Form 10-Q.
Although we continue to evaluate the effects of complying with this update, we expect that the most significant impact of the transition date will be the requirement to update our liability discount rate with one that is generally equivalent to a single A interest rate.
As we stated in the 10-Q, we expect this will result in a material decrease to accumulated other comprehensive income and primarily being driven by the difference between the expected interest rates from our investment strategy and interest rates indicative of a single A rated portfolio.
We plan to provide updates to you in 2022 as we near adoption.
Specifically, we plan to provide an update on the impact at the transition date as well as our 2022 outlook with a conference call on February 25.
We'll release details on the logistics for that call in the next several days.
I'd reiterate, we continue to be pleased with the operational performance of the company through what continues to be an extraordinary environment.
We believe we're well positioned to benefit from today's business environment, but remain vigilant as COVID-related mortality and infection rates continue to persist. | q4 adjusted operating earnings per share $1.15 excluding items.
anticipates a strong recovery in after-tax adjusted operating income per share in second half of 2021.
qtrly total revenue $4,273.5 million versus $3,034.6 million. | 0 |
I'm here today with Pat McHale and Mark Sheahan.
Our conference call slides have been posted on our website and provide additional information that may be helpful.
Sales totaled $439 million for the third quarter, an increase of 10% from the third quarter last year and an increase of 9% at consistent currency translation rates.
Acquisitions added 1 percentage point of growth in the quarter.
Net earnings totaled $114 million for the quarter or $0.66 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises and other non-recurring tax items, net earnings totaled $102 million or $0.59 per diluted share.
The sale of the company's UK-based valve business Alco, was finalized in July of 2020.
Impairment charges totaled $300,000 in the quarter and $35.2 million year-to-date.
No additional impairment charges are expected from the sale.
Our gross margin rate was up slightly compared to the third quarter last year.
Improved factory volumes, lower material cost, the favorable impact of currency and realized pricing more than offset the unfavorable effect of product and channel mix, as sales in the Contractor segment increased, while sales in the Industrial and Process segments declined.
Given the growth in certain products in the Contractor segment, particularly products for the home center channel, factory capacity has strained.
We've managed the increase in demand levels by investing in additional production lines, moving employees from other factories, increasing contract labor and working over time.
We are making progress toward meeting current demand levels and continue to monitor the situation closely.
Operating expenses in the quarter were comparable to the third quarter last year, as reductions in volume and earnings-based expenses offset higher product development costs.
The reported tax rate was 6% for the quarter, down 7 percentage points from last year.
On an adjusted basis, the rate in the quarter was 16% as compared to 20% in the first half of 2020.
The decrease in the rate from the first half is due to the impact of lower foreign earnings and earnings in countries with lower tax rates than the US rate.
Excluding the effect from excess tax benefits related to stock option exercises, and other one-time items, our tax rate is expected to be 18% to 19% for both the fourth quarter and the full year.
Cash flow from operations totaled $263 million year-to-date as compared to $299 million last year, primarily due to lower operating earnings and increases in working capital.
Capital expenditures totaled $46 million year-to-date as we continue to invest in manufacturing capabilities as well as the expansion of several locations.
For the full-year 2020, capital expenditures are expected to be approximately $85 million, including approximately $50 million for facility expansion projects.
A few final comments, looking forward to the rest of the year.
On page 11 of our slide deck, we note our 6-week booking average through October 16th by segment.
I would point out that there is an inherent volatility in order rates reflected in such a short period of time.
Nonetheless, we thought it would be helpful to provide current order rate data, so you can see what we are experiencing heading into the fourth quarter.
Similar to the last two quarters, our Industrial and Process businesses are still experiencing declines from a year ago.
Although less severe than they were in Q2, while our contractor business remains strong.
As the US dollar continues to weaken, the effect of currency translation will continue to be favorable.
At current rates, the impact would have been negligible on sales and earnings for the full year, and have a full -- have a favorable impact to the fourth quarter of approximately 2% on sales and 3% on earnings, assuming the same mix of business as the prior year.
Despite the unusual operating environment, we achieved record quarterly sales, driven by the strength of the North American construction market and a gradually improving Asia-Pacific region.
The Contractor segment, single handedly accounted for the company's sales growth for the quarter.
It's been Graco teamwork on full display.
Contractor grew in all regions during the quarter as customers have responded favorably to our new product offerings, residential construction activity has been solid and the home improvement market has been robust.
The Industrial segment declined low single-digits for the quarter.
Although improved from Q2, business activity remains muted across most of our major end markets.
Access to industrial facilities is limited.
Factory demand in many industries remains well below last year and appetite for capital spending is constrained.
Some specific areas showing signs of life, such as spray foam, electronics and battery, aren't large enough to offset declines elsewhere.
Asia-Pacific improved during the quarter, all those up against an easier comp from last year.
As you'll recall that industrial demand softened in the second half of 2019.
Reduced spending on travel, sound discretionary expense management, good factory performance and solid price realization resulted in improved industrial operating earnings for the quarter, despite the lower sales.
The Process segment declined low teens for the quarter and for the year.
Demand in this segment vary significantly by end market with growth in our semiconductor and environmental businesses more than offset by declines in our diaphragm pump and lubrication businesses.
While it's difficult to predict near-term economic conditions, we expect things to remain challenging for the short term.
As we've done throughout 2020, and through prior downturns, we intend to continue to fully execute against our strategies.
We're full scheme [Phonetic] ahead on our new product development initiatives, continue to make solid ROI capital investments in our factories are adding channel globally and are focused on finding profitable growth opportunities in attractive niche markets whether organically or by acquisition.
We've kept our workforce intact, morale is good and we expect to do well as economic conditions improve. | quarterly earnings per common share $ 0.63.
quarterly earnings per common share, adjusted $ 0.62. | 0 |
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Despite, what continues to be a challenging operating environment, including elevated cost pressures and broad-based supply chain disruptions, our teams remain focused on controlling what we can control, and they are delivering for our customers.
We are grateful for their efforts.
Looking ahead, we believe we are well positioned to navigate the current environment.
And although we've experienced higher-than-expected costs, both from a product and supply chain perspective we're very confident in our price position.
As our price indexes relative to our competitors and other classes of trade remain in line with our targeted and historical ranges.
And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important for our customers and they will continue to have a significant presence in our assortment.
In fact, approximately 20% of our overall assortment remains at $1 or less.
And moving forward we will continue to foster and grow this program where appropriate.
As the largest retailer in the US by store count, with over 18,000 stores located within five miles of about 75% of the US population, we believe our presence in local communities across the country provides another distinct advantage and positions us well for continued success.
Overall, we remain focused on advancing our operating priorities and strategic initiatives.
As we continue to strengthen our competitive position, while further differentiating and distancing Dollar General from the rest of the discount retail landscape.
To that end, I'm excited to share an update on some of our more recent plans.
First, as you saw in our release, we expect to execute a total of nearly 3,000 real estate projects in 2022, including 1,100 new store openings as we continue to lay and strengthen the foundation for future growth.
Of note, these plans include the acceleration of our pOpshelf concept, as we expect to nearly triple our store count next year, as compared to our fiscal '21 year-end target of up to 50 locations.
In addition, given the sustained performance of our pOpshelf concept, which continues to exceed our expectations, we plan to further accelerate the pace of new store openings as we move ahead.
Targeting a total of about 1,000 pOpshelf locations by fiscal year-end 2025.
Importantly, we anticipate these new pOpshelf locations will be incremental to our annual Dollar General store opening plans, as we look to further capitalize on the significant growth opportunities we see for both brands.
We are also now at the early stages of plans to extend our footprint into Mexico, which will represent our first store locations outside the Continental United States.
We believe Mexico represents a compelling expansion opportunity for Dollar General given this demographics and proximity to the US, and we are confident that our unique value and convenience proposition will resonate with the Mexican consumer.
While our initial entry in the Mexico is focused on piloting a small number of stores in 2022.
We expect to seize -- we plan today will ultimately turn into additional growth opportunities in the future.
Finally, as previously announced, we recently introduced our digital services by partnering with DoorDash to provide delivery in under an hour, in over 10,000 locations.
Further enhancing our convenience proposition, while broadening our reach with new customers.
Jeff will discuss these updates in more detail later in the call.
But first let's recap some of the top line results for the third quarter.
Net sales increased 3.9% to $8.5 billion following a 17.3% increase in Q3 of 2020.
Comp sales declined 0.6% to the prior year quarter, which translates to a robust 11.6% increase on a two-year stack basis.
From a monthly cadence perspective, comp sales were lowest in September, with October being our strongest month of performance.
And I'm pleased to report that Q4 sales to-date are trending in line with our expectations.
Our third quarter sales results include a year-over-year decline in customer traffic, which was largely offset by growth in average basket size, even as we lap significant growth in average basket size last year.
In addition, during the quarter, we saw an improvement in customer traffic, as compared to Q2 of 2021.
And we continue to be pleased with the retention of the new customers acquired in 2020.
We're also pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories.
And even as our market share in total highly consumable product sales decreased slightly in Q3, we feel good about our overall share gains on a two-year stack basis.
Collectively, our third quarter results reflect strong execution across many fronts.
And further validates our belief that we are pursuing the right strategies to enable sustainable growth, while supporting long-term shareholder value creation.
We operate in one of the most attractive sectors in retail.
And as a mature retailer in growth mode, we continue to lay the groundwork for our future initiatives, which we believe will unlock additional growth opportunities as we move forward.
Overall, I've never felt better about the underlying business model and we are excited about the significant growth opportunities we see ahead.
Now that Todd has take you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless we specifically note otherwise all comparisons are year-over-year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit.
As a reminder gross profit in Q3 2020 was positively impacted by a significant increase in sales, including net sales growth of 24% in our combined non-consumable categories.
For Q3 2021, gross profit as a percentage of sales was 30.8%, a decrease of 57 basis points, but an increase of 121 basis points, compared to Q3 2019.
The decrease compared to Q3 2020 was primarily attributable to a higher LIFO provision, increased transportation costs, a greater proportion of sales coming from our consumables category and an increase in inventory damages.
These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales.
SG&A as a percentage of sales was 22.9%, an increase of 105 basis points.
This increase was driven by expenses that were greater as a percentage of sales in the current year period, the most significant of which were retail, labor and store occupancy costs.
The quarter also included $16 million of disaster-related expenses attributable to Hurricane Ida.
Moving down to income statement.
Operating profit for the third quarter decreased 13.9% to $665.6 million.
As a percentage of sales, operating profit was 7.8%, a decrease of 162 basis points.
And while the unusual and difficult prior year comparison create pressure on our operating margin rate, we're very pleased with the improvement of 78 basis points, compared to Q3 2019.
Our effective tax rate for the quarter was 22.2% and compares to 21.6% in the third quarter last year.
Finally, earnings per share for Q3 decreased 10% to $2.08, which reflects a compound annual growth rate of 21% over a two-year period.
Turning now to our balance sheet and cash flow which remain strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders.
Merchandise inventories were $5.3 billion at the end of the third quarter, an increase of 5.4% overall and a decrease of 0.1% on a per store basis.
And while we're not satisfied with our overall in-stock levels, we continue to make good progress and are focused on improving our in-stock position particularly in our consumables business.
Looking ahead, we are pleased with our inventory position for the holiday shopping season and our teams continue to work closely with suppliers to ensure delivery of goods for the remainder of the year.
Year-to-date through [Phonetic] the third quarter, we generated significant cash flow from operations totaling $2.2 billion.
Capital expenditures to the first three quarters were $779 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 1.6 million shares of our common stock for $360 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million.
At the end of Q3, the total remaining authorization for future repurchases was $619 million.
We announced today that our Board has increased this authorization by $2 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continue to operate in a time of uncertainty regarding the economic recovery from the COVID-19 pandemic, including any changes in consumer behavior and the corresponding impacts on our business.
Despite continued uncertainty, including cost inflation ongoing pressure throughout the supply chain, we are updating our sales and earnings per share guidance, which reflects our strong performance through the first three quarters, as well as our expectations for Q4.
For 2021, we now expect the following: Net sales growth of approximately 1% to 1.5%; a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a two-year stack basis; and earnings per share in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24% or approximately 21% to 23%, compared to 2019 adjusted earnings per share over a two-year period.
Our earnings per share guidance now assumes an effective tax rate of approximately 22%.
Let me now provide some additional context as it relates to our outlook.
In terms of sales, we remain cautious in our outlook over the next couple of months, given the continued uncertainties arising from the COVID-19 pandemic, including additional supply chain disruptions and the impact of the end of certain federal aid such as additional unemployment benefits and stimulus payments.
Turning to gross margin.
Please keep in mind, we will continue to cycle strong gross margin performance from the prior year where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rate.
Consistent with Q2 and Q3, we expect continued pressure on our gross margin rate in the fourth quarter, due to a higher LIFO provision, as a result of cost of goods increases, a less favorable sales mix, compared to the prior year quarter, and an increase in markdown rates as we continue to cycle the abnormally low levels in 2020.
We also anticipate higher supply chain costs in Q4 compared to the 2020 period.
Like other retailers our business continues to be impacted by higher costs due to transit and port delays, as well as elevated demand for services at third-party carriers.
However, despite these challenges we are confident in our ability to continue navigating these transitory pressures.
With regards to SG&A, we continue to expect about $70 million to $80 million, an incremental year-over-year investments in our strategic initiatives.
This amount includes $56 million in incremental investments made during the first three quarters of 2021.
However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
Finally, our updated guidance does not include any impact from the proposed federal vaccine and testing mandate, including potential disruptions to the business or labor market or any incremental expense.
In closing, we are pleased with our third quarter results, which are with testament to the strong performance and execution by the team.
As always we continue to be disciplined and how we manage expenses in capital with the goal of delivering consistent strong financial performance, while strategically investing for the long-term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
The team did a great job this quarter, executing against a robust portfolio of growth initiatives.
Let me highlight some of our more recent efforts.
Starting with our non-consumables initiative or NCI.
The NCI offering was available in nearly 11,000 stores at the end of Q3, and we continue to be very pleased with the strong performance we are seeing across our NCI store base.
Notably, this performance is contributing an incremental 2.5% total comp sales increase on average in NCI stores along with a meaningful improvement in gross margin rate, as compared to stores without the NCI offering.
Overall, we now plan to expand this offering to a total of more than 11,500 stores by year-end, including over 2,000 stores in our light version.
And we expect to complete the rollout of NCI across nearly the entire chain by year-end 2022.
Moving to our pOpshelf concept, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a unique in-store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter we added 14 new pOpshelf locations, bringing the total number of stores to 30.
Opened our first 14 store within a store concepts and celebrated the one-year anniversary of our first pOpshelf store opening.
For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end, as well as up to an additional 25 store with an in-store concepts, which incorporate a smaller footprint pOpshelf shop into one of our larger format Dollar General market stores.
Importantly, as Todd noted earlier, we continue to be very pleased with the performance of our pOpshelf stores, which have far exceeded our expectations for both sales and gross margin.
In fact, we anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%.
We believe this bodes well for the future as we move toward our goal of about 1,000 pOpshelf locations by year-end 2025.
Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of frozen and refrigerated goods.
As a reminder, we completed the initial rollout of DG Fresh across the entire chain in Q2, and are now delivering to more than 18,000 stores from 12 facilities.
The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items.
And we continue to be very pleased with the savings we are seeing as DG Fresh remains a meaningful contributor to our gross margin rate.
Another goal of DG Fresh is to increase sales in these categories.
And we are very happy with the performance on this front, as overall comp sales of our frozen and refrigerated goods outperformed all other product categories in Q3, even against a difficult prior year sales comparison.
Going forward, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network, further leverage our scale, deliver an even wider product selection and build on our multi-year track record of growth in cooler doors and associated sales.
With regards to our cooler expansion program, during the first three quarters we added more than 52,000 cooler doors across our store base.
In total, we expect to install approximately 65,000 additional cooler doors in 2021.
The majority of which will be in high capacity coolers.
Turning now to an update on our expanded health offering, which consist of about 30% more feet of selling space and nearly 400 additional items, as compared to our standard offering.
This offering was available in nearly 800 stores at the end of Q3, with plans to expand to approximately 1,000 stores by year-end.
Looking ahead, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services overtime, particularly in rural America.
In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
We recently celebrated a significant milestone with the opening of our 18,000 stores, which reflects the fantastic work of our best-in-class real estate team, as we continue to expand our footprint and further enhance our ability to serve additional customers.
Through the first three quarters, we completed a total of 2,386 real estate projects, including 798 new stores, 1,506 remodels and 82 relocations.
For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total.
In addition, we now have produce in approximately 1,900 stores with plans to expand this offering to a total of over 2,000 stores by year-end.
For 2022 we plan to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations.
We also plan to add produce and approximately 1,000 additional stores next year with the goal of ultimately expanding this offering to a total of up to 10,000 stores over time.
Of note, we expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot new store prototype, allowing for a more optimal assortment and room to accommodate future growth.
Importantly, we continue to be very pleased with the sales productivity of this larger format, as average sales per square foot continue to trend about 15% above an average traditional store.
Our 2022, real estate plans also include opening approximately 100 additional pOpshelf locations, bringing the total number of pOpshelf stores to about 150 by year-end, as well as, up to an additional 25 store with in-store concept.
As Todd noted, we are also very excited about our plans to expand our footprint internationally for the first time, with plans to open up to 10 stores in Mexico by year-end 2022.
As we look to extend our value and convenience offering to even more communities, while continuing to lay the foundation for future growth.
Overall, our proven high-return, low-risk real estate model continues to be a core strength of our business.
And the good news is, we believe we still have a long runway for new unit growth ahead of us.
In fact, across our Dollar General, pOpshelf and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the Continental United States alone.
Although, these opportunities available to all small box retailers, we expect to continue capturing a disproportionate share as we move forward.
And while still early, we expect our entry into Mexico will ultimately unlock a significant number of additional new unit opportunities in the years to come.
When taken together, our real estate pipeline remains robust and we are excited about the significant new store opportunities ahead.
Next, our digital initiative, which is an important complement to our physical store footprint, as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
Of note, we ended Q3 with over 4.4 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings.
As Todd noted, our partnership with DoorDash is another example of meeting the evolving needs of our customers, by providing the savings offered by Dollar General, combined with the convenience of same-day delivery in an hour or less.
And while still early, we are pleased with the initial results, including better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base.
Our DG Media Network, which we launched in 2018 is also seeing strong results, including significant growth in the number of campaigns on our platform.
Overall, we remain very excited about the long-term growth potential of this business.
And we look to better connect our brand partners with our customers in a way that is accretive to the customer experience.
Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of customer engagement across our digital ecosystem.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions.
This zero based budgeting approach internally branded as safe to serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset.
Our Fast Track initiative is a great example of this approach, where our goals include, increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.
Looking ahead, our plans now include expanding this offering to over 6,000 stores by year-end 2021, and to the majority of our store base by the end of 2022, as we look to further extend our position as an innovative leader in small box discount retail.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we continue to create new jobs in the communities we serve.
As evidenced in 2022, we plan to create more than 8,000 net new jobs.
In addition, our growth also fosters an environment where employees have opportunities to advance to roles with increasing levels of responsibility and meaningful wage growth in a relatively short timeframe.
In fact, over 75% of our store associates at/or above the lead sales associate position were internally placed.
And we continue to innovate on the development opportunities we offer our teams.
Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by our robust promotion pipeline, healthy applicant flows and staffing above traditional levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
We also recently completed our annual community giving campaign, where our employees came together to raise funds for a variety of important causes.
And I was once again inspired by the generosity and compassion of our people.
Our mission of serving others is deeply embedded in the daily culture of Dollar General.
And I'm so proud to be a part of such an incredible team.
In closing, we are making great progress against our operating priorities and strategic initiatives.
And with the actions and multi-year initiatives we have in place, we are confident in our plans to drive long-term sustainable growth and shareholder value creation. | compname reports q3 earnings per share of $2.08.
q3 earnings per share $2.08.
sees fy sales up about 1 to 1.5 percent.
q3 sales rose 3.9 percent to $8.5 billion. | 1 |
We expect the call to last roughly an hour.
In addition, during our call today, we will refer to certain non-GAAP financial measures that we believe provide additional information to enhance the understanding of the way management views the operating performance of our business.
Our third quarter performance reflects continued momentum across our business.
Global Client top line performance, which grew at 11% on a constant currency basis was once again driven by strong demand for Transformation Services, made up of analytics, digital and consulting.
Our strategic investments over the years in capabilities and talent, including the continuous training and development of our global workforce positions us well to address the pressing challenges and opportunities our clients are facing.
This quarter, we achieved the milestone of crossing the threshold of $1 billion in quarterly total revenue for the first time.
For the third quarter 2021, we delivered: total revenue of $1.02 billion, up 8% on a constant currency basis; Global Client revenue of $921 million, up 11% on a constant currency basis; adjusted operating income margin of 16.6% compared to 17.1% during the third quarter of 2020; and adjusted diluted earnings per share of $0.66 per share, up 18% year-over-year.
Global Client revenue growth in the quarter cut across almost all of our industry verticals with double-digit growth in consumer goods and retail, life sciences and healthcare, high-tech and manufacturing and services.
As expected, banking and capital markets growth continued to be muted due to the restructured relationship with one client that resized its asset management business in late 2020.
Our pipeline remains healthy with a mix of both large and regular-sized deals.
We continue to scale our revenue and bookings from existing relationships and add new logos, which sets the stage for future growth.
During the third quarter, we signed four large deals across life sciences, CPG, banking and capital markets and high-tech services.
As we deepen our role as a trusted advisor to our clients, we have seen sole-sourced deals, which was, for many quarters, above 50% of our bookings, now rising above 60%.
We are also seeing great traction build up in fintech, digital banking and other fast growth tech companies where our domain strength and agile development and deployment is helping them scale rapidly.
Global Client Transformation Services continues to grow at a 30%-plus rate and now accounts for more than 35% of total Global Client revenue, including the contribution from the Enquero acquisition.
Year-to-date, approximately 70% of Global Client bookings include a component of analytics, digital or consulting in them.
As a reminder, approximately half of Transformation Services bookings are annuity-based and often lead to large long-term intelligent operations engagements.
Analytics is not only the largest component of Transformation Services, contributing more than half of its revenue over the last several quarters, but is also its fastest-growing component, consistently growing well above 30%.
Many of our analytics solutions are deeply connected to high-growth areas where we are strategically focused, such as sales and commercial, supply chain, financial crimes and risk and SG&A.
Our sharp differentiation is our ability to orchestrate data and analytics in the cloud with deep industry and process knowledge.
The availability of high-quality data and the ability to derive actionable insights with analytics to drive decision-making is now more critical than ever.
It is at this insight to action level where we differentiate ourselves the most.
Our intelligence platform, Genpact enterprise 360 enables clients to do just that.
Genpact enterprise 360 harnesses the power of data and insights from our operations built on proprietary metrics and benchmarks we have deployed and developed over the past 20 years in our digital Smart Enterprise frameworks.
This enables clients to have radical transparency in their businesses.
The platform then uses AI to generate connective insights.
This further empowers clients to take actions, either themselves all through our work with them to deliver better outcomes today and to point transformation opportunities to unlock future growth.
Another differentiator for us is our ability to drive outcome-oriented value for clients beyond just cost and productivity, such as increased growth, lower receivables and inventory, lower losses in fraud and better pricing.
This is one of the key reasons why our Transformation Services solutions resonate so well with our clients.
Some examples include, for a large global CPG client, leveraging our experience and design thinking methodologies, we are using analytics to help them with better sales targeting and automating processes such as contract management and payment reconciliations.
This enables its sales teams to focus on much higher proportion of their time on business development.
For a large fintech client, we have designed, implemented and are now running a best-in-class anti-money laundering and transaction monitoring process to improve their regulatory risk compliance as they experience hyper growth.
For a large high-tech client using our Cora sales assist solution, we are leveraging data and analytics to proactively generate and prioritize advertising leads for small and medium business segment to grow the client's top line.
For a large client in the semiconductor ecosystem, we are using digital and analytics solutions to improve supply and demand forecasting, diversify their supplier base for greater resilience, conduct global inventory analysis and run spot price forecasting to optimize the timing of purchases.
These examples reflect the five trends we continue to see in every CxO conversation.
The five trends are: one, a significant shift from off-line to online across every industry; two, the virtualization of all technology services and solution delivery; three, an accelerated consumption of cloud-based services and solutions; four, an exponential growth in real-time predictive analytics; and five, the move to human-centered design that creates superior experiences for customers, users and employees.
Clients continue to tell us that our approach of bringing together our expertise in digital and cloud-based analytics solutions with our deep industry and process depth to drive actions that deliver outcomes is different.
We continue to see momentum in driving commercial models linked to these outcomes versus traditional input-based models that focus on the cost of FTEs.
These commercial models ensure goal alignment between us and our clients.
For example, being paid for the outperformance of predefined metrics, consumption of transaction-based models or fixed fee models.
As the world continues to adapt to the changes that I've seen over the last 18 months, companies across every industry are intensely competing for talent across the globe.
While this hot talent market presents challenges for our kind of a business, it certainly creates an interesting set of opportunities for us.
We see many engagements where we can help our clients access and nurture global talent, given our ability to scale across a range of skill sets and geographies as well as our focus on reskilling.
We are using our investments in our online on-demand learning platform, Genome, to build the critical skills businesses are looking for across digital, data and analytics.
Specific industry and process knowledge, use of Lean and Six Sigma as well as soft skill and personal development.
As an example, our data and analytics certification program equips our employees with the skills necessary to generate impact immediately after course completion by deriving insights from complex data sets.
To date, Almost 70% of our employees are enrolled with more than 43,000 fully trained and tested.
This is analytics at scale for our clients.
At the height of the pandemic in 2020, we saw historically low attrition rates.
In the third quarter, as expected, our attrition rate increased above our historical average.
This is a global trend that is impacting our peers and clients alike.
However, given our talent management practices to date, we have had no impact on our client engagements or our ability to convert new bookings.
This reflects the strength of our culture of curiosity, innovation and learning as well as the countless learning, development and career opportunities we provide for our employees, enabled by investments like Genome and our redeployment platform, Talent Match.
We are delighted to have had a state of recent recognitions for being a great destination for talent in the market, such as: Forbes 2021 World's Best Employers List; the Refinitiv's 2021 diversity and inclusion top 100; a total of 28 excellent awards from Brandon Hall Human Capital Management; International SOS' Duty of Care award for diversity and inclusion; Aptar's top 10 best companies for women in India.
And earlier today, Forbes 2021 America's Best Employers for Veterans.
We are also being recognized for the work we are doing to improve our communities.
For example, being named to Fortune's Change the World List as one of 100 companies celebrated for having a positive societal impact.
We are deeply committed to our environmental, social and governance initiatives and are proud to have been recently awarded a gold medal from EcoVadis, recognizing our efforts across environment, labor and human rights, ethics and sustainable procurement.
We also recently concluded our annual green-a-thon event with more than 25,000 participants to sponsor the planting of more than 14,500 tree saplings, underscoring our commitment to environmental sustainability.
ESG is not only an important focus for us internally as a company, but also for what we do with our clients.
Given our industry knowledge, strength in data and analytics, and deep familiarity with our clients' processes, we are in a meaningful position to help our clients achieve progress on their own ESG agenda through areas like responsible sourcing, supply chain optimization, financial crimes, climate footprint of equipment usage and many others were able to help our clients generate positive social and environmental impact.
We are very excited about the work we are doing on our pursuit of a world that works better for people.
Lastly, as our teams are beginning to return to the office globally and travel more frequently to collaborate in person or meet with clients.
We are taking every precaution to continue to ensure the health and safety of our own employees and their families.
We are happy to report that a large and increasing number of our employees are getting vaccinated globally.
For example, in our largest delivery ecosystem, India, approximately 80% of our workforce has received at least one dose of a COVID vaccine, and we continue to encourage participation for the rest of our population.
Today, I'll review our third quarter results and provide our latest thinking regarding our full year 2021 financial outlook.
Total revenue was $1.02 billion, up 9% year-over-year or 8% on a constant currency basis.
Global Client revenue that expanded to 91% of total revenue increased 12% year-over-year or 11% on a constant currency basis primarily driven by ongoing movement in Transformation Services led by analytics that grew more than 30% in the quarter as we continued underlying strength in our Intelligent Operations business.
Total Global Client growth included approximately one point contribution from revenue related to certain divested GE businesses that we began including in our Global Client portfolio as of January one.
During the quarter, we continued to expand the size of our Global Client relationships.
For example, during the 12-month period ended September 30, we grew the number of Global Client relationships with annual revenue over $5 million from 129 to 142 or a 10% year-over-year increase.
This included clients with more than $25 million in annual revenue, increasing from 23 to 26 or 13% year-over-year.
GE revenue declined 15% year-over-year driven by our delivery of committed productivity and the overall macroeconomic impact on GE.
Excluding the effect of revenue related to divested GE businesses I mentioned earlier, GE revenue would have declined 6% during the quarter, which is in line with our expectations.
Adjusted operating income margin at 16.6% declined from the first half of the year largely due to the increase in investment activity that we discussed with you last quarter as well as higher travel expenses.
As we move into the latter part of the year, we expect travel-related activity to increase as the macro environment continues to stabilize.
Gross margin in the quarter was 35.6% compared to 35.2% during the same period last year largely due to increased productivity from higher revenue and a more favorable mix.
We continue to expect our full year gross margin to expand 70 to 75 basis points year-over-year.
SG&A as a percentage of revenue was 21.3%, up 10% year-over-year and 60 basis points sequentially as we dialed up investment activity to be able to take advantage of long-term growth opportunities.
Adjusted earnings per share was $0.66, up 18% year-over-year compared to $0.56 in 2020.
This 10% -- $0.10 increase was primarily driven by higher adjusted operating income of $0.04, lower taxes of $0.03, a $0.02 impact related to FX remeasurement and a $0.01 impact related to lower year-over-year share count.
Our effective tax rate was 17.3% compared to 22.6% last year largely due to discrete benefits in the quarter as well as a nonrecurring prior period tax refund-related items.
Excluding this onetime tax benefit that equates to $0.03 per share, our effective tax rate for the quarter would have been 21.4%.
Turning to cash flow and balance sheet.
During the third quarter, we generated $210 million of cash from operation that corresponds to free cash flow being almost two times higher than net income.
As a reminder, during 2020, we experienced a lower-than-normal working capital impact to our cash flow given improved days outstanding as lower revenue growth related to the pandemic.
This helped drive cash flow from operations of $252 million during the third quarter last year.
Our days outstanding have remained in a consistent range with third quarter 2021 at 84 days.
Cash and cash equivalents totaled $922 million compared to $753 million at the end of the second quarter of 2021, and includes $350 million related to the 1.75% bond that we issued in the first quarter.
We continue to closely monitor market conditions for the optimum timing of the pay down of our 3.7% bond that is scheduled to mature in April 2022.
Our net debt-to-EBITDA ratio for the last four rolling quarters was 1.1 times.
With undrawn debt capacity of approximately $500 million and existing cash balances, we continue to have ample liquidity to pursue growth opportunities and execute on our capital allocation strategy.
While we continue to invest to drive organic top line growth, we have a solid M&A pipeline, and we remain vigilant in searching for companies that can strengthen our capabilities in our chosen service lines.
As our track record demonstrates, to the extent capital is available, we expect to repurchase shares, particularly when the valuation is attractive in comparison to our view of the intrinsic value of the firm.
As expected, capital expenditures as a percentage of revenue increased from levels we saw during the first half of the year due to investments related to deal ramp-ups and the measured pace of our global workforce return to office.
Given our year-to-date spending, we now anticipate capital expenditures as a percentage of total revenue for the full year to be in the range of 1.5% to 2%.
Let me now turn to an update of our full year outlook.
We continue to expect total revenue between $3.96 billion and $4 billion, representing year-over-year constant currency growth of 5.5% to 6.5%.
For Global Clients, the expected growth remains in the range of 10.5% to 11.5% or 9% to 10% on a constant currency basis.
There is also no change to our full year GE outlook of approximately 20% year-over-year decline.
Excluding the effect of approximately $40 million in revenue related to the GE divested businesses, we continue to expect GE full year revenue to decline 10% to 12%.
We continue to expect our adjusted operating income margin to expand to 16.5% for the full year.
Factored into this outlook is the impact of continued ramp-ups in investment activity in both sales and marketing, research and development, higher fourth quarter travel, and a higher level of transaction costs related to recent large deal signings.
To be clear, our approximate 16.5% adjusted operating income full year margin remains the baseline for which we think about our trajectory for 2022.
As a result of the nonrecurring tax benefit in the third quarter I referred to earlier, we now expect our full year 2021 effective tax to be approximately 22.5% to 23.5%, which compares to the prior year range of 23.5% to 24.5%.
Given the outlook I just provided, we now expect full year adjusted earnings per share to be in the range of $2.40 to $2.43, up from the prior $2.36 to $2.39 range due to the favorable impact of the nonrecurring tax benefit as well as the balance sheet remeasurement gains during the quarter.
Additionally, given our year-to-date performance, we can now expect our full year operating cash flow to be at least $550 million, up from our earlier outlook of $500 million, and we continue to anticipate free cash flow from operations of approximately 1.2 times to 1.3 times net income, above our historical 1:1 ratio.
Our results for the third quarter are a reflection of the focused long-term strategic choices we have made, the capabilities we have built organically and added inorganically over the years are resonating well in the market.
We are pleased with our performance that we believe reinforces our medium- to long-term trajectory of double-digit to low teens Global Client revenue growth driven by continued momentum in Transformation Services, particularly analytics with an expanding adjusted operating income margin and adjusted diluted earnings per share growing ahead of total revenue, all supported by strong cash flow generations.
Clients across all industries are increasingly looking to leverage data and analytics for predictive insights to drive actions and position themselves to compete in this new world.
This secular trend plays to our strengths in Transformation Services that continues to power our revenue growth led by its largest segment analytics that have been consistently growing more than 30%.
The majority of our Transformation Services engagements are longer-term annuity-based work that often leads to larger intelligent operations engagements that are, of course, annuity based by definition.
Our outcome-oriented solutions are resonating well with clients as we focus on generating value beyond just cost and productivity, which is helping us win many sole-source opportunities, both with existing client relationships that are growing as well as with new logos.
We are at the forefront of developing new ways of working.
We are conducting many experiments across the globe with and for our clients in a variety of hybrid flexible models that allows our talent to get the benefits of being able to work from home while coming together as a team in a set rhythm to collaborate, innovate and build on a strong team culture that we are known for.
Our clients value us for our talent practices and our ability to reskill globally and at scale.
These strengths differentiate us even more in the talent market we are today.
This is opening doors to many opportunities to help clients transform their business models with new cloud-based digital solutions that leverage newer commercial constructs given the changing nature of work away from traditional FTE modes.
I'm very proud of the work we are doing and the impact our global teams have for our clients, our colleagues, our shareholders and the communities we live in, and I'm very excited about the opportunities ahead of us.
Nika, can you please provide the instructions? | compname reports adjusted earnings per share of $0.66.
q3 adjusted earnings per share $0.66.
q3 revenue rose 9 percent to $1.02 billion.
sees fy revenue $3.96 billion to $4.0 billion.
sees 2021 adjusted diluted earnings per share of $2.40 to $2.43. | 1 |
New factors emerge from time to time and it's simply not possible to predict all such factors.
On our call today, Allan will review highlights from the third quarter, discuss our view of the current macroeconomic environment and outline how we have strategically positioned for continued growth in fiscal '22 and beyond.
I will cover our third quarter results in greater depth, our expectations for the fourth quarter and full fiscal year and update our expectation for continued growth in our land position followed by a wrap up by Allan.
We had a very successful third quarter, generating financial results that met or exceeded our expectations, positioning us for a strong end of the fiscal year.
Our sales pace in the third quarter was one of the highest levels that we've generated in the last five years.
And in fact, this pace would have been even higher if not for our deliberate efforts to proactively slow sales to align with our production capacity and limit our exposure to raw material price inflation.
We delivered substantial gains in operating margin, EBITDA and net income as we benefited from increased pricing and improved overhead leverage.
On the balance sheet, we expanded both our total lot position, share of lots controlled by option, while retiring $14 million in debt.
Together, these results perfectly demonstrate our long-standing balanced growth strategy, which is a multiyear plan to grow profitability faster than revenue from a less leveraged and more efficient balance sheet.
With these results and confidence in our expectations for the fourth quarter, we are once again raising full year guidance, highlighted by earnings per share of at least $3.25.
Collectively, these factors have led to significant home price appreciation, which has clearly outpaced wage and income growth.
In the coming quarters, we do not expect this level of price appreciation to continue.
Our view is that disciplined mortgage underwriting will effectively limit the extent of home price appreciation.
That's entirely healthy and gives us confidence that we won't experience the kind of pricing accesses about a painful correction in the future.
The demand and supply characteristics of our industry remain highly compelling.
Aspiration for homeownership among millennials and changing homeownership expectations among baby boomers provide a durable source of demand for new homes, particularly with enduring work from home expectations.
And the significant deficit of new homes simply can't be addressed quickly with the supply chain, land use and entitlement barriers that exist.
Ultimately, our industry's challenge will be to ensure that labor and material cost expectations in the supply chain remain tethered to affordable home prices.
That's where we believe our market positioning will prove advantageous.
With three strong customer-facing differentiators, we have a lot of tools to work with to enable us to deliver extraordinary value at an affordable price in a highly competitive environment.
Last quarter, we provided initial visibility into our expectations for profitability growth in fiscal '22, and our confidence has only increased since then.
First, at the end of our third quarter, we had more than 1,500 homes in backlog scheduled to close next year, nearly double the level at this time last year.
And importantly, these homes have higher prices and higher margins.
Second, even as our ASP has increased, we have remained focused on carefully managing our overhead costs.
This will drive SG&A leverage, pushing SG&A below 11% next year.
And finally, our deleveraging efforts continue to reduce our cash interest expense, setting us up for reductions in GAAP interest over time.
Next year, we expect at least $5 million in GAAP interest savings with further reductions in subsequent years.
Taken together, we're confident that these factors will allow us to achieve our goal of generating double-digit earnings-per-share growth in fiscal '22.
First, over the past six months, we've experienced exceptional demand in gatherings, our 55-plus active adult business.
While traffic and engagement among this buyer segment was particularly impacted during the early part of the pandemic, the strength in the resale market and the availability of vaccines have contributed to much higher sales activity.
This is a growing part of our business with communities underway in Atlanta, Dallas, Houston, Nashville and Orlando.
Second, the roll out of charity title, our title business committed to contributing 100% of its profits to charity continues to gain momentum.
In fiscal '21, we expect to provide title insurance for more than a third of our closings.
Next year, we expect to provide title for two-thirds of our customers, which should generate philanthropic resources of over $1 million a year on a run rate basis.
This will allow us to expand our efforts with Fisher House and support local charities in each of our markets.
I'm incredibly proud of our team's innovative strategy to develop a dedicated funding mechanism that aligns our customers, employees and partners in supporting our communities.
Looking at our third quarter results compared to the prior year, new home orders decreased approximately 13% to 1,199 as a higher sales pace helped to offset a reduction in average community count.
Homebuilding revenue increased nearly 7% to $567 million on 1% higher closings and a 6% higher average sales price.
Our gross margin, excluding amortized interest, impairments and abandonments was 24.2%, up approximately 300 basis points to the highest level in more than a decade.
SG&A was down 60 basis points as a percentage of total revenue to 11.1% as we benefited from improved overhead leverage.
Adjusted EBITDA was $78.8 million, up over 45%.
Our EBITDA margin was 13.8%.
Interest amortized as a percentage of homebuilding revenue was 4%, down 10 basis points.
And net income from continuing operations was $37.1 million, yielding earnings per share of $1.22, more than double earnings per share for the same period last year.
Given our continued performance and substantial backlog, we are able to increase our financial expectations for fiscal '21.
We now expect EBITDA to be over $250 million.
Our full year EBITDA guidance equates to earnings per share of at least $3.25, up from last quarter's guidance of above $3.
We now expect our return on average equity for the full year to be approximately 15%.
If you exclude our deferred tax asset, which doesn't generate profits, our ROE would be about 22%.
Turning now to our expectations for the fourth quarter.
We expect the sales pace of over three sales per community per month as we actively manage pace to ensure cost certainty and a positive customer experience.
This pace is higher than our historical average, but below the extraordinarily high base we experienced last year.
We expect backlog conversion to be in the mid-40s as we continue to manage through the challenging production environment.
Our ASP should be above $410,000.
Gross margin should be up more than 100 basis points year-over-year.
SG&A on an absolute dollar basis should be down about 10%.
Our interest amortized as a percentage of homebuilding revenue should be under 4%, and our tax rate will be about 25%.
Combined, this should drive earnings per share up over 20%.
In addition, we expect to repurchase over $55 million of debt, bringing our full year total to at least $80 million.
Our increased land spending in the quarter helped us grow our active lot count to over 19,000.
We also increased our option percentage in the third quarter and now control nearly half of our active lots through options, up from less than 30% in the same period last year.
Given our current pipeline of deals, we expect to continue to grow our land position to over 20,000 lots by the end of fiscal '21.
It's worth noting that most of these deals have been in our pipeline for many months and are under contract at favorable prices.
In addition, we remain focused on growing our position, while minimizing risk by maintaining our strict underwriting standards, focusing on products that we built before in some markets that we already know and relying on options to control around half of our lots.
So, while land prices have appreciated, we're still finding deals at pencil, allowing us to refill the pipeline and grow our business.
In the third quarter, we spent over $140 million on land and development and we expect to spend around $600 million for the full year, with higher land spending and a big increase in our option lot position, we're creating a framework to sustain profitable growth in the years ahead.
On Slide 12, we depict our expectations for near-term community count.
As you might expect, the supply chain issues so common in the home construction market have also impacted land development activities.
As such, predicting the timing of new communities has never been more difficult.
While we'll be actively opening communities every month, we don't expect sequential growth in community counts until next spring.
Fortunately,, we've concentrated our acquisition activities in established new home corridors, so many of our coming soon communities are already generating interest lists.
We ended the third quarter with over $600 million of liquidity, up about 50% versus the prior year, with unrestricted cash in excess of $360 million and nothing outstanding on our revolver.
During the quarter, we retired approximately $14 million of our senior notes.
And with two remaining term loan repayments, we're on a clear path to achieve our goal of bringing our total debt below $1 billion before the end of fiscal '22.
Our net debt to trailing 12-month adjusted EBITDA fell below 3 times, down from 8 times five years ago.
During the quarter, our corporate rating was upgraded by one of the rating agencies and we remain on positive outlook at both S&P and Moody's.
We had a terrific third quarter.
But instead of repeating the highlights, I'd like to close by putting this quarter in context.
We have been diligently and successfully executing against our balanced growth strategy.
Over the last five years, we've grown EBITDA by more than 60%, improved our return on assets by more than five percentage points and reduced debt by more than $300 million.
At the same time, we quietly demonstrated leadership in each of the ESG categories.
As satisfying as these results have been so far, we're even more excited about what's in front of us.
Industry fundamentals are solid and we're deliberately investing for future growth.
In the meantime, we'll have higher prices and gross margins and lower overheads and interest expense to sustain earnings growth.
And we aren't just succeeding for investors.
We have charted the most ambitious energy saving course in the industry with our path to net zero energy ready homes, and we've created a growing philanthropic platform to fuse the efforts of our employees with the resources provided by our customers.
I'm confident that we have the people, the strategy and the resources to create durable value in the coming years. | compname reports q2 earnings per share of $0.81.
q2 earnings per share $0.81.
dollar value of homes in backlog as of march 31, 2021 increased 54.9% to $1,386.4 million. | 0 |
Our speakers are Jim Owens, H.B. Fuller President and Chief Executive Officer; and John Corkrean, Executive Vice President and Chief Financial Officer.
First, a reminder that our comments today will include references to organic revenue, which excludes the impact of foreign currency translation on our revenues.
We believe that discussion of these measures is useful to investors to assist their understanding of our operating performance and how our results compare with other companies.
Unless otherwise specified, discussion of sales and revenue refers to organic revenues and discussion of EPS, margins or EBITDA refers to adjusted non-GAAP measures.
Many of these risks and uncertainties are and will be exacerbated by COVID-19 and resulting deterioration of the global business and economic environment.
Last evening, we reported first quarter results, which built upon the momentum we saw in Q4 of last year.
Organic revenues this quarter were up 10.5%, adjusted EBITDA was up 30% and adjusted earnings per share of $0.66 was nearly doubled last year's first quarter.
The H.B. Fuller team gained share and reduced operating expense in each of our businesses in 2020, which created the momentum that is delivering exceptional financial performance to begin fiscal 2021.
Market innovation and exceptional service led to the share gains as H.B. Fuller solved customer problems faster than competition and growth accelerated as demand continued to strengthen in the first quarter.
As we reported last March, COVID-19 impacted our fiscal Q1 of 2020 only in China and by about $15 million in revenue, $4.5 million in EBITDA and $0.06 of EPS.
Excluding this impact, our revenues were up 8% organically, EBITDA was up 23% and earnings per share was up 65%, exceptional results.
H.B. Fuller works with our customers to solve their toughest adhesive problems.
In today's remote work environment, this means collaborating in new ways and delivering market-driven innovation faster than ever.
For example, we proactively developed and qualified new engineering adhesives for mobile devices, automotive, electronics, electronic vehicle batteries and solar panels to name just a few.
These innovations helped drive one of our strongest quarters for engineering adhesive sales growth.
We created technology and branding opportunities with the new line of GorillaPro MRO adhesives and there will be more H.B. Fuller marketing innovation in the year ahead.
We work with Hygiene, Health and Consumable customers to develop innovative applications and to ensure supply to meet high demand for their products.
As a result, we substantially grew our sales across the majority of our HHC end markets in the first quarter.
H.B. Fuller's revenue growth was also broad based geographically in the quarter with organic growth in all three of our geographic regions.
Importantly, our growth came with positive incremental margins driven by product mix, reduced expenses and structural efficiencies resulting from our business realignment last year.
EBITDA margin increased 190 basis points year-on-year.
Raw material cost increased from where we exited 2020, but we're still relatively neutral on a year-over-year basis in the first quarter and in line with our expectations.
Raw material cost going forward will increase at a faster rate than originally anticipated due to increased demand, reduced inventories and supply constraint.
Winter storm Uri in the Gulf Coast in February has created additional tightening in the United States and is impacting global supply.
Supply has become tight for commodity materials, which make up a smaller portion of our portfolio.
As the year progresses, this will also have an impact on the supply and pricing of the specialty materials, which make up the majority of our purchases.
Most suppliers have made good progress in recovering from Uri.
However, the rate of recovery going forward will mostly depend on the output rates of the impacted assets and the time it takes for supply chains and inventory levels to fully recover.
We have done a very good job of serving customers thus far by working closely to manage inventories and available materials.
Our contracted positions with our suppliers, backward integration of key polymers and global breadth have helped us manage the supply crisis thus far.
The breadth of our adhesive chemistry and the diversity of our raw materials has meant that no single material has had a large impact on us and has enabled us to help customers find alternatives when short supply exists.
The near-term disruptions we are navigating in the US are considerable, but they are temporary and supply is expected to normalize to a more balanced level in the coming months.
Our planning assumptions anticipate that the risk of supply disruption will lessen as we exit the second quarter and we do not anticipate that it will have a material impact on our ability to meet demand.
However, we now expect year-on-year raw material inflation to be in the range of 5% to 8%.
H.B. Fuller has done a remarkable job in supporting customers through supply shortages and we also have implemented over $100 million in annualized price adjustments that are effective in Q2 and will enable us to continue to seamlessly serve our customers.
Some of these were effective on February 15, with most effective March 15 and April 1.
We are preparing for further price adjustments, if needed in Q3.
These price adjustments will fully offset the impact of raw material increases.
Now let me move on to discuss performance in each of our segments in the first quarter on Slide 4.
Hygiene, Health and Consumable Adhesives' first quarter organic sales increased 7.6% year-over-year, continuing the strong performance trend in this business unit in 2020.
Sales increased versus last year across the majority of our HHC markets with strong growth in Packaging, Tissue & Towel and Tape & Label and good growth in hygiene in particular.
HHC segment EBITDA margin was strong at 13.3%, up 180 basis points, margin improved versus last year, reflecting volume leverage, restructuring benefits and good expense management.
Construction Adhesives' organic revenue was down 10% versus last year as winter storm Uri, extreme weather and material supply issues across much of the United States impacted construction activity as we started the year.
Construction Adhesives' EBITDA margin declined versus last year reflecting these issues.
Underlying operational improvements from the GBU restructuring were offset by lower volume and the impact of severe weather.
Uri temporarily disrupted operations at our construction adhesive facilities in Texas in February.
Both plants have now been fully up and running since early March.
Aside from these near-term impacts, demand for Construction Adhesives continues to be strong for residential builds and remodeling.
Demand has also begun to improve on the commercial roofing side.
We are planning for both top-line performance and margins to improve significantly over the rest of the year.
Engineering Adhesive results were extremely strong with organic revenue up 21% versus last year, reflecting share gains and improving end market demand.
Sales increased versus last year across the majority of our EA markets with the strongest growth in electronics and new energy.
We expect continued strength and double-digit full year growth in this segment.
Engineering Adhesives' EBITDA margins were strong at 15.4%, up 300 basis points compared with Q1 last year, reflecting strong volume leverage and good expense management.
Looking ahead at our full year results, our planning assumptions are that COVID-related shutdown impacts will remain but continue to decrease as vaccines are rolled out around the world.
We anticipate that many raw materials will be tied through the summer as supply chains normalize and demand continues to be strong.
We anticipate continued improvement in underlying demand in each of our business units, driving volume growth in 2021 versus 2020.
Growth in some end markets such as commercial construction and aerospace will improve at a slower pace and may not return to 2019 levels of activity this year.
While Engineering Adhesives demand is expected to moderate from first quarter levels, which reflect some pent-up demand, we expect end market demand will likely be strong for the entire year.
Overall, when considering our strategic pricing actions, coupled with the solid volume growth in HHC, improved performance in Construction Adhesives and strong demand in Engineering Adhesives, we now expect full year revenue growth of high single digits to low double-digits versus 2020.
I'll begin on Slide 5 with some additional financial details on the first quarter.
Net revenue was up 12.3% versus same period last year.
Currency had a positive impact of 1.8%.
Adjusting for currency, organic revenue was up 10.5% with volume accounting for all of the growth.
Pricing had a neutral impact year-on-year in the quarter.
Year-on-year adjusted gross profit margin was 26.7%, up 20 basis points versus last year, driven by the higher volume.
Adjusted selling, general and administrative expense was up 2.9% versus last year.
SG&A was down 170 basis points as a percentage of revenue, reflecting savings associated with our business reorganization, lower travel expense, general cost controls, offset by higher variable comp than last year.
Net other income increased by $3 million versus last year, driven primarily by increased income on pension assets.
Net interest expense declined by $2 million, reflecting lower debt balances.
The adjusted effective income tax rate in the quarter was 27.5%, up 180 basis points versus the adjusted tax rate in the first quarter last year, driven primarily by mix of income and tax related to the global cash strategies.
Adjusted EBITDA for the quarter of $101 million is 30% higher than the same period last year, driven by strong top-line growth, particularly in Engineering Adhesives, restructuring savings and good cost management, partially offset by higher variable compensation.
Adjusted earnings per share was $0.66, up 94% versus the first quarter of last year, reflecting strong operating income growth and lower interest expense associated with our debt reduction.
Cash flow from operations in the quarter of $36 million was up from last year, reflecting strong income growth, partly offset by higher working capital requirements to support the strong top-line performance.
We continue to reduce debt paying down $16 million in the quarter compared to $6 million during the same period last year.
Regarding our outlook, based on what we know today and the planning assumptions that Jim laid out earlier, we anticipate revenue to be up high single-digits to low double-digits versus 2020 and EBITDA to be between $455 million and $475 million as continued strong volume growth and pricing actions offset higher raw material costs.
We expect cash flow to be strong for the rest of the year, allowing us to maintain our target to pay down approximately $200 million of debt during 2021.
We were very pleased with our strong start in the first quarter, which follows a strong fourth quarter, both of which greatly outperformed predominantly non-COVID quarters from the prior year.
We are growing through our strategy of delivering sustainable innovation and high value solutions and we are in a great position to continue to grow our business as global economies continue to open up in 2021.
This year, we will focus on three critical priorities to profitably grow our business in a dynamic environment.
Our top priority is to drive continued volume growth as we support our customers success in the current high demand and supply constrained environment.
This means continued growth through innovation, leverage of remote servicing tools as a new standard and finding creative ways to address any raw material shortages we see in the coming months.
Our second imperative is to strategically manage pricing aligned to the value we deliver in this inflationary environment.
Our company has built pricing tools and in-depth training in anticipation of the day when material inflation returned.
And we are already executing with speed and precision to maintain and grow our business while pricing to value.
Our third priority, to help fuel our growth will be to release productive capacity through our operational excellence programs.
Our 2020 operations investment was centered on creating the operational discipline and metrics that enable more productivity per employee work hour.
In a low capital-intensive business like ours, this helps to reduce cost and increase capacity.
We will also deliver an additional $200 million of debt reduction in 2021, moving the company closer to our net debt target of 2 to 3 times EBITDA.
On our conference call a year ago in March of 2020, I told you that because of our extraordinary collaboration with customers, a robust global operations and supply chain and our unmatched expertise and adhesive innovation, I was confident that H.B. Fuller which strengthened its position in this industry, setting ourselves apart from competition and enabling us to grow as global economies recover.
I was confident that we would emerge as an even stronger company than prior to the pandemic.
Our stronger performance throughout 2020 and our exceptional results in the first quarter are proof that my confidence was well founded.
This company is built on an agile business model where people collaborate remotely with each other, with customers and with suppliers around the globe.
In a changing world, these attributes of agility, collaboration and flexibility have enabled H.B. Fuller to excel.
As working conditions changed, supply and demand fluctuated and as supply constraints emerged, the H.B. Fuller team has been first and fastest among adhesive companies at addressing challenges.
Growing the business this year in a period of economic recovery presents exciting opportunities and unique challenges.
In 2021, our business priorities are squarely focused on capturing share and managing inflation risks as we continue to build on our rising leadership position in the global adhesives industry.
Our culture of collaboration and innovation and our improving operational execution gives me confidence that we are strongly positioned to continue to deliver sustained value for our shareholders in 2021 and in the years ahead.
Operator, please open up the call so we can take some questions. | q4 revenue $1.3 billion versus refinitiv ibes estimate of $1.29 billion.
sees fy 2021 adjusted earnings per share $2.40 to $2.55 from continuing operations.
sees q1 adjusted earnings per share $0.56 to $0.60 from continuing operations.
qtrly adjusted diluted net earnings per share from continuing operations were $0.70. | 0 |
So with that, I'll hand the call over to Blake.
On the leadership front we have two exciting announcements today.
First, we've hired Scott Genereux as our new Chief Revenue Officer.
Scott built strong executive-level customer relationships and has spent most of his career leading global sales forces and major enterprise software and hardware companies.
These include Oracle and most recently Veritas, and we are thrilled to bring him on board in this newly created role.
Scott will be responsible for all our worldwide sales and marketing efforts, leading our global go-to-market strategies and accelerating Rockwell's growth, including software sales and annual recurring revenue.
The second important announcement is that Brian Shepherd has been hired as the new leader of our Software and Control business segment.
Brian has extensive experience in the industrial software space and joins Scott in bringing proven knowledge about ways to drive faster recurring revenue growth in our business.
Prior to joining us, Brian was President of Production Software and Smart Factory solutions for Hexagon AB and before that was a longtime executive at PTC where he led strategy and operations for their enterprise software segments.
He has strong technical expertise across the design, operate and maintain phases of the customer journey and how industrial software can maximize customer value.
We are excited to have him on board.
Both Scott and Brian begin on February 1st.
Finally, I'm happy to report we are well along in our CFO search and expect to make that announcement shortly.
It's been a busy few months but I'm very pleased with the new talent and fresh perspectives we are adding to our leadership team.
In other news this quarter, we had a very important win on the legal front.
In Q1 Radwell International was found liable for trademark infringement and false advertising relating to its resale of Rockwell products.
This latest legal victory underscores our commitment to protecting our intellectual property as well as our authorized distribution network.
We're using a portion of the gain that resulted from this ruling to make additional investments this year.
This includes investments to pull forward software product launches that will increase recurring revenue in fiscal '22 and beyond as well sustainability-related investments to drive our ESG goals.
With that, let me now turn to our Q1 results on Slide 3.
In Q1, total reported sales declined 7%.
Organic sales were down 10% versus prior year.
Total sales included a two-point positive contribution from our ASEM and Kalypso acquisitions.
Note that Sensia is now included in our organic results.
During the quarter we saw a sharp acceleration in order intake, especially for our products.
Total orders were back above pre-pandemic levels.
The increased demand was broad-based and well above our expectations and the higher order rates will benefit sales for the balance of the year.
More on that in a moment.
I'll now comment on our new business segments.
Intelligent devices organic sales declined 8%.
In the quarter we saw positive year-over-year growth in motion, where we believe we are gaining market share.
Orders in this segment returned to positive growth a quarter ahead of our expectations.
Software and Control organic sales declined 6%.
In the quarter we saw year-over-year growth in Network and security infrastructure.
Lifecycle services' organic sales decline of 16% was led by continued weakness in oil & gas.
We did see a 25% sequential uptick in Lifecycle services orders in the quarter, which will drive sequential sales improvement through the balance of the year.
In Information solutions and connected services, organic sales were down slightly in the quarter primarily due to COVID-related project delays.
However, we saw double-digit organic orders growth in IS as well as strong demand in the cyber security portion of connected services.
IS/CS built backlog by about 30% versus prior year and we expect IS/CS to have a great year overall, growing double-digits in fiscal '21 with organic sales exceeding $500 million.
Total backlog grew strong double-digits on an organic basis both year-over-year and sequentially.
Lifecycle services book-to-bill reached a record of 1.18 reflecting a significant improvement both sequentially and year-over-year.
Segment operating margin performance of 20% in the quarter was roughly flat with last year on lower sales, a testament to our increasing business resilience.
Adjusted earnings per share grew 11% versus prior year, including the legal settlement gain.
Excluding the gain adjusted earnings per share came in above our expectations for the quarter.
Figures are for organic sales.
Our Discrete Market segment sales declined by approximately 5% however, we saw strong broad order momentum in the quarter particularly in North America that should benefit sales performance for the remainder of the year.
Automotive sales declined approximately 10% versus prior year with mid-single digits growth in EMEA offset by tough comparisons in other regions.
Our EV business significantly outperformed the rest of automotive and include key wins from a major auto brand owner in Europe that is building a new line for EV battery manufacturing.
We also won at a European Tier 1 OEM, which shows our independent cart technology for the precision motion control necessary to build new electric vehicles.
These were both hard fought wins where our strong customer support and technology differentiation were important factors in our success.
Semiconductor grew low-single digits in the quarter and is expected to improve significantly over the balance of the year.
Strong secular tailwinds in this vertical are prompting some of our largest semiconductor customers to increase their capex spend this year.
As a result we are raising our semiconductor outlook to high-single digit growth for the year, up from our original guidance of mid-single digit growth.
Another highlight within discrete was our performance in e-commerce, with sales growing approximately 40% versus prior year.
This is obviously another industry with secular tailwinds and we're well positioned to provide value that will continue to support its tremendous future growth.
Our independent cart technology is a long-term differentiator here as it is in battery assembly and the packaging of consumer products.
Turning now to our Hybrid Market segment.
This segment grew by low-single digits and accounted for 45% of revenue this quarter.
Food & Beverage grew low-single digits.
In addition, packaging OEMs delivered another quarter of double-digit growth versus the prior year.
Life sciences grew about 10% in Q1 well above our expectation for the quarter led by strong broad-based demand in North America.
Thermo Fisher is an important part of the vaccine ecosystem and we were very proud this quarter to be awarded a significant multi-year enterprise software order to supply software and professional services to enable their Pharma 4.0 initiative and drive their COVID readiness and response.
That shows Rockwell's FactoryTalk innovation suite, which uniquely integrates MES, IIoT, analytics and augmented reality in a single software solution to drive productivity.
FTIS in combination with strong pharma industry expertise, full lifecycle services and best-in-breed digital partner ecosystem were key factors in why Thermo Fisher selected Rockwell.
While there is a lot of focus on our role in vaccine formulation, we're also working with the broader vaccine ecosystem to support packaging and distribution requirements.
For every one pallet of vaccines being shipped, 20 to 30 additional pallets of vaccine accessories are required.
Based on the broad-based increase in life sciences' demand, we're are now expecting life sciences to grow mid-teens in fiscal '21.
Process markets were down approximately 25% and weaker than we expected led by larger declines in oil & gas.
Process verticals typically lag our discrete business by about half-a-year.
Turning now to Slide 5, and our organic regional sales performance in the quarter.
North America organic sales declined by 11% versus the prior year primarily due to sales declines in oil & gas and automotive.
Business conditions improved significantly through the quarter and were reflected in strong product orders.
EMEA sales declined 8% led by oil & gas.
Sales from food & beverage and water customers were strong in the quarter.
Sales in the Asia Pacific region declined 7% largely due to declines in process industries that were partially offset by growth in mass transit and semiconductor.
Asia Pacific backlog reached a record high in the quarter and we do expect strong sales growth in the region for both the upcoming quarter and full year.
In China, we saw growth in auto with some important greenfield EV battery wins.
Sequential orders growth in Q1 and double-digit year-over-year growth in backlog support our full-year sales growth outlook in China to be above the company average.
Latin America declines were led by oil & gas and mining.
In the region we saw good growth in food & beverage and tire.
Orders momentum in the first quarter is expected to drive strong growth in the balance of the year.
The higher top-line guidance is primarily related to improvements in the outlook for life sciences and e-commerce in North America as well as in our global outlook for semiconductor growth.
Our new reported sales outlook assumes 10% year-over-year growth at the midpoint including 6% organic growth.
We expect our new software offerings and expanded services will drive double-digit ARR growth in fiscal '21, our new hires will be focused on this objective.
Our new adjusted earnings per share target of $8.90 at the midpoint of the range represents 13% growth over the prior year.
A more detailed view into our outlook by end market is found on Slide 7.
I won't go into the details on this slide but as you can see we expect positive organic sales growth in all of our key end markets this year with the exception of oil & gas.
Our market uptick in orders for Sensia in the latter part of Q1 sets the stage for improving sales later in the fiscal year.
I'll start on Slide 8, first quarter key financial information.
First quarter reported sales were down 7.1% year-over-year.
Organic sales were down 9.7%.
Acquisitions contributed 1.8 points of growth and currency translation increased sales by 0.8 points.
Segment operating margin was 19.8%, slightly below Q1 of last year.
This is the second quarter in a row that segment margin was about flat year-over-year despite lower sales, so a good result.
Corporate and other expense of $28 million was down about $5 million compared to last year.
Last year's amount included transaction fees related to the formation of the Sensia joint venture.
Note that previously, we referred to this line item as general corporate net.
The adjusted effective tax rate for the first quarter was 15.4% compared to 8.3% last year.
The increase in the tax rate is primarily due to a large discrete tax benefit recorded in Q1 last year related to the formation of Sensia and other discrete items.
As a reminder, beginning with this quarter, we changed the definition of adjusted earnings per share to also exclude the impact of purchase accounting, depreciation and amortization expense.
First quarter adjusted earnings per share was $2.38.
As Blake mentioned earlier, this result includes $0.45 related to a favorable legal settlement.
Adjusted earnings per share excluding the legal settlement was $1.93 identical to last quarter and better than we expected.
We're pleased with this result since compared to last quarter we were unable to overcome a $0.30 headwind from the reinstatement of incentive compensation and the reversal of temporary cost actions as of the end of November.
I'll cover year-over-year adjusted earnings per share bridge for Q1 on a later slide.
Free cash flow was $319 million in the quarter including the $70 million legal settlement.
Free cash flow conversion was 115% of adjusted income.
One additional item not shown on the slide.
We repurchased 356,000 shares in the quarter at a cost of about $88 million.
This is in line with our full-year placeholder of about $350 million.
At December 31, $766 million remained available under our repurchase authorization.
Slide 9 provides the sales and margin performance overview of our operating segments.
As a reminder, this is the first quarter we're reporting under our three segment structure, the new three segment structure.
The Intelligent Devices segment had an organic sales decline of 7.9% in the quarter.
Segment margin was 19.4%, 130 basis points lower than last year, mainly due to lower sales partially offset by temporary and structural cost savings.
As Blake highlighted earlier, we had a strong order performance in the quarter particularly in our product businesses.
Intelligent devices' orders grew low-single digits year-over-year and high-single digit sequentially.
Software and Control segment organic sales declined 6.2% in the quarter.
Acquisitions contributed 2.7% to growth and segment margin was 30.2%, which was 80 basis points lower than last year's strong margin performance mainly due to lower sales, partially offset by temporary and structural cost savings.
Software and control orders also grew low-single digits year-over-year and high-single digits sequentially.
Organic sales of the Lifecycle Services segment declined 16.3% year-over-year as the recovery in this segment's offerings tends to lag our products businesses.
Acquisitions contributed 3.9% to growth and operating margin for this segment increased 50 basis points to 8.9% versus 8.4% a year ago despite lower sales.
Contributing to the lower year-over-year margin improvement -- I'm sorry, contributing to the year-over-year margin improvement were temporary and structural cost savings and the absence of Sensia one-time items recognized in the first quarter of fiscal 2020.
First quarter book-to-bill performance for the Lifecycle Services segment was 1.18, a strong start to the year.
The next Slide 10 provides the adjusted earnings per share walk from Q1 fiscal 2020 to Q1 fiscal 2021.
Starting on the left, core performance had a negative impact of about $0.25 driven by lower organic sales.
Temporary cost actions partially offset the sales impact by $0.20.
These were the salary reductions and 401(k) match suspension that we implemented in Q3 of fiscal 2020, which remained in effect through the end of November 2020.
Incentive compensation was a year-over-year headwind of about $0.10.
Tax was a headwind of about $0.10 primarily due to the Sensia-related tax benefit recorded last year and other discrete items.
Acquisitions contributed about $0.05.
This represents the positive contribution from acquisitions that we completed in 2020 and so far in 2021.
As a reminder Sensia is now reported in core.
Finally, as mentioned earlier, the legal settlement contributed $0.45 to adjusted EPS.
Moving to Slide 11, monthly product order trends.
This slide shows our order -- daily order trends for our Software and Control and Intelligent Devices segments excluding the longer lead time configured to order offerings.
The trend shown here accounted for about two-thirds of our overall sales.
Order intake for products improved again this quarter as the recovery continue.
As you can see there was a sharp acceleration in demand in November and December.
Orders for the Lifecycle Services segment also improved in the quarter but are recovering slower than product orders.
A strong order performance resulted in record total company backlog growing over 20% year-over-year and double-digits sequentially.
Our quarterly product order trends are shown on Slide 12.
This is the same data as the prior slide summarized by quarter.
Our order levels in the first quarter are now clearly above pre-pandemic levels, both for products and the total company.
This takes us to Slide 13, updated guidance.
We are increasing our organic sales growth outlook by 1 point.
The new range is 4.5% to 7.5% with a midpoint of 6%.
Given the weaker U.S. dollar we now expect currency translation to contribute about 2.5% to growth.
We expect acquisitions to contribute about 1.5%.
In total, the midpoint of our reported sales guidance range is 10%.
We have also updated the adjusted earnings per share guidance range to $8.70 to $9.10.
I'll review the bridge from the prior guidance midpoint and the new $8.90 midpoint on the next slide.
Segment operating margin is now expected to be about 19.5%.
The lower margin compared to prior guidance reflects the software investments that Blake mentioned earlier and the impact of the Fiix acquisition.
These will primarily affect the Software and Control segment and will be weighted toward the third and fourth quarters.
Our adjusted effective tax rate is expected to be about 14%, the same as prior guidance.
As mentioned last quarter, this includes a 300 basis point benefit related to discrete items, which we expect to realize late in the fiscal year.
We continue to project free cash flow conversion of about 100% of adjusted income.
A few additional comments on the fiscal 2021 guidance.
Corporate and other expense is expected to be between $105 million and $110 million.
Purchase accounting amortization expense for the full year is expected to be about $50 million.
Net interest expense for fiscal 2021 is still expected to be between $90 million and $95 million.
Finally, we're still assuming average diluted shares outstanding of about 117 million shares.
This takes us to Slide 14.
This slide bridges the midpoint of our November adjusted earnings per share guidance range to the midpoint of our new guidance.
Starting on the left, there is a higher contribution from core operating performance, primarily due to the higher organic sales guidance.
Currency is projected to add about $0.05 compared to prior guidance.
Next, given the increase in guidance, there is about a $0.10 impact from higher bonus expense.
Finally, there is the $0.45 contribution from the Q1 legal settlement, partially offset by about $0.35 for the incremental investments and the impact of the Fiix acquisition.
The new midpoint of the guidance range is $8.90.
Finally, a couple of quick comments regarding fiscal Q2.
Given our strong order performance in Q1, we expect Q2 sales to grow sequentially and to be about flat year-over-year.
We expect second half year-over-year organic sales growth in the mid-to-high teens.
As a reminder, as we mentioned on the last earnings call, Q2 will have the largest year-over-year headwind from the reinstatement of the bonus in the range of $50 million.
With that, I'll hand it back to Blake for some additional comments.
Historically, the pace of recovering demand for our products after a recession has come faster than we predicted when we were still in the downturn.
This recovery is looking similar so far and we will see Q2 sales and earnings begin to reflect the torn of orders we received in November and December, with significant double-digit year-over-year growth expected in the second half of the year.
The rate of infections in each region around the world has had a direct impact on the timing and rate of their respective economic recoveries.
The Americas were last in and seem to be the last to recover, with our sales most highly correlated to this geography given our revenue there.
We are working over time to meet this demand and staying close to our component suppliers around the world.
We are actively hiring an additional capacity for Logix, it's coming online this month.
The new Milwaukee manufacturing center is working two shifts a day to keep pace with this increased level of orders activity.
Turning to Slide 15.
We're also investing in software development to drive our future growth.
Last November at our Investor Day, we talked about how we will be releasing Software as a Service within our FactoryTalk portfolio to add value in the design, operate and maintenance phases of the customers' investment lifecycle.
The recent legal settlement gain will allow us to advance these deliverables.
Recent acquisitions are playing an important role in these offerings as well with fixed software central to FactoryTalk Maintenance Hub within the Software and Control business segment.
Fiix is already showing great momentum and just booked their first million dollar annual recurring revenue contract.
Their leadership is already a part of the larger plans for accelerating our SaaS offerings.
It all begins with great people and I continue to be immensely proud of our employees in all parts of the organization and around the world.
We continue to hire top talent and the two new members of the team we announced today will add to an already great leadership team.
With that, let me pass the baton back to Jessica to begin the Q&A session.
Michelle, let's take our first question. | q1 adjusted earnings per share $2.38.
rockwell automation - fiscal 2021 first quarter sales were $1,565.3 million, down 7.1 percent from $1,684.5 million in the first quarter of fiscal 2020.
updating fiscal 2021 diluted earnings per share guidance to $11.07 - $11.47 and adjusted earnings per share guidance to $8.70 - $9.10.
sees fy 2021 organic sales growth of 4.5% to 7.5%. | 1 |
Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
drhorton.com and we plan to file our 10-Q early next week.
The D.R. Horton team delivered an outstanding third quarter, highlighted by a 78% increase in earnings to $3.06 per diluted share.
Our consolidated pre-tax income increased 81% on a 35% increase in revenues to $7.3 billion and our pre-tax profit margin improved 490 basis points to 19.4%.
Our homebuilding return on inventory for the trailing 12-months ended June 30 was 34.9% and our consolidated return on equity for the same period was 29.5%.
These results reflect our experienced teams and their production capabilities, our ability to leverage D.R. Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Housing market conditions remained very robust, and we are focused on maximizing returns and increasing our market share further.
However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction time to become less predictable.
As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align to our current production levels and are selling homes later in the construction cycle, when we can better ensure the certainty of home close date for our homebuyers.
We expect to work through these issues and increasing our production capacity.
We started construction on 22,600 homes this quarter and our homes in inventory increased 44% from a year ago to 47,300 homes at June 30, 2021, positioning us to finish 2021 strong and to achieve double-digit growth again in 2022.
We believe our strong balance sheet, liquidity and low leverage positioned us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments.
Earnings for the third quarter of fiscal 2021 increased 78% to $3.06 per diluted share compared to $1.72 per share in the prior year quarter.
Net income for the quarter increased 77% to $1.1 billion compared to $630.7 million.
Our third quarter home sales revenues increased 35% to $7 billion on 21,588 homes closed, up from $5.2 billion on 17,642 homes closed in the prior year.
Our average closing price for the quarter was $326,100 and the average size of our homes closed was down 2%.
The value of our net sales orders in the third quarter increased 2% from the prior year to $6.4 billion, while our net sales orders for the quarter decreased 17% to 17,952 homes.
Our average number of active selling communities increased 1% from the prior year quarter and was down 3% sequentially.
Our average sales price on net sales orders in the third quarter was $359,200.
The cancellation rate for the third quarter was 17%, down from 22% in the prior year quarter.
As David described, in this very strong demand environment, our local teams are restricting the sales order pace in each of their communities based on the number of homes in inventory, construction time and lot position.
They continue to adjust sales prices to market on a community-by-community basis, while staying focused on providing value to our buyers.
Based on the stage of completion of our current homes in inventory, production schedules, and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter.
As a result, we expect our fourth quarter net sales orders to be lower than the third quarter.
However, we are confident that we will be well-positioned to deliver double-digit volume growth in fiscal 2022 with 32,200 homes in backlog, 47,300 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenue in the third quarter was 25.9%, up 130 basis points sequentially from the March quarter.
The increase in our gross margin from March to June exceeded our expectations and reflects the broad strength of the housing market.
The strong demand for a limited supply of homes has allowed us to continue to raise prices or lower the level of sales incentives in most of our communities.
On a per square foot basis, our revenues were up 4.7% sequentially, while our stick and brick cost per square foot increased 3.5% and our lot cost increased 1.7%.
We expect both our construction and lot costs will continue to increase on a per square foot basis.
However, with the strength in today's market conditions, we expect to offset any cost pressures with price increases.
We currently expect our home sales gross margin in the fourth quarter to be similar to or slightly better than the third quarter.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.
In the third quarter, homebuilding SG&A expense as a percentage of revenues was 7.1%, down 80 basis points from 7.9% in the prior year quarter.
Our homebuilding SG&A expense, as a percentage of revenues, is lower than any quarter in our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports our business.
We have increased our housing inventory in response to the strength of demand and we expect the current constraints on our supply chain to ultimately subside.
This quarter, we started 22,600 homes, up 33% from the third quarter last year, bringing our trailing 12-month starts to 94,500 homes.
We ended this quarter with 47,300 homes in inventory, up 44% from a year ago.
15,400 of our total homes at June 30 were unsold, of which 500 were complete.
At June 30, our homebuilding lot position consisted of approximately 517,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
25% of our total owned lots are finished and at least 44% of our controlled lots are or will be finished when we purchase them.
Our growing and capital efficient lot portfolio is a key to our strong competitive position and it'll support our efforts to increase our production volume to meet homebuyer demand.
Our third quarter homebuilding investments in lots, land and development totaled $1.8 billion, of which $910 million was for finished lots, $540 million was for land development and $350 million was to acquire land.
$300 million of our total lot purchases in the third quarter were from Forestar.
Forestar, our majority owned subsidiary, is a publicly traded well-capitalized residential lot manufacturer operating in 55 markets across 22 states.
Forestar is delivering on its high-growth expectations and now expects to grow its fiscal 2021 lot deliveries by approximately 50% year-over-year to a range of 15,500 to 16,000 lots with a pre-tax profit margin of 11.5% to 12%, excluding their $18.1 million loss on extinguishment of debt recognized during the quarter.
At June 30, Forestar's owned and controlled lot position increased 91% from a year ago to 96,600 lots.
61% of Forestar's owned lots are under contract with D.R. Horton or subject to a Right of First offer under our master supply agreement.
Forestar is separately capitalized from D.R. Horton and had approximately $470 million of liquidity at quarter end with a net debt-to-capital ratio of 37.8%.
With a strong lot supply, capitalization and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.
Financial Services pre-tax income in the third quarter was $70.3 million with a pre-tax profit margin of 37.3% compared to $68.8 million and 43.9% in the prior year quarter.
The year-over-year decline in our Financial Services pre-tax profit margin was primarily due to lower net gains on loans originated this quarter caused by market fluctuations and increased competitive pricing pressure in the market.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our homebuyers.
FHA and VA loans accounted for 45% of the mortgage company's volume.
Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 and an average loan-to-value ratio of 89%.
First-time homebuyers represented 58% of the closings handled by the mortgage company this quarter.
At June 30, our multi-family rental operations had 11 projects under active construction and an additional four projects that are completed and in the lease-up phase.
Based on leased occupancy in our marketing process, we expect to sell two or three of these projects during the fourth quarter of fiscal 2021.
Our multi-family rental assets sold $458.3 million at June 30.
Last year, we began constructing and leasing homes as income-producing single-family rental communities.
After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is marketed for sale.
During the third quarter, we sold our second single-family rental community for $23.1 million in revenue and $11.4 million of gross profit.
At June 30, our homebuilding inventory included $303.1 million of assets related to 44 single-family rental communities, compared to $87.2 million of assets related to 10 communities at the beginning of the fiscal year.
We are pleased with the performance of our single and multi-family rental teams and we look forward to their growing contributions for our future profits and returns.
Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
During the nine months ended June, our cash provided by homebuilding operations was $276 million even while we have reinvested significant operating capital to expand our homebuilding inventories in response to strong demand.
At June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.7 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
We believe this level of homebuilding cash and liquidity is appropriate to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 16% at the end of June with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months.
At June 30, our stockholders' equity was $13.8 billion and book value per share was $38.54, up 27% from a year ago.
For the trailing 12-months ended June, our return on equity was 29.5% compared to 19.9% a year ago.
During the quarter, we paid cash dividends of $72.1 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August.
We repurchased 2.6 million shares of common stock for $241.2 million during the quarter for a total of 8.1 million shares repurchased fiscal year-to-date for $661.4 million.
Our remaining share repurchase authorization at June 30 was $758.8 million.
We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.
In the fourth quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $7.9 billion to $8.4 billion and our homes closed to be in a range between 23,000 and 24,500 homes.
We expect our home sales gross margin in the fourth quarter to be in the range of 26% to 26.3% and homebuilding SG&A, as a percentage of revenues, in the fourth quarter to be approximately 7%.
We anticipate our Financial Services pre-tax profit margin in the range of 40% to 45% and we expect our income tax rate to be approximately 23.5%.
For the full fiscal year of 2021, we now expect consolidated revenues of $27.6 billion to $28.1 billion and to close between 83,000 and 84,500 homes.
This year, we have prioritized reinvestment of our operating capital to increase our housing and land and lot inventories to support higher demand.
Our other cash flow priorities remain balanced among increasing our investment in our multi and single-family rental platforms, maintaining conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to reduce our outstanding share count by approximately 2% from the beginning of fiscal 2021.
In closing, our results reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands.
Our results also illustrate the growth opportunity in front of us as we increase production capacity in response to homebuyer demand.
Our strong balance sheet, liquidity and low leverage provide us with a significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions.
We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.
As a result of these efforts, we are incredibly well-positioned to continue growing and improving our operations.
We will now host questions. | q1 earnings per share $3.17.
qtrly consolidated revenues increased 19% to $7.1 billion.
homes closed in quarter decreased 2% to 18,396 homes compared to 18,739 homes closed in same quarter of fiscal 2021.
qtrly net sales orders increased 29% in value to $8.3 billion on 21,522 homes sold.
reaffirms its previously issued fiscal 2022 guidance.
homebuilding revenue for q1 of fiscal 2022 increased 17% to $6.7 billion from $5.7 billion in same quarter of fiscal 2021.
updating its fiscal 2022 guidance for consolidated revenues to range of $34.5 billion to $35.5 billion. | 0 |
On Slide 4 is our safe harbor statement.
These statements are based on our beliefs and assumptions, current expectations, estimates, and forecasts.
The company's future results are influenced by many factors beyond the control of the company.
During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS.
Starting on Slide 5.
I am pleased to report that we had an exceptional first quarter.
This was driven by strong organic sales growth in both our base business and the accelerating demand for products associated with COVID-19.
Our high-value products continue to fuel increased gross and operating margins.
Together, this has resulted in record earnings per share for the first quarter.
The strength of our performance is demonstrated in our ability to execute the market-led strategy, leverage the power of our global manufacturing network, and rally as a One West team to meet the increased market demand.
I am proud of how our team members have focused on our priorities and emphasize the importance of our purpose and values during these times.
Turning to Slide 6.
We have highlighted the key drivers of growth in Q1.
We continue to see strong uptake of HVP components, including Westar, FluroTec, Envision, and NovaPure offerings, as well as Daikyo's Crystal Zenith.
Our biologics customers are seeking to use these best-in-industry components to ensure the highest degree of quality and safety for their vaccines and injectable medicines.
This has resulted in strong double-digit growth, excluding COVID sales, and continued demand growth for FluroTec and NovaPure in our biologics business.
Through the first four months of 2021, our participation rate in recently approved new molecular entities in the U.S. and Europe continues to be strong with over 95% of these approvals using either West or Daikyo components.
In addition, we experienced strong growth in Westar ready-to-use components with customers seeking the value, quality, and convenience of our Westar washed and sterilized products.
And for Envision, we also had significant growth with customers looking for higher quality and better production yields by using our Envision inspected components.
Another highlight was strong sales growth in Daikyo CZ syringes and vials.
Customers prefer CZ for its compatibility with their sensitive molecules and its outstanding track record of quality and reliability.
Moving to Slide 7.
The power of our global manufacturing network continues to support our growth trajectory.
We are uniquely positioned as a result of the global operations strategy implemented a few years ago.
This has enabled the right capabilities, scale, and flexibility to keep in pace with the increase in demand.
As a result of recent capital investments, we have expanded our manufacturing capacity across our high-value product portfolio with additional equipment and validated lines to support our highest HVP growth areas, Westar, FluroTec, and NovaPure.
We have accelerated the timeline for capacity builds within our existing footprint by working closely with our incumbent suppliers and staging installations around the 24/7 plant schedules.
Our first phase, which began at the start of the pandemic is about 75% installed and operational, with expected completion in second half of the year.
Our second phase, we'll see equipment arriving in the back end of the year in operational in 2022.
And we are evaluating additional investments for a third expansion phase in response to an increasing possibility of COVID-19 boosters and annual vaccinations required over the next few years.
When this occurs, we think that future COVID-19 vaccines could likely be fewer doses per vial and/or in single-dose prefilled syringes.
As a result, it may mean higher volume demand of our HVP components compared to what we are experiencing today.
I am pleased to share that from my recent visit to our Scottsdale, Arizona facility, we are on schedule with our fully automated line for CZ insert needle syringes.
We're in the process of validating the line, which is targeted to commence commercial production for our customers' committed orders during the third quarter of this year.
This is our third automated line with another line scheduled for delivery in late 2021.
Turning to Slide 8.
Core to our values at West has been a strong corporate citizen.
In 2019, we exceeded our initial five-year environmental, social, and governance, or ESG, initiatives set in 2017 and raised the bar higher with a new set of five-year goals.
I'm proud to say that we continue to make significant progress on our ESG priorities with good momentum toward our stated reduction goals for waste, energy, and water usage.
We continue to reaffirm our commitment to live by our One West team value that calls on us to respect each other, drive collaboration, and to embrace diversity, inclusion in our workplace.
And we continuously look for ways to improve sustainability of our business and the rigor of our ESG reporting continues to evolve.
Last year, we published a supplement -- or later this year, we will publish a supplement to our 2020 CR report incorporating the SASB ESG standards.
Let's review the numbers in more detail.
We'll first look at Q1 2021 revenues and profits, where we saw continued strong sales and earnings per share growth, led by strong revenue performance, primarily in our biologics, pharma, and generic market units.
I will take you through the margin growth we saw in the quarter, as well as some balance sheet takeaways.
And finally, we will provide an update to our 2021 guidance.
Our financial results are summarized on Slide 9, and the reconciliation of non-U.S. GAAP measures are described in Slides 17 to 20.
We recorded net sales of $670.7 million representing organic sales growth of 31.1%.
COVID-related net revenues are estimated to have been approximately $102.9 million in the quarter.
These net revenues include our assessment of components associated with vaccines, treatment, and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic.
Looking at Slide 10.
Proprietary products sales grew organically by 39.6% in the quarter.
High-value products, which made up more than 70% of proprietary products sales in the quarter grew double digits and had solid momentum across all market units throughout Q1.
Looking at the performance of the market units, Biologics market unit delivered strong double-digit growth.
We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings.
The generics market unit also experienced strong double-digit growth led by sales of FluroTec components.
Our pharma market unit saw strong double-digit growth with sales led by high-value products including Westar and FluroTec components.
And contract manufacturing had mid-single-digit organic sales growth for the first quarter, led once again by sales of diagnostic and healthcare-related injection devices.
We continue to see improvement in gross profit.
We recorded $271.9 million in gross profit, $104.9 million or 62.8% above Q1 of last year.
And our gross profit margin of 40.5% was a 650-basis-point expansion from the same period last year.
We saw improvements in adjusted operating profit with $179.2 million recorded this quarter, compared to $88 million in the same period last year, for a 103.6% increase.
Our adjusted operating profit margin of 26.7% was an 880-basis-point increase from the same period last year.
Finally, adjusted diluted earnings per share grew 103% for Q1.
Excluding stock-based compensation tax benefit of $0.15 in Q1, earnings per share grew by approximately 102%.
So let's review the growth drivers in both revenue and profit.
On Slide 11, we show the contributions to sales growth in the quarter.
Volume and mix contributed $146.7 million or 29.8 percentage points of growth, including approximately $102.9 million of volume driven by COVID-19-related net demand.
Sales price increases contributed $6 million or 1.2 percentage points of growth, and changes in foreign currency exchange rates increased sales by $26.5 million or an increase of 5.4 percentage points.
Looking at margin performance.
Slide 12 shows our consolidated gross profit margin of 40.5% for Q1 2021, up from 34% in Q1 2020.
Proprietary products first-quarter gross profit margin of 46.3% was 610 basis points above the margin achieved in the first quarter of 2020.
The key drivers for the continued improvement in proprietary products gross profit margin were favorable mix of products sold driven by growth in high-value products, production efficiencies, one-time fees associated with certain canceled COVID supply agreements of approximately $11.8 million, and sales price increases, partially offset by increased overhead costs, inclusive of compensation.
Contract manufacturing first-quarter profit gross margin of 15.7% was 140 basis points above the margin achieved in the first quarter of 2020.
This is a result of improved efficiencies and plant utilization.
Now, let's look at our balance sheet and review how we've done in terms of generating more cash for the business.
On Slide 13, we have listed some key cash flow metrics.
Operating cash flow was $88.7 million for the first quarter of 2021, an increase of $31.6 million compared to the same period last year or a 55.3% increase.
Our first-quarter 2021 capital spending was $54.7 million, $22.6 million higher than the same period last year and in line with guidance.
Working capital of $844.2 million at March 31, 2021, declined slightly by $26.1 million from December 31, 2020.
Our cash balance at March 31 of $483.7 million was $131.8 million less than our December 2020 balance primarily due to our share repurchase program activity offset by the positive operating results.
Slide 14 provides a high-level summary.
Full-year 2021 net sales are expected to be in a range of $2.63 billion and $2.655 billion, compared to prior guidance range of $2.5 billion and $2.525 billion.
This guidance includes estimated net COVID incremental revenues of approximately $345 million.
There is an estimated benefit of $75 million based on current foreign exchange rates.
We expect organic sales growth to be approximately 19% to 20%.
We expect our full-year 2021 adjusted diluted earnings per share guidance to be in a range of $6.95 to $7.10, compared to a prior range of $6 to $6.15.
We continue to expand our HVP manufacturing capacity at our existing sites to meet anticipated core growth and COVID vaccine demand.
We are keeping our capex guidance at $230 million to $240 million but continue to evaluate the levels needed to support our continued growth.
There are some key elements I want to bring your attention to as you review our guidance.
Estimated FX benefit on earnings per share has an impact of approximately $0.23 based on current foreign currency exchange rates.
And our guidance excludes future tax benefits from stock-based compensation.
So to summarize the key takeaways for the first quarter, strong top-line growth in proprietary, gross profit margin improvement, growth in operating profit margin, growth in adjusted diluted EPS, and growth in operating and free cash flow, delivering in line with our pillars of execute, innovate, and grow.
To summarize on Slide 15, in this dynamic changing environment, we remain committed to our customers and the patients we serve together.
Our focus remains within the strategic pillars, which allow us to be more responsive, leverage our assets more effectively and support the trends that are happening in the industry today.
We're working from a position of strength, and we believe we have a long horizon of continued organic sales growth and margin expansion.
Today, more than ever, we're enabling our customers' ability to support patient health, and it's not taken for granted.
West products are needed by patients across the globe and in many cases, for the administration of life-saving medicines.
As the market leader, we know that West will continue to play an integral role with our customers as they develop and bring new medicines to market for a brighter future.
Stephanie, we're ready to take questions. | q3 ffo per share $0.25.
q3 revenue $32.4 million versus $29.9 million. | 0 |
And as a result of this performance and an improved outlook for the rest of the year, we have once again raised our guidance.
The 2021 guidance that we provided you last quarter was already within reach of our original pre-COVID plans for 2021.
Our revised guidance today significantly exceeds those original plans.
In many ways 2020 was a reset year for our company and also for the industry.
We've been saying for a long time that the traditional timelines for the development of new drugs are too long.
The speed at which COVID vaccines were developed in 2020 has obviously raised the bar in terms of what expectation should be.
The crisis accelerated the adoption of new technologies and we believe it will force a lasting change in how innovative medicines are developed and commercialized.
All of these has made IQVIA even more relevant to our clients and has highlighted the power of our differentiated offerings.
The deep client engagements that we had during the pandemic demonstrated how uniquely positioned we are to bring new insights and expertise that can improve drug development and commercial timelines.
What is also becoming clear is that there is a lot of pent-up demand due to one, the many trials that were slowed down or temporarily pushed to the right.
And two the trials that did not get started as they were crowded out by the COVID resolution efforts on which everyone was focused.
This pent-up demand across therapy areas combined with record levels of biotech funding provide a very strong backdrop for our industry.
As a result of these favorable conditions we started the process of revisiting our vision 2022 goals.
We plan to update you later this year on our vision '22 progress and lay the groundwork for the next phase of our journey.
We may do this at an investor conference later this year, especially if we are able to hold one in person, so stay tuned for more information.
So now, let's review the quarter.
Revenue for the first quarter grew 24% on a reported basis and 21% at constant currency was $209 million above the high end of our guidance range, but about half of this beat came from strong operational performance and half was from higher pass-throughs.
First quarter adjusted EBITDA grew 32%, reflecting our revenue growth and productivity measures.
The $69 million beat above the high end of our guidance range was entirely due to the stronger organic revenue performance.
First quarter adjusted diluted earnings per share of $2.18 grew 45%.
The beat here entirely reflect the adjusted EBITDA drop-through.
A little bit more color on the business.
Our commercial technology presence continues to grow as we launch new offerings in the market.
During the quarter, a top 10 pharma client deployed our next best action solution in 14 countries.
This tool is a SaaS-based technology platform that optimizes our client's sales force effectiveness.
It increases the success of their marketing activities by providing automated sales call recommendations to the field based on advanced artificial intelligence and machine learning algorithms.
Our base OCM -- CRM win rates remain strong.
We added another 10 new clients this quarter and now have 150 clients deploying about 70,000 users.
Our eCOA technology platform or Electronic Clinical Outcomes Assessment tool, which is used by our real world as well as R&DS team is also experiencing strong demand.
This cloud-based platform utilizes a user-friendly interface to collect clinical data directly from patients.
We launched this solution during 2019 and the team is seeing strong user acceptance.
To-date, we've been awarded over 125 studies with over 300,000 patients enrolled and over 4 million surveys completed.
Moving now to R&DS.
We continue to build on our strong bookings momentum in our R&DS business.
In the first quarter, we achieved a contracted net book-to-bill ratio of 1.41, including pass-throughs and 1.41 excluding pass-throughs.
At March 31st, our LTM contracted book-to-bill ratio was 1.52 including pass-throughs and 1.45 excluding pass-throughs.
These numbers are although more impressive, obviously, given our strong revenue growth.
Our contracted backlog in R&DS including pass-throughs grew 18.3% year-over-year to $23.2 billion at March 31, 2021.
As a result, our next 12 months revenue from backlog increased by over $600 million sequentially to $6.5 billion, that's up 31.1% year-over-year.
The R&D team is building on the success we experienced in 2020 with our hybrid virtual trial offering or the term what is now decentralized trials.
In the first quarter we won decentralized trials in new therapeutic areas, including cardiovascular and metabolic disorders.
We are working with 5 of the top 10 pharma client and to-date we've recruited almost 170,000 patients using our advanced decentralized trial solutions.
Finally, you saw that on April 1, we completed the acquisition of the remaining interest in Q Squared Solutions from Quest Diagnostics.
As you know Q Squared is an industry-leading laboratory service provider for clinical trials with global capabilities across safety, bioanalytical, vaccine, genomics, and bioanalytical testing along with best-in-class technology in bio specimen and consent lifecycle management.
This transaction streamline strategic decision making for us and gives us the flexibility to build out greater bioanalytical, genomic and biomarker capability, as we see increased attractive growth opportunities in this expanding market.
As already mentioned, this was a very strong quarter.
We'd start first by giving you some more detail on revenue.
First quarter revenue of $3,409 million grew 23.8% on a reported basis.
Analytics Solutions revenue for the first quarter was $1,348 million, which was up 20.7% reported and 17.1% at constant currency.
R&D Solutions first quarter revenue of $1,868 million improved 29.6% at actual FX rates, and 28.1% at constant currency.
Pass-through revenues were a tailwind of 770 basis points to the R&DS revenue growth rate in the quarter.
CSMS revenue of $193 million was down 1.5% reported and 4.1% on a constant currency basis.
Moving down to P&L, adjusted EBITDA was $744 million for the quarter.
Margins expanded 140 basis points despite significant headwinds from higher pass-through revenue and lower margin COVID work.
GAAP net income was $212 million and GAAP diluted earnings per share were $1.09.
Adjusted net income was $425 million for the first quarter and adjusted diluted earnings per share grew 45.3% between [Technical Issues] $2.18.
R&D Solutions delivered another exceptional quarter of net new business.
Backlog was up 18.3% year-over-year to $23.2 billion at March 31.
Next 12 months revenue as Ari mentioned from backlog grew significantly and currently stands at $6.5 billion, up 31.1% year-over-year.
And of course this metric now includes the first quarter of 2022, which is a further indication that we see the momentum of the business continuing beyond this year.
Now let's review the balance sheet.
At March 31, cash and cash equivalents totaled $2.3 billion and debt was $12.2 billion, resulting in net debt of $9.9 billion.
Our net leverage ratio at March 31 improved to 3.9 times trailing 12 month adjusted EBITDA, marking the first time since just following the merger that this ratio was below 4 times.
And this is particularly noteworthy, you may recall that in 2019, when we gave you our three year guidance, we committed to delever to 4 turns or below exiting 2022.
We're pleased to have achieved this target entering 2021.
First quarter cash flow, free cash flow in particular was very strong.
Cash flow from operations was $867 million, capex was $149 million, resulting in free cash flow of $718 million.
We repurchased $50 million of our shares in the quarter, which leaves us with $867 million of share repurchase authorization remaining under the program.
Now let's turn to guidance.
You'll recall that back on April 1, when we announced the acquisition of Quest 40% interest in our Q Squared joint venture, we raised our 2021 earnings per share guidance by $0.12 to reflect the elimination of Quest minority interest in the joint venture's earnings.
We wrapped revenue and adjusted EBITDA guidance unchanged, of course because we already consolidated the -- or consolidated the financial of the joint venture prior to the transaction.
Well, today we're revising our guidance upward again as follows.
We're raising our full-year 2021 revenue guidance, both at the low and high end of that range, resulting in an increase of $625 million at the midpoint of the range.
The new revenue guidance is $13,200 million to $13,500 million, which represents year-over-year growth of 16.2% to 18.8%.
This increased guidance range reflects the first quarter strength and the continued operational momentum that we see in the business.
And also absorbed an FX headwind versus our previous guidance.
Now compared to the prior year, FX is expected to be a tailwind of about 150 basis point to full-year revenue growth.
From segment perspective, we now expect full year Technology & Analytics Solutions revenue to grow at a low to mid-teens percentage rate and R&D Solutions to grow in the low to mid-20s.
Our previous expectation that revenue in the CSMS business would be slightly down, remains unchanged.
We're also raising our full-year profit guidance as a result of stronger revenue outlook, we've increased it, increased adjusted EBITDA guidance at both the low and high end of the range, resulting in an increase of $133 million at the midpoint.
Our new full-year guidance is $2,900 million to $2,965 million, which represents year-over-year growth at 21.6% to 24.4%.
Moving to EPS, I mentioned Q Squared transaction on April 1, as a result of that, we raised our adjusted diluted earnings per share guidance by $0.12 to a new range of $7.89 to $8.20.
We're now raising both the low and the high end of that guidance range, resulting in a new adjusted diluted earnings per share guidance of $8.50 to $8.75 or year-over-year growth of 32.4% to 36.3%.
Moving to detail on P&L, interest expense is expected to be approximately $400 million for the year, operational depreciation and amortization is still expected to be somewhat over $400 million and we're continuing to assume an effective tax rate of approximately 20% for the full year.
This guidance assumes that current foreign currency exchange rates remain in effect for the rest of the year.
Now let's turn to the second quarter guidance, assuming FX rates remain constant through the end of the quarter, second quarter revenue is expected to be between $3,225 million and $3,300 million, which represents reported growth of 27.9% to 30.9%.
Adjusted EBITDA is expected to be between $690 million and $715 million, which represents reported growth of 42.9% to 48%.
And finally, adjusted diluted earnings per share is expected to be between $2 and $2.10, up 69.5% to 78%.
So to summarize, we delivered very strong first quarter results, once again reporting double-digit growth in all key financial metrics.
This included revenue growth of over 20% in both our TAS and R&DS segment.
R&DS backlog improved to $23.2 billion, up 18% year-over-year.
Next 12 months revenue from that backlog increased to $6.5 billion, up 31% year-over-year.
Free cash flow was strong again this quarter.
Net leverage improved to 3.9 times trailing 12 month adjusted EBITDA.
And finally, given the strong momentum we see in the business, we are once again raising our full year guidance for revenue, adjusted EBITDA and adjusted diluted EPS.
Before we open up the call up for Q&A, I'd like to make you aware of a couple of leadership changes within IQVIA finance organization.
Andrew Markwick, who has led Investor Relations function for the past four years very capably, I think you'll agree, is moving on to become, CFO of the R&DS unit.
Nick Childs, who currently runs our Corporate FP&A function will take-over as SVP of Investor Relations and Corporate Communications.
Nick has been in his role for over three years and has a very deep knowledge of the company and our financials.
He will be succeeded by Mike Fedock who has served as CFO of the R&DS unit for the past few years.
Finally those of you on the fixed income side know that Andrew who has also served as our Treasurer for the past couple of years and Manny Korakis who is our Corporate Controller will also assume leadership of the Treasury function going forward.
And with that, let me hand it back over to Casey, who will open the call for Q&A. | q3 adjusted non-gaap operating earnings per share $1.35.
qtrly printing papers operating profits profits were $106 million versus $63 million. | 0 |
These statements are subject to change due to new information or future events.
Assured Guaranty's insurance production loss mitigation and capital management strategies combined to deliver outstanding results in 2021.
We had many notable accomplishments during the year, we earned $470 million of adjusted operating income, 84% more than in 2020.
We more than doubled adjusted operating income per share to $6.32 per share.
We brought all three of our measures of shareholder value to new highs.
Over the year, shareholder's equity per share grew 9% to $93.19.
Adjusted operating shareholder's equity per share increased 13% to $88.73, and adjusted book value per share rose 14% to $130.67.
We repurchased $10.5 million common shares, or approximately 14% of our shares outstanding at December 31, 2020, at an average price of $47.19.
Those repurchases totaled $496 million, with the addition of $66 million of dividends, we returned a total of $562 million to shareholders.
Through strong new business production in each of our financial guarantee markets, U.S. public finance, international infrastructure finance and global structure finance, we generated a total of $361 million of PVP in 2021.
Direct PVP exceeded $350 million for the third consecutive year, compared with an average annual direct PVP of $210 million from 2012 to 2018, making the last three years our best in more than a decade for direct new business production.
With a more than 60% share of new issue insured par sold, we led the U.S. public finance bond insurance industry to its highest penetration, market penetration in a dozen years.
And taking advantage of exceptionally low interest rates are U.S. holding company issued a total of $900 million, a 3.15% 10-year and 3.60% 30-year senior debt to refinance $600 million of debt with higher coupons ranging from 5% to almost 7%.
As a result, annual debt service savings will be $5.2 million through the next maturity date.
Our financial guarantee production was well-diversified across all of our markets.
U.S public finance PVP of $235 million included in its second best direct production in at least a decade, surpassed only by the previous year's result, or $79 million of international infrastructure PVP marks the fourth year out of the last five that we have exceeded 75 million of direct PVP in that sector.
Global structure finance PVP at $47 million was the second best and direct production since 2012.
Our markets and economic environment offered both opportunities and challenges during 2021, issuance of U.S. municipal bonds reached a record par amount of $457 billion in 2021.
This partly reflected investors increased demand for taxes on paper in expectation of higher tax rates and continued limitations on state and local tax deductions at the federal level.
Additionally, -- issuers were eager to take advantage of extremely low municipal interest rates to refinance bonds issued in the path of higher rates, with the option to execute tax exempt advance refunding still off the table.
Many issuers also turned to the taxable market to replace higher coupon tax exempt debt.
Total insured market volume increased to 8.2% of par issued, the highest annual rate over the past 12 years, and up from 7.6% during 2020 and 5.9% during 2019.
We believe this increased penetration in 2021 indicates that the risk of unpredictable developments, which is brought home by the onset of the COVID-19 pandemic in 2020, has made a lasting impression on investors.
We have also seen that Assured Guaranty has the underwriting and risk management skills to construct an insured portfolio that experienced minimal claims from the economic disruption caused by the pandemic, most of which have already been reimbursed.
The $37.5 billion of insured par in 2021 represented a 10% annual increase, on the heels of a 43% increase the prior year, resulting in a 57% growth of the insured market in just two years since 2019.
Assured Guaranty's production was a leading force behind this growth, as we enjoyed over 58% of new issue insured par sold in 2020, and more than 60% in 2021.
Our highest annual market share since 2013, Our $23 billion of insured new issue volume in 2021 was almost $3 billion more par than we insured in 2020, and was generated by more than 8,000 individual transaction.
An important trend in recent years has been the use of our guarantee to help launch some of the municipal bond markets largest transaction, which indicates growing institutional demand for the security, relative price stability and significant market liquidity our guarantee can provide.
We guaranteed $100 million or more on each of 48 large issues launched in 2021, up from 39 transactions in 2020 and 22 in 2019.
Significantly, we continue to add value on credits with underlying ratings in the double aid category from one or both of S&P and Moody's, ensuring a 109 such AA transactions totaling more than $3.5 billion of insured par.
U.S. public finance, forms the largest part of our uniquely diversified financial guarantee strategy.
Our three pronged strategy also targets insurable transactions in both infrastructure finance outside the United States and structured finance throughout the world.
This helps us in times when one market or another shows temporary weaknesses, and it drives great results in years like 2021, when we are thriving in all three of our markets.
Further demonstrating the diversity of our business, in 2021, we guaranteed financing of a Spanish solar power facilities and UK higher education and healthcare projects.
Additionally, we work with the UK water company to extend a debt service reserve guarantee, which is a unique product we developed as an alternative to bank liquidity facilities.
We also provided a number of secondary market guarantees.
Our European business was historically based in the UK, which previously allowed us to do business throughout the European Union.
We have long been active and where we continue to believe that plentiful and diverse opportunities.
Our Paris subsidiary, which we opened in 2020 to serve continental Europe more effectively, especially now that the UK has left the European Union, further grew its business around originations in 2021.
A global structured finance and important part of our business is to provide institutions like banks and insurance companies with tools to optimize the capital utilization of their asset portfolios.
During the year, we guarantee large insurance securitizations and significantly increase our CLO activity.
Our guarantees of CLOs attract new investors who might otherwise be discouraged by the higher capital requirements on uninsured Clos.
We are seeing more opportunities to help investors reduce the capital consume of both existing structured finance exposures and new investment.
The new business we rode across all of our markets in 2021, enabled us to increase the year-end net par amount of our insured portfolio for the first time in many years.
We believe the trend going forward will be to continue increasing the par amount of our insured portfolio, and increase our deferred premium revenue, which will further stabilize and grow our future earnings.
We have continued to reduce the risk in our insured portfolio, and believe we can continue to do so as we continue to write new investment grade business.
The below investment grade portion of our insured portfolio declined to barely more than 3% as of December 31, 2021.
Almost half of our below investment grade net par exposure is to Puerto Rico, and we expect that with the court approved settlements pertaining to the GO and certain other credit scheduled to occur on March 15th of this year, that figure should drop below 2.5%, and continue to fall as more of our Puerto Rico settlements are executed.
After years of twists and turns related to the restructuring of Puerto Rico debt, decisive progress occurred in 2021, we and the other creditors, along with the Commonwealth, agreed to support the final revision of the Oversight Boards restructuring plan for the central government, which the Title III court approved in January of this year.
As a result, the Commonwealth government's exit from bankruptcy is expected to begin in mid-March.
The Title III court also laid the groundwork for favorable consideration of additional agreements that support certain other Puerto Rico restructurings, such as for highways and transportation authority.
All this means that Puerto Rico's long awaited resolution of its unpaid debt is proceeding well, and the island is positioned for years of fiscal stability, according to the Oversight Board's latest fiscal plan.
In addition to our success in the financial guarantee business in 2021, we also made significant progress toward our goals for the asset manager business.
Our overall investment performance was strong as one of the top 25 collateralized loan obligation managers by assets under management.
We were well-positioned to participate in this CLO market that reached a record level of interest issuance.
During 2021, we launched six new CLOs representing $2.5 billion of assets under management, more than double what we issued in 2020, and we converted non-fee earning AUM to fee earning at AUM by selling substantially all this CLO equity still held by a Assured IM legacy funds, where we had been rebating management fees.
Through these efforts, we increased CLO management fees in 2021 to $48 million from $23 million in 2020.
Additionally, we reset a refinance 10 CLOs in the United States and Europe.
In the asset backed sector, we closed a continuation fund holding an auto finance investment.
Additionally, the healthcare portfolio managed by Assured healthcare partners continue to grow as capital was deployed.
Looking back on the year, we believe much of Assured Guaranty success reflected the market's growing appreciation of the reliability of our financial strength and the security we provide investors, while also delivering financial benefits and first class service to bond insurers and other clients, the responsibility embodied in our careful underwriting, discipline risk management, and tireless loss mitigation.
The proven resilience or financial guarantee business model and our strategic approach to capital management to protect policyholders and create value for shareholders.
In our view, this heightened recognition of our guarantees value could help to drive demand higher as interest rates rise.
We expect market conditions in 2022 and beyond to be very different from those of 2021, as the Fed strives to contain inflation, the economic and social impact of the COVID-19 recedes, developing geopolitical events continue to disrupt markets, and municipal governments prepare for the end of extraordinary federal support.
Rising interest rates, widening credit spreads, and the accompanying volatility tend to increase financial guarantee demand.
We believe Assured Guaranty is better positioned for the long-term success than in any time in our history.
Our financial strength has never been stronger.
The credit challenges in our legacy insured portfolio are largely behind us.
Our markets are large.
Our opportunities are diverse.
Our human capital exceptional.
And our business model proven through decades of economic cycles.
We look forward to fulfilling the high expectations of our policyholders, clients and shareholders.
I am very pleased to report that our fourth quarter 2021 adjusted operating income was $273 million, or $3.88 per share, a significant increase over the adjusted operating income of the fourth quarter of 2020, which was $56 million, or $0.69 per share.
The primary driver of the increase in fourth quarter 2021 total adjusted operating income was the insurance segment where adjusted operating income increased 134% over fourth quarter 2020 from $109 million to $277 million.
Much of this benefit came from our loss mitigation strategies, particular for our Puerto Rico exposure.
After many years of negotiation and other loss mitigation efforts, we are close to resolving $1.4 billion in gross par associated with our Puerto Rico GO, PBA, CCDA and PREPA exposures.
The increased certainty of the settlement and Puerto Rico's improved economic outlook, combined with the increased value of our actual and expected recoveries under the settlement agreements, were the primary drivers of the $186 million economic benefit in the fourth quarter of 2021.
During the fourth quarter of 2021, we sold a portion of our salvage and subrogation recovered bulls associated with certain matured Puerto Rico GO and PREPA exposures, resulting in proceeds of $383 million, thereby realigning some of our expected recoveries early.
In 2022, we continued to sell portions of our GO, PBA and PREPA salvage and subrogation recoverable, resulting in an additional proceeds of $133 million.
The prices at which we crystallized these recoveries, as well as observed market pricing for other similar instruments and the forward interest rate environment, are reflected in the updated assumptions of the value of the remaining recovery bonds and contingent value instrument that we project receiving in the various Puerto Rico settlements.
Other components of the insurance segment also performed well in the fourth quarter of 2021.
Total income from investments, which consists of net investment income on the fixed maturity portfolio and equity in earnings on short Im funds and other alternative investments, was $111 million, an increase from $94 million in the fourth quarter of 2020.
Collectively, the investments in Assured IM funds and alternative investments generated $44 million in equity in earnings of investees in the fourth quarter of 2021, compared with $24 million in the fourth quarter 2020.
With the increase mainly attributable to a large fair value gain on a specific investment in a private equity fund.
As a reminder, equity in earnings and investees is a function of mark-to-market movements attributable to the Assured IM funds and other alternative investments.
It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period-to-period.
Our fixed maturity and short-term investments account for the largest portion of the portfolio, generating net investment income of $67 million in the fourth quarter of 2021, compared with $70 million in the fourth quarter of 2020.
As we shift fixed maturity assets into alternative investments, net investment income from fixed maturities may decline, however, over the long-term, we are targeting enhanced returns on the alternative investment portfolio of over 10%, which exceeds our projected returns on a fixed maturity portfolio.
In terms of premiums, scheduled net earned premiums decreased slightly in the fourth quarter of 2021 to $91 million, compared with fourth quarter 2020 of $94 million.
Premium earnings due to refundings and terminations were $20 million in fourth quarter 2021, compared with $65 million in the fourth quarter of 2020, when two large transactions refunded.
The asset management segment adjusted operating loss was $3 million in the fourth quarter of 2021, compared with $20 million in the fourth quarter of 2020.
The improvement in asset management segment results is primarily attributable to increased management fees in the strategies we launched since the 2019 Blue Mountain acquisition, and a non-recurring impairment of a lease right of use asset of $13 million in 2020.
Asset management fees on a segment basis were $21 million in the fourth quarter of 2021, compared with $20 million in the fourth quarter of 2020.
Higher fees from healthcare opportunity funds and CLOs more than offset the decrease in fees from wind down funds as distributions to investors continue.
As of December 31, 2021, AUM of the wind down funds was $582 million, compared with $1.6 million as of December 31, 2020.
In the fourth quarter of 2021, the effective tax rate was 15.1%, compared with 12.7% in fourth quarter 2020, which included the release of a reserve for uncertain tax positions.
The overall effective tax rate on adjusted operating income fluctuate period-to-period based on the proportion of income in different texture jurisdictions.
Overall, the fourth quarter capped off a year of successful execution of our strategic initiatives.
These achievements are reflected in our 2021 full year adjusted operating income of $470 million, which includes a loss on extinguishment of debt of $175 million pre-tax, or $138 million after tax.
Despite the debt extinguishment charge, full year 2021 adjusted operating income represents an 84% increase compared with 2020 adjusted operating income of $256 million.
The primary driver of this increase was the insurance segment, with 722 adjusted operating income in 2021, compared with $421 million in 2020.
U.S public finance benefited from the increased recovery assumptions, the Puerto Rico exposures that I mentioned earlier and the U.S. RMBS benefit this primarily a function of home price appreciation.
Economic loss development, which excludes the effects of deferred premium revenue, was a benefit of $287 million in 2021.
Across the whole portfolio, loss expense in 2020 was $204 million, and was primarily attributable to Puerto Rico.
On a full year basis, total income from the investment portfolio was $424 million in 2021, compared with $371 million in 2020.
The investment returns on the portion of the portfolio invested in Assured IM funds demonstrates an important component of the benefits of the asset management segment, not only as a fee earning business but as an investment advisor for our insurance segments.
Assured IM funds in which the insurance subsidiaries invest generated gains of $80 million in 2021, compared with gains of $42 million in 2020.
The gains were across all strategies, particularly healthcare, CLOs, and asset based, and generated a year-to-date return of 20.8%.
The third party alternative investments also generated gains of $64 million in 2021, compared with $19 million in 2020.
These gains more than offset reduced net investment income on the available -- sale fixed maturity portfolio, which was $280 million in 2021, down from $310 million in 2020.
Lower average balances, the fixed maturity portfolio reinvestment yields an income -- loss mitigation securities were the primary drivers of the year-over-year variance.
Total net earned premiums in credit driven revenues were $438 million in 2021, compared with $540 million in 2020, including premium accelerations of $66 million and $130 million, respectively.
In the asset management segment, we have continued to make great progress in 2021.
We raised new third party capital in our CLO, healthcare and asset base strategies.
We increased for earning for CLO AUM to the issuance of $2.8 billion in CLOs and the sale of CLO equity out of the legacy funds, and we continue to liquidate assets in the wind down funds.
The improvement in the asset management segment operating loss from $50 million in 2020 to $90 million in 2021, was primarily attributable to an increase in management fees from $59 million in 2020 to $76 million in 2021.
Higher free -- fees from CLOs and -- turning funds more than offset the decline in fees from wind down funds.
The increase in -- opportunity fund fees was primarily attributable to the new healthcare funds launched in late 2020, which raise additional third party capital in late 2021.
The corporate division had adjusted operating loss of $253 million in 2021, including a loss on debt extinguishment of $175 million, or $138 million on an after tax basis.
Which resulted from a $600 million in debt redemptions that Dominic mentioned earlier, this charge is simply an acceleration of expenses that would have occurred over time.
In the prior year, corporate division adjusted operating loss was $111 million.
The debt redemptions were financed with the proceeds from the issuance of $900 million in new 10-year and 30-year debt, which resulted in a reduced average coupon and redeemed debt from 5.89% to 3.35%, and $170 million -- reduction in our 2024 debt refinancing needs.
In addition to debt refinancing has generated annual debt service savings of $5.2 million until the next maturity date and provided flexibility to continue share repurchases.
We were able to accomplish all of this without significantly affecting our debt leverage or interest coverage ratios, the additional $300 million of proceeds from the debt issuances were used primarily for share repurchases.
In the fourth quarter 2021, where we purchased $3.7 million shares for $192 million at an average price of $51.47 per share.
This brings full year 2021 purchases to $10.5 million shares, or $496 million, which represents 14% of the total shares outstanding at the beginning of the year.
The continued success of this program helped to drive by our per share book value metrics to record highs as of December 31, 2021.
Subsequent to the quarter close, we repurchased an additional $1.7 million shares for $91 million.
Since the beginning of our repurchase program in January 2013, we have returned $4.2 billion to shareholders under this program, resulting in a 69% reduction in total shares outstanding.
The cumulative effect of these purchases was a benefit of over $37 an adjusted operating shareholder's equity per share and $65 in adjusted book value per share, which helped drive these metrics to new record highs.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $274 million dollars, of which $124 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to [Inaudible] our business or repurchase shares to manage our capital.
This week, the Board of Directors authorized the repurchase of an additional $350 million of common shares.
Under this and previous authorizations, the company is now authorized to purchase $364 million of its common shares.
In addition, we declared a dividend of $0.27 per share, which represents an increase of 13.6% over the previous dividend of $0.22 per share.
As we look to 2022 and beyond, we are optimistic that our largest single BIG exposure, Puerto Rico, will be substantially resolved by the end of this year.
The interest rate environment will be more conducive to new insurance business production and that the asset management segment and alternative asset strategies will continue to contribute to the company's progress toward its long-term strategic goals. | q4 adjusted non-gaap operating earnings per share $3.88. | 1 |
I hope everyone is staying healthy and safe.
Let's start on slide four.
We are making great progress this year at DTE for our team, our customers and our communities positioning us to deliver for our investors.
This progress has produced a strong second quarter and positions us well for continued growth.
Our company celebrated Juneteenth together last month with a series of virtual meetings, we pay tribute to this important day with global community partners.
A number of employees offered reflections on what the day means to them personally.
Overall, it was a great way to come together and honoured a significant holiday.
We continue to focus on service excellence for our customers and delivering clean, safe and reliable energy as we continue our clean energy transformation.
DTE Electric received approval from the MPSC to further expand the voluntary renewable program MIGreenPower, while also making it even more affordable, including increased access for low-income customers.
Additionally, we partnered with Ford Motor Company to install new rooftop solar and battery storage technology at the Ford Research and Engineering Center.
The array includes an integrated battery storage system and will be used to power newly installed electric vehicle chargers.
This can generate over 1,100 megawatt hours of clean energy.
We also continue to support the communities where we live and serve.
We were also recognized by Points of Light for the fourth consecutive year as one of the Civic 50.
This award highlights DTE as one of the top 50 community-minded companies nationwide and corporate citizenship.
We also launched a Tree Trim Academy to create 200 high-paying jobs in Detroit.
DTE has a need for Tree Trimmers, and the community has a need for good high-quality jobs.
It will also help us continue to improve electric liability as Trees account for over 70% of our customer outages.
On the investor front, we completed the spin of the midstream business.
Now DTE Midstream is a stand-alone company and DTE Energy is a predominantly pure-play utility with 90% of operating earnings coming from our utilities.
The transaction went very smoothly and was well received by all stakeholders.
We didn't miss a beat on a very strategic transaction and many said, we made it look easy.
We delivered a strong second quarter with earnings of $1.70 per share and we are raising our 2021 operating earnings guidance and continue to pay a strong dividend.
DTE is continuing to deliver successful operating results.
At DTE Electric, we made another significant step toward our goal of reducing carbon emissions as we retired River Rouge Power Plant in the second quarter.
For over 60 years, the River Rouge Power Plant delivered safe, reliable and affordable energy for community throughout, Southeast Michigan.
River Rouge is one of the three coal-fired power plants, DTE is retiring by the end of 2022, which is an integral part of our company's clean energy transformation.
We continue to look at ways to accelerate our coal fleet retirements and potentially file our updated IRP before September of 2023.
We continue to expand on our voluntary renewable program, which is exceeding our high expectations.
In the first quarter, we announced the commitment of new customers to MIGreenPower, including the State of Michigan, Bedrock and Trinity Health.
During the second quarter, we signed up a number of new large customers, including Detroit Diesel, which is now one of our largest voluntary renewable customers.
The program continues to grow at an impressive rate.
So far, we've reached 950 megawatts of voluntary renewable commitments with large business customers and approximately 35,000 residential customers.
We have an additional 400 megawatts in the very advanced stages of discussion for future customers.
MIGreenPower is one of the largest voluntary renewable programs in the nation and helps advance our work toward our net 0 carbon emission goal while helping our customers meet their decarbonization goals.
We have made progress with our expedited tree trimming program, which is greatly improving reliability for our customers and have received Michigan Public Service Commission approval to securitize the tree trimming costs along with costs associated with the River Rouge Power Plant retirement.
At DTE Gas, we are on track to achieve net 0 greenhouse gas emissions by 2050.
We began the second phase of construction on our major transmission renewal project in Northern Michigan in June.
The project includes the installation of a new pipeline as well as facility modification work which will reduce the risk of significant customer outages.
Project is on track to be in service by the first quarter of next year.
Last quarter, we announced our New CleanVision Natural Gas Balance program.
This program provides the opportunity for customers to purchase both carbon offsets and renewable natural gas.
We enable them to reduce their carbon footprint.
We are proud of how fast the program is growing.
Finally, we have over 3,000 customers subscribed, and we are looking forward to seeing it become as successful as our voluntary renewable program at DTE Electric.
On our Power and Industrial business, we continue to add new projects as we began construction on a new RNG facility, our large dairy farm in South Dakota.
This will be P&I's largest dairy RNG project to date.
Project will directly inject RNG into the Northern Natural Gas system for sale into the California transportation fuels market.
Facility is expected to be in service in the third quarter of 2022.
We are also in advanced discussions on several new industrial energy and RNG projects and we'll provide updates on these as they progress.
P&I was also recognized by the Association of Union Contractors with the 2020 Project of the Year Award for the Ford Dearborn cogeneration project.
Overall, I am extremely proud of the team's accomplishments year-to-date, and I'm looking forward to more successes in 2021 and beyond.
Now moving on to slide six.
As I said, we've had a very strong start to 2021.
We are raising our operating earnings guidance midpoint from $5.51 per share to $5.77 per share, moving our year-over-year growth and operating earnings per share guidance from 7.4% to a robust 12.5%.
We are able to use some of this favorability to position the company to continue to deliver in future years.
We mentioned in Q1, we were deep into planning for 2022 in a great level of detail.
With all of this work, we feel great about achieving a smooth 5% to 7% growth trajectory into 2022 and through the five-year plan.
You are not going to see any surprises from us in our growth rate in 2022 in spite of the area roll off [Phonetic] and the converts coming due.
90% of our future operating earnings will be from our two regulated utilities, where we have a large investment agenda with $17 billion of capital investment in our five-year plan, focused on clean energy and customer reliability.
Overall, we feel very confident with our performance in 2021 and our future operational and financial performance.
Dave, over to you.
Let me start on slide seven to review our second quarter financial results.
Total operating earnings for the quarter were $329 million.
This translates into $1.70 per share.
You can find a detailed breakdown of earnings per share by segment, including our reconciliation to GAAP reported earnings in the appendix.
I'll start the review at the top of the page with our utilities.
The second quarter was a really warm quarter for us here in Michigan.
In fact, it was the seventh warmest on record.
DTE Electric earnings were $238 million for the quarter, which was $19 million higher than the second quarter of 2020, primarily due to higher commercial sales, rate implementation and warmer weather offset by nonqualified benefit plan gains that we had in 2020.
As we mentioned in the first quarter call, we've taken steps to reduce the variability of these investments going forward.
Moving on to DTE Gas.
Operating earnings were $7 million, $4 million lower than the second quarter of last year.
The earnings decrease was driven primarily by the warmer weather in 2021, offset by new rates.
Let's keep moving to the Gas Storage and Pipelines business on the third row.
Operating earnings for GSP were $86 million.
This was $16 million higher than the second quarter of 2020, driven primarily by the LEAP pipeline going into service and strong earnings across the pipeline segment.
On the next row, you can see our Power and Industrial segment operating earnings were $34 million.
This is a $9 million increase from second quarter last year due to new RNG projects beginning operation.
On the next one, you can see our operating earnings at our Energy Trading business were $21 million, which is $16 million higher than second quarter earnings last year due primarily to strong performance in the gas portfolio.
Year-to-date through the second quarter, this positions us positive to our expectation and our original guidance for the year.
Finally, Corporate and Other was unfavorable $22 million quarter-over-quarter, primarily due to the timing of taxes and higher interest expense.
Overall, DTE earned $1.70 per share in the second quarter of 2021, which is $0.17 per share higher than 2020.
Moving on to slide eight.
Given the strong start to the year, we were able to use this favorability to position ourselves to continue to deliver for our customers and investors in future years.
And we are also increasing our 2021 operating earnings per share guidance midpoint $5.51 per share to $5.77 per share.
The increase in guidance is due primarily to warmer-than-normal weather, sustained continuous improvement, and uncollectible expense variability at DTE Electric, higher REF volumes at P&I, and stronger performance of energy trading due to the realization of gains from a small, long physical storage position during the extreme cold weather event in Texas in the first quarter.
In the third quarter, we are seeing additional sales upside for Electric compared to our plan and higher than planned REF volumes at P&I.
We are continuing to explore opportunities to support future years through our invest strategy and to support future customer affordability.
As you can see on the slide, there is no Gas Storage and Pipeline segment in our operating guidance for this year.
The GSP segment will be classified as discontinued operations starting in the third quarter.
We continue to focus on maintaining solid balance sheet metrics.
Due to our continued strong cash flows, DTE is targeting no equity issuances in 2021 and has minimal equity needs in our plan beyond the convertible equity units in 2022.
We have a strong investment-grade rating and targeted an FFO-to-debt ratio of 16%.
With the proceeds from the spin-off of DTM, we are retiring long-term parent debt of approximately $2.6 billion after debt breakage costs.
These were NPV-positive transaction and immediately earnings per share accretive as we were able to retire a higher interest rate debt to support our current plan and to deliver our 5% to 7% operating earnings per share growth rate.
We feel great about our second quarter accomplishments, and we are confident in achieving our increased 2021 guidance and continuing to deliver on our long-term 5% to 7% operating earnings per share growth rate.
Our utilities continue to focus on our infrastructure investment agenda specifically investments in clean generation and investments to improve reliability and the customer experience.
We continue to focus on maintaining solid balance sheet metrics and are targeting no equity issuances in 2021.
In closing, after executing a successful spin of our midstream business, DTE continues to be well positioned to deliver the premium, total shareholder returns that our investors have come to expect over the past decade with strong utility growth and a growing dividend. | compname says operating earnings for q2 were $329 million, or $1.70 per diluted share.
operating earnings for q2 were $329 million, or $1.70 per diluted share. | 1 |
On the call today, we have Dun & Bradstreet's CEO, Anthony Jabbour; and CFO, Bryan Hipsher.
Our actual results may differ materially from our projections due to a number of risks and uncertainties.
Today's remarks will also include references to non-GAAP financial measures.
We are off to a strong start as we continue with our transformation and the execution of our near-term and long-term objectives.
We finished the first quarter with solid financial results and made significant progress with the integration of Bisnode.
Overall, we are pleased with the start of the year as adjusted revenues for the quarter increased 29% and adjusted EBITDA increased 37%.
Organic constant-currency revenues increased 1.3% as strength in international was partially offset by the final quarter of COVID-19 headwinds and Data.com in North America.
Total company revenue retention was 96.3% and we now have approximately 48% of our business under multiyear contracts.
The enhancements we have made to data quality and our underlying technology are resulting in positive feedback and deeper customer relationships, allowing us to have more productive conversations about cross-sell and price opportunities of both existing and new products.
As we reach the two-year anniversary of our cost savings program, we finished the quarter with $246 million of annualized run-rate cost savings.
Despite COVID-19 delaying some of our planned cost savings initiatives, we exceeded our original target by 23%, which ultimately contributed to the expansion of adjusted EBITDA margins by over 800 basis points from when we took the company private.
While this marks the completion of our formal cost savings program, we will continue to drive ongoing improvement in terms of operational efficiency through optimizing our geographic footprint, modernizing back-office technologies, and further integrating our solutions to reduce cost and complexity.
It's important to note that the cost savings figure we just discussed is a net number, meaning that while we took a significant amount of cost out of the business, we also continue to invest a significant amount in the business, primarily by enhancing and expanding our data and technology assets.
While much of the heavy lifting was completed in 2019 and 2020, our transformation is ongoing as we look to leverage the foundational enhancements we've made during that time to more rapidly and effectively deploy new and innovative solutions.
Our key priorities for 2021 are to continue to grow our share of wallet with our strategic customers; approach and monetize the SMB space in new and innovative ways; launch new products domestically; localize new and existing products globally; and lastly, to integrate the Bisnode acquisition.
We're pleased with the ongoing success we're having with our strategic clients as they renew near 100%, while continuing to expand their relationships with us.
In North America, we signed an expanded multiyear renewal with the largest online retailer to support their third-party risk management strategy.
As the client continues to expand and enhance their controls around their global supply chain, we are pleased to continue to support their growing needs.
We also signed a multiyear renewal with one of the largest multinational retail corporations, expanding their use of data across their business.
The client leverages our third-party risk and compliance solutions to mitigate risk throughout their extremely large and complex supply chain, and we are glad to extend and broaden this relationship with such a key customer.
We renewed business with another strategic client, a global property and casualty insurance firm who needed access to timely, high-quality data on their current client base to ensure proper underwriting methodologies, ongoing monitoring, as well as access to data for new customer acquisition.
The result was a multiyear deal for both core risk and marketing solutions.
In our international business, there's been significant focus on rearchitecting our go-to-market efforts to better capture the large global opportunity.
In the first quarter, we rolled out a Global 500 account program simultaneously with the close of Bisnode, prioritizing the most strategic accounts.
I'm pleased with the early traction we are seeing from these efforts demonstrated by several wins in the first quarter.
Our U.K. team is working with Generali, a Global 500 global insurance and asset management provider with a leading position in Europe and a growing presence in Asia and Latin America, to help them identify ways to improve consistency of screening across their global, corporate, and commercial businesses, as well as reduce risk.
The result is a multiyear deal for the integration of D&B Data by Direct+ and our third-party risk solution into their CRM and underwriting system to provide a flexible end-to-end solution that was fully compliant with the global requirements.
Another Global 500 company, Linde Region Europe North, member of Linde PLC, is a leading global industrial gas and engineering company that wanted to improve their credit checks and risk monitoring of B2B customers in a more data-driven way.
We are pleased they chose D&B Finance and Risk solutions, bringing us both new business and a multiyear deal.
We are pleased with the momentum we have with our growing roster of clients and expanding existing client relationships worldwide, particularly with our strategic clients.
One segment that we continue to see immense opportunity in is the small and midsized business market.
I'm excited to update you on the progress we have been making to enhance our SMB strategy through a mix of digital marketing and delivery efforts, as well as through innovative partnerships.
After a difficult 2020, the SMB market is beginning to reemerge.
As existing small businesses begin to recover from the effects of COVID-19, we are also seeing a significant rise in the formation of new businesses, especially gig economy start-ups that would benefit significantly from our self-service finance, risk, and sales and marketing solutions, along with software and services offered from our partners.
This was the driving purpose behind the first-quarter launch of our improved digital platform.
This includes personalized small business resources and offerings for each dnb.com user, driven by the utilization of our visitor intelligence solution, as well as the D&B marketplace, which makes it easier for small businesses to identify and purchase D&B solutions and those from our partners.
The marketplace has two primary sections: a product section called D&B Product Marketplace and a dataset section called the D&B Data Marketplace.
The D&B Product Marketplace includes a curated set of our solutions along with those of our partners that creates a combined set that allows a small business to operate in a much more sophisticated manner, much earlier in their stage of maturation.
But we will continue to add new D&B solutions and partners in the coming quarters.
We are mindful of keeping the number of partners limited as this is not a broad-based marketplace, but one that has preferred solutions that we believe will drive the best outcomes for our SMB customers.
A few examples of solutions that are available in the marketplace today are funds manager integrated with Plaid, CreditSignal, Credit Monitor, Email IQ, Analytics Studio, Hoovers Essentials, and D&B Connect.
We also have partner offerings such as KPMG Spark, SAP Ariba with D&B Direct+ integration, and Amazon business access with special rates.
Within the D&B Data Marketplace, users can buy a broad range of data sets from alternative data providers to help them identify opportunities and mitigate risks.
These data sets are already curated and matched to a DUNS number to make it easy to append to a client's existing D&B data.
Today, we have 22 partner datasets, including healthcare reference data from IQVIA and commercial fleet data from IHS Markit, and we're adding more partners monthly.
User feedback has been overwhelmingly positive around the power of the DUNS number and how it's the key to unlock the power of the data and it's something that meaningfully differentiates us competitively.
The D&B customer portal, also launched in the first quarter, allows existing clients to log in and access their already purchased products through a single sign-on, unified digital experience.
While inside the portal, we offer personalized offerings of our and our partner's solutions, which has already resulted in a 60% increase in cross-sells during the first quarter.
And while we continue to grow our solution set within D&B, we're also expanding our reach outside of our core ecosystem.
A great example of this is what we're doing with Bank of America.
Bank of America became the first major financial institution to offer millions of small businesses the ability to get ongoing insights into their D&B business credit score directly through their Business Advantage 360 banking platform.
This is exciting for D&B because it is driving net new paid subscriptions and increased engagement with our small business digital platform.
We also partnered with Plaid to bring their network to our solutions.
By integrating Plaid capabilities to our digital platform, small businesses can securely permission access to their bank account information for authentication purposes.
This gives them instant access to update their D&B business credit profile.
In addition, small businesses can share their bank transaction details, enabling us to explore new ways to establish business credit outside of traditional payment data, which many smaller businesses may lack.
We're really excited as this is the first of its kind in the business credit space.
In the first quarter, subscriptions to our freemium products were up 43% from the prior year.
The investments into our small business and digital go-to-market strategy, products, and groundbreaking partnerships are clear evidence of our determination to make this segment a priority and deliver more innovative solutions to our small business clients.
The third critical priority is launching new products and use cases.
Yesterday, we announced D&B Rev.
Up, a solution that simplifies and automates marketing and sales workflows by providing data, targeting, activation, and measurement in a single platform that easily integrates to a customer's existing martech or sales tech stacks through the use of open architecture integrations.
Clients can purchase the full breadth of D&B Rev.
Up capabilities or even start with a specific channel and build up from there.
We have also collaborated with Bambora and Folloze to further extend the insights and capabilities of the D&B Rev.
Up offerings by adding best-in-class intent and personalized omnichannel experiences to help increase demand generation.
In addition, we've entered into an accelerate partnership with a leading data-driven martech company in support of this platform.
This is a game-changer in how we approach account-based marketing through the integration of our solution sets along with complementary partnerships.
We look forward to providing more updates on Rev.
Up as it progresses, and it's just a great example of how we're thinking more holistically about serving clients through an integrated platform.
This is the vision behind Rev.
Up, as well as the late 2020 launches of D&B Finance Analytics, an integrated and powerful credit to cash platform; and D&B Risk Analytics, an integrated third-party risk, and compliance platform, both within our Finance and Risk business unit.
In our international segment, we continue to focus on rolling out localized solutions across our growing territories.
After 20 new product launches in 2020, we continued the momentum in the first quarter, introducing the Finance Analytics platform in the U.K., Data Vision in Greater China and India, and data blocks in three additional worldwide network partner markets.
We're also launching multiple new products in D&B Europe, which is a newly created region that describes our recently acquired Bisnode markets.
Leveraging our solutions in these markets is a key pillar of our playbook, which we're starting to execute.
Regarding the Bisnode transformation, we're leveraging the same playbook that led to the successful transformation of D&B these past two years, and we're off to a great start coming together as one D&B.
In Q1, we completed the first phase of synergy actions immediately following close, principally, senior leadership rationalization.
Overall, we have actioned approximately $12 million of annualized run-rate savings and continue to see significant efficiencies through the combination of our two companies.
We also established a new European operating model and expect this to be fully implemented during Q2, delivering a more streamlined and integrated business with corresponding operational synergies consistent with our business model.
We developed a robust product plan for D&B Europe to accelerate sales of our modern global product solutions and support the sundown of legacy Bisnode products.
Several product launches are slated for the second half, including Finance Analytics, Risk Analytics, D&B Hoovers, and data blocks, to name a few.
The team is also accelerating rollouts of several solutions Bisnode had recently launched prior to the acquisition.
Overall, we are really excited about the progress we are making and look to capitalize on the strong momentum we have built in our first quarter together.
Overall, I'm pleased with our start to 2021, and I'm excited about the progress we continue to make in terms of increasing share of wallet with strategic clients, better serving SMBs in innovative ways, developing new products domestically, and localizing them internationally and integrating Bisnode.
These, along with many other projects the teams are working on are laying the foundation for accelerated, sustainable growth throughout the remainder of 2021 and into 2022.
Today, I will discuss our first-quarter 2021 results and our outlook for the remainder of the year.
Turning to Slide 1.
On a GAAP basis, first-quarter revenues were $505 million, an increase of 28% or 27% on a constant-currency basis compared to the prior-year quarter.
This includes the net impact of a lower purchase accounting deferred revenue adjustment of $17 million.
Net loss for the first quarter on a GAAP basis was $25 million or a diluted loss per share of $0.06, compared to a net income of $42 million for the prior-year quarter.
This was primarily driven by a change in fair value of the make-whole derivative liability in connection with the Series A preferred stock in the prior-year quarter and a higher tax benefit recognized in the prior-year period due to the Cares Act.
This was partially offset by lower interest expense, preferred dividends in the prior-year period, improvement in operating income, largely due to lower net deferred revenue purchase accounting adjustments and the net impact of the Bisnode acquisition, partially offset by higher costs related to ongoing regulatory matters.
Turning to Slide 2.
I'll now discuss our adjusted results for the first quarter.
First-quarter adjusted revenues for the total company were $509 million, an increase of 28.6% or 27.7% on a constant-currency basis.
This year-over-year increase includes 22 percentage points from the Bisnode acquisition and 4.4 percentage points from the net impact of lower deferred revenue purchase accounting adjustments.
Revenues on an organic constant-currency basis were up 1.3%, driven by growth in our International segment, partially offset by the final quarter of headwinds in North America from COVID-19 and the Data.com wind down.
Excluding these headwinds, the underlying business grew approximately 3%.
First-quarter adjusted EBITDA for the total company was $186 million an increase of $50 million or 37%.
This increase includes the net impact of lower deferred revenue purchase accounting adjustment, a 15-percentage-point impact on year-over-year growth.
The remainder of the improvement is due to the net impact of the Bisnode acquisition, as well as increased revenues in international and lower net personnel expenses overall.
First-quarter adjusted EBITDA margin was 36.5%.
Excluding the impact of the deferred revenue adjustment and the net impact of Bisnode, EBITDA margin improved 220 basis points.
First-quarter adjusted net income was $98 million or adjusted diluted earnings per share of $0.23, an increase from first quarter's 2020 adjusted net income of $50 million.
Turning now to Slide 3.
I'll now discuss the results for our two segments, north America and International.
In North America, revenues for the first quarter were $339 million, an approximate 1% decrease from prior year.
Excluding known headwinds, North America grew approximately 2%.
In Finance and Risk, we continue to see strength in our government solutions and risk aversion as both private and public sector enterprises continue to need solutions to deal with a rapidly evolving global supplier landscape.
The growth in these solutions was offset by approximately $3 million of lower revenues attributable to COVID-19 and $1 million of revenue elimination from the Bisnode transaction.
For sales and marketing, we're excited to see double-digit growth in our digital solutions as customers continue to leverage more and more of our modern intent-enabled solutions.
And while data sales also had another solid quarter, the overall growth in sales and marketing was partially offset by $5 million from the Data.com wind down.
North America first-quarter adjusted EBITDA was $151 million, an increase of $7 million or 5% primarily due to lower operating costs resulting from ongoing cost management efforts.
Adjusted EBITDA margin for North America was 44.5%, up 220 basis points versus prior year.
Turning now to Slide 4.
In our international segment, first-quarter revenues increased 137% to $179 or 131% on a constant-currency basis, primarily driven by the net impact from the acquisition of Bisnode and strong growth in our sales and marketing solutions.
Excluding the impact from Bisnode, International revenues increased approximately 9%.
Finance and Risk revenues were $107 million, an increase of 83% or an increase of 78% on a constant-currency basis primarily due to the Bisnode acquisition.
Excluding the net impact of Bisnode, revenue grew 7% with growth across all markets, including higher worldwide network cross-border sales and higher revenues in Greater China from our risk and compliance solutions and newly introduced API offerings.
Sales and marketing revenues were $63 million, an increase of 382% or an increase of 359% on a constant-currency basis, primarily attributable to the Bisnode acquisition.
Excluding the net impact of Bisnode, revenue grew 18% due to new solution sales in our U.K. market and increased revenues from our worldwide network product loyalty.
First-quarter international adjusted EBITDA of $52 million increased $28 million or 114% versus first-quarter 2020 primarily due to the net impact of Bisnode acquisition, as well as revenue growth across our international businesses, partially offset by higher net personnel costs.
Adjusted EBITDA margin was 30.3% or 37.8%, excluding Bisnode, which is an increase of 430 basis points versus prior year.
Turning now to Slide 5.
I'll walk through our capital structure.
At the end of March 31, 2021, we had cash and cash equivalents of $173 million, which when combined with full capacity of our $850 million revolving line of credit through 2025, represents total liquidity of approximately $1 billion.
As of March 31, 2021, total debt principal was $3,674 million, and our leverage ratio was 4.8% on a gross basis and 4.6% on a net basis.
The credit facility senior secured net leverage ratio was 3.6%.
And finally, on March 30, we executed $1 billion floating to fixed swaps at an all-in rate of 46.7 bps.
These are three-year slots and bring our fixed floating debt ratio to approximately 50-50.
Turning now to Slide 6.
I'll now walk through our outlook for full-year 2021.
Adjusted revenues are expected to remain in the range of $2,145 million to $2,175 million, an increase of approximately 23.5% to 25% compared to full-year 2020 adjusted revenues of $1,739 million.
Revenues on an organic constant-currency basis, excluding the net impact of the lower deferred revenues, are expected to increase between 3% to 4.5%.
Adjusted EBITDA is expected to be in the range of $840 million to $855 million, an increase of 18% to 20%.
And adjusted earnings per share is expected to be in the range of $1.02 to $1.06.
Additional modeling details underlying our outlook are as follows: We expect interest expense to be $200 million to $210 million; depreciation and amortization expense of approximately $90 million, excluding incremental depreciation and amortization expense resulting from purchase accounting; an adjusted effective tax rate of approximately 24%; weighted average shares outstanding of approximately $430 million; and finally, capex, we anticipate, of around $160 million, including $7 million due to a small asset acquisition we completed in the first quarter.
Overall, we continue to see the year shaping up as previously discussed, with revenue growth accelerating throughout the year as we transition from the middle of the range in Q2 to the high end of the range in the fourth quarter.
And finally, as previously discussed, we continue to expect adjusted EBITDA for the second and third quarter to be below the low end of the range due to timing of certain expenses in the fourth quarter to be above the high end of the range of our guide.
Overall, we are pleased with the start of 2021 and look forward to continuing the strong momentum in our building both North America and international.
Operator, will you please open up the line for Q&A? | sees fy 2021 revenue up 0 to 2 percent.
qtrly revenue $454.5 million versus $522.1 million.
positioned for recovery to begin in the second quarter, enabling us to exit 2021 with revenue growth in mid-single digits.
expect q1 financial performance to be a continuation of q4 2020. | 0 |
I remain extremely proud of the resilience of our entire organization as we've navigated through the combination of the oil and gas industry dislocation, as well as the prolonged COVID-related headwinds that continue to impact our business.
Adding to these market headwinds, the third quarter is also impacted by the most active hurricane season in the last decade, causing repeated work stoppages in the Gulf of Mexico.
In the face of these challenging conditions, we remain focused on executing our strategic playbook by pulling the required levers to maintain positive free cash flow and paying down debt while adjusting our infrastructure to address the new market realities in our U.S. Fluids business.
Free cash flow generation and debt reduction remain our highest priorities and I am extremely pleased with our performance on this front.
During the third quarter, we generated $15 million of cash from operations and reduced our total debt balance by $34 million as we continue to harvest working capital and repatriate excess cash from our foreign subsidiaries.
Benefiting from the strong cash generation over the past two quarters, we reduced our total outstanding debt by $65 million since the start of the year.
Touching on the specifics of the segment results, Fluids Systems posted third quarter 2020 revenues of $68 million, reflecting a 9% sequential decline.
In contrast to a 35% reduction in U.S. rig count, revenues from U.S. land has steadily improved as we progressed through the quarter, increasing 8% sequentially to $30 million.
This improvement was driven by our expanding market share and a recovery in customer activity, specifically drilling more wells with fewer rigs.
As we touched on last quarter, our market share in U.S. land has meaningfully expanded in recent months and I'm pleased to highlight that our share has remained above [Phonetic] 20% mark, throughout the third quarter, achieving a record level for Newpark.
In the Gulf of Mexico, the quarter is impacted by the repeated weather-related disruptions which led to revenues declining by nearly 50% to $7 million.
Internationally, activities in key markets within the Middle East and North Africa were negatively impacted by greater travel and operational restrictions, imposed by local governments in response to a surge in COVID outbreaks in the third quarter.
This led to a 12% sequential reduction in our international Fluids revenues.
Also, as we announced previously, in response to the significant change in the U.S. oil and gas market, we've been working over the past two quarters to reposition our chemical blending facility located in Conroe, Texas to serve more stable markets.
As an update, I'm pleased to announce that we completed the installation of our first semi-automated packaging line late in the quarter, which allowed us to begin scaling up production of industrial cleaning products as we target leading cleaning product companies.
With a partial quarter of production, we generated nearly $3 million of revenue from the cleaning products in the third quarter.
We remain encouraged by our progress in this area, but more work is required to better understand the industrial cleaning products market, including our position in that value chain.
In the Mats segment, despite the continuing impact of COVID across the United States and the United Kingdom, revenues improved 5% sequentially in the third quarter to $29 million.
The improvement benefited from a late quarter surge in demand from the utility sector along the Gulf Coast where we are supporting electrical infrastructure, damaged by the recent hurricanes.
We anticipate that the hurricane-related demand will provide a positive impact to Q4 results as work continues repairing damaged utility infrastructure.
While the market conditions were extremely challenging in the third quarter, I'm pleased to note that we feel that both of our business segments had bottomed out and the worst is now behind us.
As we look forward to the fourth quarter, we are anticipating improvement in operating results across both segments.
And with that, I will hand the call over to Greg to discuss in more detail the financials for the third quarter.
I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook.
In the Fluids Systems segment, as Paul touched on, revenues from U.S. land increased 8% sequentially to $30 million in third quarter despite the 35% reduction in average rig count, reflecting our expanding market share as well as a rebound in customer spending per rig.
The Northeast and Rockies reflected the most notable areas of sequential improvement.
Our Gulf of Mexico business had an extremely challenging quarter due to the repeated hurricane shutdowns leading to nearly 50% reduction in revenues to $7 million in the third quarter.
Industrial cleaning product revenues contributed nearly $3 million in the third quarter, more than tripling the prior quarter.
In Canada, revenues declined 36% to $2 million in the third quarter with the sequential comparison negatively impacted by the timing of customer projects.
Outside of North America, as Paul touched on, COVID continued to have a negative impact on customer activity, most notably in the EMEA region were ongoing restrictions on movement of personnel and products within a number of countries have resulted in significant activity disruptions and project delays.
Although the Middle East held up well in the second quarter, we've seen a more notable COVID impact during the third quarter.
Total international revenues declined 12% sequentially to $25 million with operations in the Middle East contributing the majority of the decline.
With the COVID-driven impacts, total revenues from the Middle East pulled back 27% to $9 million in the third quarter.
On a year-over-year basis, our Fluids Systems revenues declined 56% compared to Q3 of 2019.
North American land revenues declined by $64 million or 66%, modestly favorable to the 71% decline in rig count while Gulf of Mexico revenues declined $2 million or 25% year-over-year as our expanding market share was more than offset by the impact of the 2020 hurricane season.
International revenues also declined $21 million or 45% year-over-year with declines seen across substantially all markets.
Despite realizing a meaningful impact from our cost actions, the third quarter operating loss was impacted by the $7 million sequential decline in revenues, cost inefficiencies driven by the unplanned activity interruptions in the Gulf of Mexico and EMEA region, the start-up of cleaning products packaging as well as ongoing efforts to drawdown excess inventories.
Turning to the Mats business, total segment revenues increased 5% sequentially to $29 million in the third quarter, driven by improvement in rental and services as well as product sales.
As Paul mentioned, rental and service revenues increased 3% sequentially as the late third quarter surge in demand from the utility sector along the Gulf Coast, was largely offset by a $2 million reduction from E&P markets.
Product sales improved 14% to $6 million for the quarter.
Although we are seeing continued strengthening in quoting and customer planning activity in the utility and industrial market, several scheduled utility infrastructure projects in Q3 were delayed due to the prolonged COVID-related restrictions in many states.
Further, it's worth noting that as a result of the utility industry's mutual assistance program, the hurricane response caused many utility service providers to redirect their efforts to support the emergency Gulf Coast repairs, causing delays in projects that would have otherwise moved ahead.
From an end market perspective, $20 million of our third quarter revenues is derived from the energy infrastructure and industrial markets, representing roughly 70% of our total segment revenue.
Compared to the third quarter of last year, Mats segment revenues declined $22 million or 43%, largely reflecting a $12 million decline in E&P, rental and service and $9 million decline in direct sales.
Our UK operation has been a particular bright spot year-over-year, delivering more than 20% growth in revenues over 2019.
Mats segment operating income declined $1 million sequentially to essentially breakeven, generating EBITDA of $5 million in the third quarter.
The third quarter operating results were impacted by the mix of rental and service revenues along with elevated unabsorbed fixed cost in our manufacturing facility and cost to mobilize our assets and resources to respond to the hurricane work.
As noted in last quarter's call, we pulled back production within our manufacturing facility in the third quarter as part of our inventory and cash management strategy.
Total corporate office expenses were $6.6 million in the third quarter, relatively in line with the second quarter.
On a year-over-year basis, corporate office expenses declined $3 million, primarily driven by a $1.5 million reduction in personnel costs, as well as lower M&A and strategic planning costs.
SG&A costs were $21 million in the third quarter, down slightly from the second quarter.
On a year-over-year basis, SG&A costs declined $7 million, largely reflecting lower personnel expense, strategic planning costs, and legal and professional spending.
As Paul discussed, we made meaningful progress in our debt reduction efforts.
As a result of the reduced debt balance, interest expense declined 17% to $2.4 million in the third quarter, roughly half of which reflects non-cash amortization of facility fees and discounts.
As of the end of the third quarter, the weighted average cash borrowing rate on our outstanding debt was approximately 3%.
The third quarter benefit from income taxes was $4.8 million, which reflects a 17% effective rate for the third quarter and 15% rate for the first nine months of 2020.
This compares to a net loss of $0.29 per share in the second quarter, which included $0.09 of charges and a net loss of $0.02 per share in the third quarter of last year.
For the third quarter, cash provided by operating activities was $15 million which included a $29 million net reduction in working capital.
The continued monetization of working capital benefited from a strong reduction in both inventories and receivables, particularly in the U.S. Investing activities again had a minimal impact in the quarter, illustrating the flexibility of our capital-light business model.
It's worth noting that the majority of our capital expenditures support our industrial end market activities, including the deployment of mats into the rental fleet to support the increased demand from the utility sector.
Our cash balance declined $20 million in the third quarter, reflecting our ongoing efforts to repatriate excess cash from our foreign subsidiaries, which combined with our free cash flow generation was used to pay down our U.S. asset-based loan facility by $34 million in the quarter.
With the benefit of the debt repayments, our total debt balance declined to $102 million, while our cash balance ended the third quarter at $24 million, resulting in a total debt-to-capital ratio of 17% and a net debt-to-capital ratio of 14%.
Our primary debt components include the remaining $67 million of convertible notes due December of next year and $30 million outstanding on our U.S. asset-based bank facility, which runs through 2024.
Substantially, all of our $24 million of cash on hand resides in our international subsidiaries.
Now turning to our near-term outlook.
In Fluids, with hurricane season coming to an end and North American land markets continuing to gradually improve, we expect to see a meaningful improvement in fourth quarter operating results.
The largest change is anticipated within the Gulf of Mexico, where we expect Q4 revenues will return to roughly Q2 levels.
In U.S. land, we're seeing continuing improvement in customer activity with October revenues coming in roughly 5% ahead of the Q3 run rate.
We also expect Canada will rebound as the overall market activity levels improved in the seasonally stronger Q4.
In addition, we expect our cleaning products revenues will roughly double Q3 levels, benefiting from a full quarter of production.
Looking outside of North America, although a second wave of COVID is currently hitting parts of Europe, the Middle East and North Africa, we currently expect our Q4 revenues will return to roughly Q2 levels, benefiting from increased customer activity in North Africa, and Eastern Europe, as well as an increase in stimulation chemical sales into the Middle East.
From a margin perspective, we anticipate the impact of the stronger revenues combined with the ongoing cost rationalization efforts should drive the Fluids business close to EBITDA breakeven in the fourth quarter and a return to positive EBITDA generation in the first quarter of 2021.
In the Mats segment, with the benefit of the hurricane-driven demand in the U.S. utility sector to start the fourth quarter, ongoing strength from our UK business along with the pickup in customer bidding and planning activity, we expect Q4 rental and service revenues to improve by roughly 10% from Q3.
Further, although visibility to the timing of Mats sales is always a challenge to predict, it's worth noting that several US utility companies have continued to publicly reconfirm their commitment to their capital plans.
Consequently, we believe we will see an uptick in year-end demand for product sales, potentially doubling the Q3 results.
Combining the RS with the product sale expectation, this sets up for Q4 to be the strongest revenue quarter of the year for the Mats business.
From a margin perspective, the extent of the year-end product sale demand will likely determine whether the Mats business can return to double-digit operating margin in the fourth quarter.
Corporate office spending should remain near the Q3 level in [Technical Issues] and we expect the effective tax rate for the remainder of the year to remain relatively in line with the year-to-date 2020 rate.
With regards to cash flows, we have made solid progress in monetizing working capital over the past two quarters and see additional opportunities ahead with over $200 million of net working capital remaining on our books.
More specifically, international receivables and global inventories remain well above historical levels.
So we expect further reductions in excess working capital will continue to provide a tailwind to cash generation in the coming quarters.
Inventories will likely take several quarters to optimize depending on customer activity.
Meanwhile, reflective of our capital-light model, we expect limited net capital investments for the foreseeable future with capital deployment largely targeting industrial end market diversification efforts that provide a clear line of sight to cash flow and EBITDA generation.
As illustrated by our actions over the past two quarters, we are taking prudent steps to maintain positive cash flow with a particular focus on the remaining $67 million convertible note maturity at the end of next year.
We expect that our cash on hand, cash generated from operations and the available capacity under our U.S. asset-based loan facility will provide sufficient liquidity to support our ongoing operations and satisfy our convertible note maturity.
As we noted in the past, it remains our intention to fund the maturity without accessing public capital markets.
As part of our capital structure management, we are evaluating additional sources of liquidity available to further enhance our capital structure.
Specifically, we maintain meaningful U.S. real estate as well as assets within our European operation that can be used to create additional liquidity through secured financings or alternative arrangements.
It's also worth noting that with our 30-day average share price recently falling below the NYSE's $1 listing requirement, we expect to receive notification from the NYSE regarding this non-compliance.
While we intend to evaluate the various options that are available to regain compliance with the NYSE requirement, our primary focus remains on driving operational improvement and consistent free cash flow generation as we continue to reshape the Company.
2020 has certainly been a challenging year that I do not think any of us could have predicted.
The combination of a global pandemic, volatile oil and gas prices and the historic hurricane season, certainly challenged our businesses, but we are optimistic that the worst is now behind us.
We also recognize that more work is required to streamline fluid to the new market realities of the oil and gas industry, while at the same time positioning the Company to take advantage of [Technical Issues] opportunities in the energy infrastructure and industrial cleaning product markets.
So, I'd like to close by summarizing the actions taken as part of the strategic playbook we laid out earlier this year to navigate through these difficult times and position the Company for profitable growth and improved returns on invested capital.
First, our focus on employee safety, our most important core value has not wavered in these exceptionally challenging times.
We are pleased with our improved 2020 safety performance as well as the limited number of COVID cases within our global employee base.
Second, we are aggressively managing our balance sheet by harvesting cash from working capital while leveraging our capital-light business model.
Since the beginning of the year, we've generated $36 million in free cash flow and reduced our outstanding debt by $65 million, a reduction of nearly 40%.
Third, we have been successful on diversifying our revenue streams away from the volatile oil and gas markets, particularly U.S. land, which we believe will ultimately lead to improved stability and cash flows and higher returns on invested capital.
In our Mats business [Technical Issues] 70% of our revenues from energy infrastructure and other industrial markets, which we believe provide significant growth opportunities as the energy transition gains traction.
In Fluids, we also believe that continued expansion of our international business, predominantly in the Eastern Hemisphere will provide future stability as it has in prior cycles.
Over the last 12 months, we've secured several new contracts in the EMEA region that should add incremental revenue once the COVID headwinds ultimately subside.
And as I touched on earlier, we've now successfully repositioned our Conroe, Texas oilfield chemicals blending site to an industrial and consumer cleaning products facility, providing a path forward to further diversification outside of the oil and gas markets.
And fourth, we've taken aggressive actions to rightsize our Fluids business, particularly in the U.S. and as we touched on last quarter's call, we have now reduced our Fluids Systems EBITDA breakeven point to roughly $350 million of annualized revenue.
But more opportunity exists to further optimize our footprint, driving efficiencies in our operations, while also harvesting additional working capital from the balance sheet, most notably inventory.
These efforts will not be completed within a quarter or two.
Rather, it will be a continuing process as the market evolves over the coming year.
Furthermore, I'd like to note that as we reduce our net capital deployed in Fluids, we remain very selective in future investments in the U.S. oilfield sector.
This should enable the Fluids business to more efficiently navigate market volatility and deliver stronger cash flow generation and improved returns on invested capital through future industry cycles.
In closing, I'd like to take a moment to speak about ESG, something that's long been part of our DNA at Newpark and a subject that is becoming of increasing importance around the world.
Over the past decade, we've prided ourselves on offering products that help our customers across all industries, improve the sustainability of their operations.
For examples of this, you need to look no further than our flagship products, including our fully [Indecipherable] DURA-BASE matting system which has been in the market for over 20 years and competes primarily with old-growth timber mats or our evolution water-based drilling fluid system launched in 2010, which provides customers with a number of environmental benefits over traditional diesel fuel-based products.
Through these product offerings and our larger ESG program, we continue to reduce our environmental impact while helping our customers reach their environmental goal.
For more information regarding the benefits of our environmentally focused product offerings and other facets of our ESG program, we encourage you to visit our website and select sustainability from the landing page. | reduces debt by $34 million in quarter. | 1 |
Hosting the call today are Doron Blachar, Chief Executive Officer; Assaf Ginzburg, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Actual future results may differ materially from those projected as a result of certain risk factors and uncertainties.
In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA.
Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.
Doron, the call is yours.
Ormat continues to successfully navigate the challenges of the COVID pandemic, delivering year-over-year improvements in our overall profitability and making significant progress in executing our long-term plan to increase our geothermal, storage and hybrid solar geothermal capacity.
For the year, we met our adjusted year guidance during last to improve gross margins within our electricity and storage segments.
Importantly, we achieved profitability in our energy store segment and this part of our business is growing rapidly.
We also strengthened our balance sheet through a combination of long-term debt and an equity offering.
We achieved this while bringing Puna back online and successfully resolving all pending Kenya tax assessment.
These achievements amid the global environment facing unprecedented challenges from the COVID pandemic positioning us for long-term success.
This year, we laid a solid foundation to accelerate the growth of our electricity and storage segments.
Our expectation is that 2021 will be a significant buildup here as we work to bring new geothermal, energy storage and solar PV projects online.
These projects are expected to increase our generation portfolio by 50% to approximately 1.5 gigawatts by 2023, with a significant contribution coming from our energy storage business.
This next step-up in the size of our overall portfolio represents approximately 29% increase in our geothermal and solar capacity, and up to approximately 400% increase in our energy storage assets by the end of 2023.
As a result of our ambitious plan, we estimate that we will reach an annual run rate of $500 million in adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and onwards.
Let me start my review of our financial highlights on slide five.
Total revenue for the full year 2020 were $705 million, down 5.5% from prior year.
In the quarter, revenues were down 6.8% over last year.
Both in the full year and in the quarter, the drivers for the decrease was the product segment, which was impacted by COVID-19.
Full year 2020 consolidated gross profit was $276.3 million, resulting in a gross margin of 39.2%, 310 basis points higher than in 2019.
Same increase noted in the fourth quarter with our growing electricity and Energy Storage segment driving the improved performance.
2020 ended with a net income attributable to the company stockholders of $85.5 million.
Diluted earnings per share for 2020 declined by 4% compared to last year, mainly impacted by a nonrecurring tax benefit recorded in 2019.
Excluding this tax benefit, diluted earnings per share increased by 13%.
For the quarter, diluted earnings per share increased 62.5% to $0.39 per share.
Adjusted EBITDA increased 9.3% to $420.2 million in 2020.
For the quarter, this was 7% increase compared to 2019.
Moving to slide six.
Breaking the revenue down, the electricity segment revenues slightly increased compared to 2019, supported by contribution from new added capacity at our Steamboat complex, and better performance of other projects in our portfolio, offset by lower generation at the other facilities and increased curtailment in Olkaria complex, mainly due to COVID-19.
In the product segment, revenue declined 22.5%, representing 21% of the total revenue in 2020.
The decline year-over-year is expected to continue in 2021, as the continued global pandemic limited and still limited ability to sign new significant contracts.
Energy Storage segment revenues increased 7.6% year-over-year, to $15.8 million and represented 2% of our total revenue for the full year 2020.
This growth mainly driven by revenues from the acquired Pomona energy storage assets and the contribution of Rabbit Hill in Texas.
In the fourth quarter, the electricity segment revenues grew 1.3% to $146 million while product segment revenue decreased 37.5% to $27 million in the fourth quarter of 2020.
Energy Storage segment revenue were $5.8 billion, increasing 36% year-over-year compared to $4.3 million in the fourth quarter of 2019.
Let's move to slide seven.
Gross margin for the electricity segment for the full year expanded year-over-year to 44.6%.
For the fourth quarter, gross margin was 45.2%.
The improvement was primarily due to improved efficiency at some of our power plants as well as decrease in lease expenses related to the Puna due to the termination of the lease agreement.
Electricity gross profit in the full year 2020 was positively impacted by $7.8 million in business interruption insurance payments compared to $9.3 million in 2019.
In the product segment, gross margin was 22.4% in the full year of 2020 compared to 23.6% in the prior year.
The product segment gross margin in 2020 was impacted by higher cost of revenue related to the NASA project that we build in New Zealand, which was impacted by, among other things, restrictions and limitations associated with COVID-19.
In the fourth quarter, we saw an increase in gross margin in the product segment of 160 basis points to 29.8%.
Energy Storage segment reported a positive gross margin of 11.1% for 2020 compared to a negative gross margin in 2019.
The improvement was primarily driven by our acquisition of the Pomona Energy storage assets.
Turning to slide eight.
The electricity segment generated 92% of the total adjusted EBITDA in the full year of 2020, and electricity segment adjusted EBITDA increased 11% over last year.
The product segment generated 7% of the total adjusted EBITDA for the full year of 2020.
The Storage segment reported, for the first time, a full year positive adjusted EBITDA of $3.2 million, including $1.7 million in the fourth quarter.
The key takeaway here is that all of the three segments are now contributing positive adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
Turning to slide nine.
For the full year 2020, we successfully raised approximately $760 million in the aggregate, including $340 million net proceeds from the issuance of common stock, [$290] million profit from the Bond Series four and approximately $130 million of proceeds from senior unsecured loan.
Our net debt as of December 31, 2020, was $920 million.
Cash and cash equivalents and restricted cash and cash equivalent as of December 31, 2020, was $537 million, compared to $153 million as of December 31, 2019.
The accompanying slide breaks down the use of cash for the 12 months and illustrate our ability to invest back in the business, service the debt and continue to return capital to our shareholders in the form of cash dividends, all from cash generated by our operation.
Our long-term and short-term debt as of December 31, 2020, was $1.46 billion, net of deferred financing costs.
And it's a payment schedule is presented on slide 31 in the appendix.
The average cost of debt for the company is currently 4.7%.
On February 24, 2021, the company's Board of Directors declared, approved and authorized a payment of quarterly dividend of $0.12 per share pursued to the company dividend policy.
The dividend will be paid on March 29, 2021, to shareholder of record of the close of Business day on March 11, 2021.
In addition, we expect to pay dividend of $0.12 per share in the next three quarters, representing a 9% increase over Q3 2020 dividend.
That concludes my financial overview.
Turning to slide 12 for a look at our operating portfolio.
Power generation in our power plants declined by 3.1% compared to last year.
This decline is mainly due to the lower generation at our oil facilities and increased customer in Olkaria power plant.
However, revenues of our electricity segment remain unchanged with higher average rate per megawatt hour of $89.6 compared to $86.6 million for last year.
We adjusted the generation capacity of our existing power plants based on their performance this year, as detailed on the slide, and the current portfolio stands at 932 megawatts compared to 914 megawatts last year.
This year, the main addition was 19 megawatts in Steamboat complex following the completion of the Steamboat enhancement.
As noted on slide 13, Puna reserved operations in November 2020, 2.5 years after the eruption of the Kilauea volcano, currently, at low output relative to its generating capacity before the eruption.
In November, Puna reached 10-megawatt generating capacity, and now it is offering at 13 megawatts.
We continue our field recovery work and drilling of news, and we expect Puna to increase power generation during the second quarter of 2021.
We target close to full production at Puna by the middle of this year.
On the insurance front, for the entire 2020, we collected $29.1 million insurance proceeds, the $7.8 million were recorded under cost of revenues and the balance in other operating income.
We are still working with our council to collect the rest of what we believe should be paid to us.
Turning to slide 14, for an update on our international fund and specifically in Kenya.
As discussed earlier, one of the impacts COVID had on our operations in Kenya relates to increased curtailment there by KPLC, which was the main driver to a reduction in revenue of approximately $6.5 million compared to prior year.
The curtailment continued into the fourth quarter in a lower frequency compared to the first three quarters in 2020.
We are also encouraged by the improved collection from KPLC that continues reducing the overdue amount.
Also in Kenya, we had an important achievement, concluding all open tax audits with the Canadian tax authorities and reached a favorable settlement related to the 2019 Flex assessment originally totaling $200 million.
The settlement agreement extended or this period for the issues addressed within the main assessment to cover the period from 2013 through 2019.
Full financial impact was recorded in the fourth quarter of 2020.
Turning to slide 15 for an update on our backlog.
Our product segment has been the part of our business most impacted by the COVID-19 pandemic, with our customers' projects around the world being delayed.
However, we believe this is a short term phenomenon.
In Turkey, a new feed-in tariff was announced that although it is lower than the previous feeling tariff, we expect the market to adapt to it, and we anticipate new potential projects in Turkey in the coming months.
As of February 24, 2021, our product segment backlog was $33 million.
We anticipate continued weakness in our product backlog and a result our 2021 guidance for this segment's revenue is significantly lower than recent years.
Our business that is resilient and a key part of it relates to a vertically integrated structure, which enables us to better allocate our manufacturer capacity and resources while focusing on internal initiatives to support our electricity segment growth.
We started to see this shift already in the second quarter of 2020 and in the full year 2020.
Inter-segment revenue increased more than 30% over 2019 and 130% over 2018.
Ormat is the only vertically integrated company in the geothermal industry.
We can efficiently transition from manufacturing components for third-party customers to develop components for our company-owned projects.
This means we can bring projects online more effectively by using internal resources and expertise.
This will also extend our energy storage segment as well as our construction expertise is tough to help development at energy storage products.
As a result, we are also able to feed capacity at our manufacturing segment, avoiding unutilized expenses.
However, we firmly believe that there's a demic base, we will see increasing demand for our products around the world.
Partially offsetting the weakness of the product segment, has been a consistent improvement in our Energy Storage business.
Energy Storage discussed on slide 16 continues to grow and to become more profitable, as Assaf presented in his financial remarks.
This year, we commissioned the Rabbit Hill 10-megawatt storage facility in Texas, which provides auxiliary services and energy optimization to the wholesale markets managed by Ormat.
On February 13, weather conditions in Texas caused abnormal reduction in electricity supply, along with record demand for electricity.
Some assess that events that are unfolding in airport represents one of the worse shots to U.S. electricity market in the recent decades.
The extreme weather conditions resulted in shortage of electricity supply, which caused electricity and prices to reach record of thousands of dollars per megawatt hour, probably all-time high.
Starting February 16 and until February 19, our Rabbit Hill facility could not charge from the grid due to the energy emergency alert which resulted in limited ability of the Rabbit Hill storage facility to provide our services.
In order to reduce our merchant risk and increase our contracted in 2021, the company signed a transaction for 80% of the volume at a fixed rate, exchanging the floating RF revenue -- for a fixed our revenue at the end of 2020.
Due to the inability to operate the facility during these times, we expect to record in Q1 financial results, up to approximately $11 million of nonrecurring loss associated with this hedge.
This event is still unfolding, and our goal is to minimize our exposure.
This year, we also completed two acquisitions: One, an operating facility in California, Pomona to shift the EBITDA margins in this business from loss to profit.
The second acquisition was an asset under development upfront in Texas that will contribute for the growth of this business.
Before I move to a discussion on our growth plans, I would like to briefly discuss our commitment to sustainable future and step we took this year to support the environment our community and our employees, in slide 18.
Sustainability is the core of our business and our way of life, saving emissions by generating clean energy that replaces the meeting conventional forms of energy.
Our goal to increase our clean energy portfolio aligns with sustainability values and further sales emissions to the environment globally.
In 2020, the health and safety of Ormat employees, our contractors and the communities in which we live, work and do business are of utmost important.
Throughout this global pandemic, Ormat followed strict protective measures necessary to safeguard every stakeholder health and safety.
This includes adhering to all government regulations and maintaining clear comprehensive plans and protective measures for employees who work in our energy plants, manufacturing facility, offices and elsewhere.
We believe that our success depends in large part on our ability to create and engage with us.
Accordingly, investing in our employees is a key element of our corporate strategy.
Since the beginning of the pandemic outbreak, we did not lay off any employee due to COVID-19.
In the communities we operate, we have created special social projects, adding thousands of people and donating food and medical supplies.
Also, we presented personal protective equipment to hospitals in Kenya, Guatemala, Honduras and the U.S. Moving to slide 20.
Our operating portfolio stands to date at over one gigawatt, comprising of 873 megawatts of geothermal, 53 megawatts offering, 7-megawatt of hybrid solar and 73 megawatts of energy storage.
We have a robust growth plan to increase by 2023, our total portfolio by almost 50%, with a significant contribution from the Energy Storage business, as detailed in the following slide.
This increase is subject to obtaining all permitting and regulatory approvals required as well as completing the development and construction of these power plants as planned.
Moving to slide 21.
Our medium-term goal is to increase the capacity of the electricity segment.
From our previous estimate of approximately 170 megawatts by end of 2022 to between 250 and 270 megawatts by the end of 2023, representing a total increase of up to 29%.
In our rapidly growing energy storage portfolio, we are planning to enhance our growth and to increase our portfolio by up to approximately 400% -- between 200 megawatts to 300 megawatts by the end of 2023.
This represents a significant increase compared to our previous growth target of 80 to 175 megawatts, we set for 2021, 2022.
Additionally, we believe that we may see additional increase coming from potential M&A activities.
The next slide explains 14 projects under way that comprise the majority of our 2023 growth plans.
We already secured long-term PPA for the majority of these projects and affirm the resource viability.
While our electricity segment has navigated the pandemic well, we had some challenges and changes to the timing of projects coming online.
The current expected commercial operation of CD4 inhibitor is during the first half of 2021, a change that was caused mainly due to delays in permitting due to COVID-19.
Slide 23 shows the geoterminal pipeline we hold for long-term growth.
These are additional prospects that are in different states of exploration.
Moving to slide 24 and 25.
The second layer of our growth plan comes from Energy Storage segment.
Slide 24 demonstrates the energy storage facilities we have announced or started construction.
The other projects included in our growth plans are in different stages of development, and the release will require a site control and execution of interconnection agreement, all obviously subject to economic justification.
Our current pipeline presented in slide 25, which is updated frequently include 33 names, potential projects with a total potential capacity of over one gigawatt, which are in different stages of development.
As I mentioned earlier, we believe that we can develop from this potential pipeline between 200 to 300 megawatts by the end of '23, mainly in Texas, New Jersey and California.
This target excludes any add-on for M&A activities that we are proactively seeking.
Moving to slide 26.
The significant growth in both our electricity and storage segments will require robust investments over the next couple of years.
To fund this growth, we have over $900 million of cash and available and restricted cash and lines of credits.
Our total expected capital expense for 2021 includes approximately $450 million for capital expenditure for construction of new projects of geothermal, solar and storage; enhancement to our existing geoterminal power plant at management release for construction; maintenance of capital expenditures, including our work at the Puna power plant; and enhancements to our production facilities as detailed in slide 32 in the appendix.
Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives.
We expect total revenues between $640 million and $675 million, with electricity segment's revenue between $570 million and $580 million.
The electricity segment includes $32 million from the Puna power plant in Hawaii, assuming we are without plans, mainly close to full operations in mid-2021.
We expect product segments revenue between $50 million to $70 million.
Revenues for energy storage is expected to be between $20 million and $25 million.
We expect adjusted EBITDA to be between $400 million and $410 million.
We expect annual adjusted EBITDA attributable to minority interest to be approximately $32 million.
Moving to the last slide.
The winter of 2020, 2021 brought away the beneficial legislation to the renewable energy industry in the United States.
In December, the Congress package included extensions to the production tax credit and investment tax credits for renewable projects, including geothermal, solar and storage and recovered energy projects.
While the December legislation did not provide a tax credit for stand-alone energy storage facilities, storage facilities related to the functioning of the solar facility were determined to be eligible for the IT fee, and we believe that our after energy storage facility can benefit from it.
In addition, safe harbor provision for renewable energy developers to claim this tax credit was extended from five to 10 years.
This enhanced flexibility, will encourage renewable developers to get construction going on more projects over the next decade.
Finally, a few days ago, the California Public Utility Commission, the CPUC issued a ruling requesting comment on a proposal for 1,000 megawatts, each of new geoterminal and long duration storage procurement between 2024 and 2026.
With the tailwind of this support, 2021 is going to be a significant buildup year, accelerating our growth in the storage and electricity with a goal to reach $500 million of annual run rate of adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and onwards.
This goal shows that our way to deliver accelerated profitability growth in the geothermal business is also applicable to our storage business.
This will happen by applying our vertical integration approach, mitigation, the partial inherent merchant risk through diversification, using our stable geothermal portfolio as a solid foundation to our storage business and maintaining a strong capital position with access to various sources of capital.
We are planning to conduct an Analyst Day likely in May of this year, where we expect to discuss in more details the growth goals in our electricity and storage segments, and our plans achieving the adjusted EBITDA goal. | q3 earnings per share $0.26. | 0 |
Also on the call are Brian McDade, chief financial officer; and Adam Reuille, chief accounting officer.
Please note, our 8-K filing is still in process with the SEC.
However, it has not yet been accepted to it.
Now, for those of you who would like to participate in the question-and-answer session, we ask that you please respect our request to limit yourself to one question and one follow-up question so we might allow everyone with interest the opportunity to participate.
I'm pleased to report our business is solid and improving.
Demand for our space and our well-located properties is increasing.
I'll turn to some highlights.
Our profitability and cash flow have significantly increased.
Second-quarter funds from operations were $1.22 billion or $3.24 per share.
Our domestic operations had an excellent quarter.
Our international operations continue to be affected by governmental closure orders and capacity restrictions, which cost us roughly $0.06 per share for this quarter compared to our expectations due to the equivalent of a two-and-a-half month of closures.
We generated over $1 billion in cash from operations in the quarter, which was $125 million more than the first quarter.
And additionally, compared to the second quarter of last year, our cash flow from operations was breakeven due to the lockdown.
Domestic-international property NOI combined increased 16.6% year over year for the quarter and 2.8% for the first half of the year.
Remember, the first quarter of 2020 was relatively unaffected by the COVID-19 pandemic.
These growth rates do not include any contribution from the Taubman portfolio or lease settlement income.
Malls and outlets occupancy at the end of the second quarter was 91.8%, an increase of 100 basis points compared to the first quarter.
We continue to see demand for space across our portfolio from healthy local, regional and national tenants, entrepreneurs, restaurateurs and mixed-use demand ever so increasing day by day.
Our team is active in signing leases with new and exciting tenants.
Average base minimum rent was $50.03.
Our average base rent was impacted by the initial lower base rents we agreed to in addressing certain tenant COVID negotiations in exchange for lower sales breakpoints.
The variable rents that were recognized in the first half of the year were included.
It would add approximately $5 per foot to our average base minimum rent.
Leasing spreads declined again due to mix of deals that are now included, as well as the activity that had fallen out of the spread given its rolling 12-month nature and metric.
New leasing activity that has affected the spread include large footprint entertainment, fitness and large-scale retailers, big boxes.
Big box deals reduced our opening rate as they're all included in our spread metric.
As a reminder, the opening rate included in our spread calculation does not include any estimates for percentage rent-based income based on sales, as I mentioned just recently.
Leasing activity accelerated in the quarter.
We signed nearly 1,400 leases for approximately 5.2 million square feet and had a significant number of leases in our pipeline.
Through the first six months, we signed 2,500 leases for over 900 -- I'm sorry, 9.5 million square feet.
Our team executed leases for 3 million more square feet or over approximately 800 more deals compared to the first six months this year, as well as -- I'm sorry, compared to the first six months of 2019.
We have completed nearly 90% of our expiring leases for 2021.
We recently had deal committee, and what I'm told by my leasing folks is that that was the most active deal committee that they've had in several years.
Now, retail sales continued to increase.
Total sales for the month of June were equal to June 2019 and up 80% compared to last year and were approximately 5% higher than May sales.
If you exclude two well-known tenants, our mall sales were up 8% more than compared to June of 2019.
Multiple regions in the US recorded higher sales volume in June and for the second quarter, compared to our 2019 levels.
We're active in redevelopment and new development.
We opened West Midlands Designer Outlet, and we started construction in the Western Paris suburb for a third outlet in France.
The end of the quarter, new development/redevelopment was underway across all our platforms for our share of $850 million.
Our retail investments posted exceptional results.
All of our global brands within SPARC Group outperformed their budget in the quarter on sales, gross margin and EBITDA, led by Forever 21 and Aeropostale.
SPARC's newest brand, Eddie Bauer, also outperformed our initial expectations.
We're also very pleased with JCPenney results.
They continue to outperform their plan.
Their liquidity position is growing, now $1.4 billion, and they do not have any outstanding balance on their line of credit.
Penny will launch several private national brands later this year, as well as their new beauty initiative.
Taubman Realty Group is operating their 2021 budget at a level above that and above our underwriting.
And their portfolio, our portfolio shows resilience as sales are quickly returning to pre-pandemic levels.
Year to date through June, retail sales are 13% higher than the first half of 2019.
As you would expect, we've been very active in the capital markets.
We refinanced 13 mortgages in the first half of the year for a total of $2.2 billion in total, our share of which is $1.3 billion at an average interest rate of 2.9%.
Our liquidity is more than $8.8 billion, consisting of $6.9 billion available on our credit facility and $1.9 billion of cash, including our share of JV cash.
And again, our liquidity is net of $500 million of US commercial paper that's outstanding at quarter-end.
We paid $1.40 per share of dividend in cash on July 23 for the second quarter.
That was a 7.7% increase sequentially and year over year.
Today, we announced our third-quarter dividend of $1.50 per share in cash, which is an increase of 7.1% sequentially and 15.4%, 15.4% year over year.
The dividend is payable September 30.
You will know that going forward, we are returning to our historical cadence of declaring dividends as we announce our quarterly earnings.
Given our results for the first half of the year, as well as our view for the remainder of 2021, we are increasing our full-year 2021 FFO guidance range from $9.70 to $9.80 per share to $10.70 to $10.80 per share.
This is an increase of $1 per share at the midpoint, and the range represents approximately 17% to 19% growth compared to 2020 results.
Before we open it up to Q&A, I wanted to provide some additional perspective.
First, we expect to generate approximately $4 billion in FFO this year.
That will be approximately 25% increase compared to last year and just 5% below our 2019 number.
To be just 5% below 2019, given all that we've endured over the last 15, 16 months, including significant restrictive governmental orders that forced us to shut down unlike many other establishments is a testament to our portfolio and a real testament to the Simon team and people.
Second, we expect to distribute more than $2 billion in dividends this year.
Keep in mind, we did not suspend our dividend at any point during the pandemic.
And in fact, we have now increased our dividend twice already this year.
Now, just a point on valuation.
And I tend to never really talk about it, but I thought it was appropriate today.
Our valuation continues to be well below our historical averages when it comes to multiple -- FFO multiples compared to other retail REITs, retailers and the S&P 500.
And our dividend yield is higher than the S&P 500 by more than 250 basis points, treasuries by 325 basis points and the REIT industry by 150 basis points.
And as I mentioned to you, our dividend is growing.
Our company has a diverse product offering that possesses many, many multiple drivers of earnings growth, accretive capital investment opportunities and the balance sheet to support our growth.
We are increasing our performance, profitability, cash flow and return to our shareholders. | simon property group raises quarterly dividend.
sees fy ffo per share $10.70 to $10.80.
q2 ffo per share $3.24.
u.s. malls and premium outlets occupancy was 91.8% at june 30, 2021.
declared a quarterly common stock cash dividend of $1.50 for q3 a 7.1% increase compared to q2 dividend. | 1 |
Joining us today are Brian Chambers Owens Corning's Chair and Chief Executive Officer and Ken Parks, our Chief Financial Officer.
In order to accommodate as many call participants as possible, please limit yourselves to one question only.
Please reference Slide 2 before we begin where we offer a couple of reminders.
We undertake no obligation to update these statements beyond what is required under applicable securities laws.
Adjusted EBIT is our primary measure of period over period comparisons, and we believe it is a meaningful measure for investors to compare our results.
Consistent with our historical practice, we have excluded certain items that we believe are not representative of our ongoing operations when calculating adjusted EBIT and adjusted earnings.
We adjust our effective tax rate to remove the effect of quarter-to-quarter fluctuations, which have the potential to be significant in arriving at adjusted earnings and adjusted earnings per share.
We also use free cash flow and free cash flow conversion of adjusted earnings as measures helpful to investors to evaluate the company's ability to generate cash and utilize that cash to pursue opportunities to enhance shareholder value.
The tables in today's news release in the Form 10-Q include more detailed financial information.
I hope all of you are staying healthy and safe.
Owens Corning posted strong 3rd quarter results today consistent with our July outlook and building on the momentum of an outstanding first half of the year.
Our global team continued to execute extremely well in a very dynamic environment overcoming higher inflation as well as some supply chain disruptions to deliver another great quarter.
Our results continue to demonstrate the resiliency of our team, the strength of our commercial and operational execution and the durability of the earnings power of our company.
I'll start with an overview of our 3rd quarter performance before turning that over to Ken who will provide additional details on our financial results.
I'll then come back to talk about our business outlook for the remainder of the year.
As always, I will begin my review of safety.
During the 3rd quarter, our commitment to safety resulted in an RIR of 0.64, which is a significant improvement compared to the same period last year, with more than half of our facilities operating injury-free for more than a year.
While we are generally encouraged by the recent decrease in COVID cases and gradual increase in vaccinations, It's clear the impacts of the pandemic will persist in the near term.
We will continue to follow enhanced safety protocols and operate our facilities with a strong focus on working together to keep each other, our customers and our suppliers healthy and safe.
Financially, we delivered record 3rd quarter revenue of $2.2 billion, an increase of 16% compared with the same period last year and adjusted EBIT of $400 million.
Our performance during the quarter was again a combination of strong market volumes and outstanding execution with each business delivering a positive price cost mix and great manufacturing performance.
This resulted in an adjusted EBIT margin for the Company of 18% with all 3 of our businesses, posting double-digit EBIT margins for a 5th consecutive quarter.
Demand for our US residential products which account for about half of our enterprise revenues as well as our commercial industrial products remained strong in Q3 and we continue to operate with extended lead times for many of our products.
Within this tight supply chain environment, our global teams, especially in supply chain, manufacturing, customer service and sales continue to work extremely hard to increase our production and meet the needs of our customers.
In addition to our focus to finish the year strong, we continue to make strategic choices to enhance the earnings power of the company and create additional growth opportunities by allocating resources to product lines where we can strengthen our market position and provide a sustainable solution.
I would like to take a few moments now to share more about the work we are doing with 2 of our product lines to position us for the future.
As part of our focus to build market-leading positions, we continuously evaluate the strength of our products and position in the market.
Based on this analysis, we have decided to explore strategic alternatives for one of our glass reinforcements product lines within our composites business thermoplastic dry use chopped strands.
The Dutch product line is primarily used in automotive and electronic applications and generates annual revenues of approximately $270 million.
The focus of our valuation will include divesting or repurposing these assets to manufacture other product lines, whether it's material science capabilities and relationships across a variety of core markets, applications and geographies, our composites business is an integral part of our company and a key contributor to our growth strategy.
The decision to explore alternatives for these production assets and product line is consistent with our approach to focus on high-value material solutions where we can develop market-leading positions, such as in building a construction, renewable energy and infrastructure.
Product and process innovation continues to be keyed how we drive growth, improve our operating performance and create value for our customers.
A great example this ongoing work is our PINK Next Gen Fiberglass Insulation launched in August.
This latest product innovation leverages advanced fiber technology to create a sustainable product that is faster and more comfortable to install compared to existing products in this space.
This is particularly important given the performance expectations and tight timelines of today's contractors and builders.
Given our commitment to sustainability, I'm pleased to note that PINK Next Gen insulation is made with 100% wind powered electricity in such an industry standard for recycled content.
Our launch of Next Gen fiberglass insulation, is the most recent example of how our industry leadership and innovation is expanding growth opportunities for our customers and Owens Corning.
We are also excited to see how our sustainability leadership and mission to build a sustainable future through material innovation is creating new growth opportunities across the enterprise.
As we engage with more and more customers to develop solutions which achieve their key sustainability goals.
The priority topics for collaboration focus on decarbonization including product specific embodied carbon reduction, circular economy, which includes both recycled content and end of life recycling solutions and product design transparency specifically related to the impact of our products throughout their lifecycle.
We look forward to sharing more details about these exciting developments to help our customers and grow our company during our upcoming Investor Day.
As Brian commented Owens Corning delivered another outstanding quarter with strong revenue and earnings growth across all 3 businesses.
While demand conditions remain strong across the markets we serve, our ongoing execution was fundamental to driving this performance, allowing us to manage through supply chain challenges and accelerating inflation.
As we talked about in our second quarter call, inflation continues to impact almost all material input costs especially asphalt and other petroleum based materials along with transportation and energy costs.
Overall positive price realization more than offset the inflation headwind in all 3 businesses in the quarter and year-to-date.
As a result, 3rd quarter operating margins reached 18% nearly 300 basis points higher than the same period last year.
The expanded earnings combined with focused working capital management and capital investments drove healthy free cash flow generation in the quarter and strong free cash flow conversion year-to-date.
Now beginning on Slide 5, we can take a closer look at our results.
Wwe reported consolidated net sales of $2.2 billion for the 3rd quarter, that's up 16% over 2020 and produced double-digit revenue growth in all 3 segments.
Our commercial and operational execution were instrumental in delivering these results as demand conditions remain strong in the markets we serve and we overcame supply chain disruptions with limited inventories.
Adjusted EBIT for the 3rd quarter of 2021 was $400 million, up $111 million compared to the prior year.
Earnings grew year-over-year, in all 3 businesses, resulting in double-digit EBIT margins for the 5th consecutive quarter.
Adjusted earnings for the 3rd quarter were $162 million or $2.52 per diluted share compared to $193 million or $76 per diluted share in the 3rd quarter of 2020.
Depreciation and amortization expense for the quarter was $129 million, up $9 million compared to Q3 2020.
our capital additions for the 3rd quarter were $90 million, up $22 million as compared to the 3rd quarter of last year.
We'll continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and prioritizing investments that drive growth and productivity.
Slide 6 reconciles our 3rd quarter adjusted EBIT of $400 million to our reported EBIT of $394 million during the quarter we recorded $20 million of restructuring costs associated with previously announced actions, which includes $19 million for the Santa Clara facility sale.
Those charges were partially offset by a $15 million gain on the sale of land related to a previously announced facility closure.
In addition, we had $1 million of acquisition related charges for, which was acquired during the quarter.
These items are excluded from our adjusted 3rd quarter EBIT.
Slide 7 provides an overview of the changes in 3rd quarter adjusted EBIT from 2020, 2021.
Q3 adjusted EBIT increased $111 million over the prior year, reaching $400 million.
Despite supply chain challenges and accelerating inflation, all 3 segments delivered year-over-year EBIT growth.
Now turning to slide 8, I'll provide more details on the performance of each of the businesses.
The insulation business, continue to build on the strong performance demonstrated in Q2, delivering double-digit year-over-year EBIT growth and 400 basis points of EBIT margin expansion.
Q3 revenues were $815 million, a 20% increase over the 3rd quarter of 2020.
We saw solid realization on announced pricing actions, as well as volume growth across the business.
Reflecting continued strength in both US new construction and the commercial end markets we serve globally.
In North American Residential Fiberglass Insulation, we saw year-over-year growth driven by positive pricing and stronger volumes benefiting from incremental capacity additions over the past year.
In technical and global insulation, demand remained strong for our highly specified products with the most notable year-over-year growth coming again from North America and Europe, with growth in both foam glass and mineral wool.
Pricing was positive versus prior year and more than double what we achieved in Q2.
For the Insulation business overall, positive price more than offset the impact of accelerating energy, material and transportation inflation.
In residential insulation, we continue to maintain a positive price cost mix in the face of accelerating inflation.
While technical and global insulation price lagged inflation, the price cost gap narrowed considerably versus Q2.
We continue to execute well in our manufacturing operations and benefited from the recovery of $18 million of fixed cost absorption on higher production.
We delivered margins of 15% and EBIT of $124 million a quarterly record and up from $73 million in the 3rd quarter of 2020.
The composites business produced another record earnings quarter.
Sales for the 3rd quarter were $591 million, up 13% compared to the prior year.
The top line growth was driven by strong commercial performance with our ongoing strategy in the business to focus on higher value applications driving favorable mix, which more than offset slightly lower volumes.
We continue to see strength in demand for our higher value applications as well as demand in key geographies where our local supply for local demand model is being valued by customers.
We also continue to see positive pricing in composites resulting from contract negotiations, as well as price increases for non-contractual business.
In the quarter, positive price more than offset the inflation headwinds from materials, energy and higher transportation costs.
Operationally, we continued to execute well with solid manufacturing performance and recovery of $29 million of prior year curtailment costs.
In the 3rd quarter composites delivered record EBIT of $101 million, up $46 million over last year and EBIT margins reached 17%.
Slide 10 provides an overview of our Roofing business.
The roofing business produced a strong 3rd quarter, sales in the quarter were $869 million, up 14% compared to the prior year.
The US asphalt shingle market was down 9% in Q3 as compared to the prior year, while our US shingle volumes were up slightly year-over-year.
We continue to see good realization on our announced price increases more than offsetting accelerating asphalt, other material and delivery inflation.
Contribution margins remained strong.
For the quarter, EBIT was $12 million, up 16 million from the prior year, achieving 24% EBIT margins.
Turning to Slide 11, I'll discuss significant financial highlights for the 3rd quarter and full year 2021.
Earnings expansion along with continued discipline around management of working capital, operating expenses and capital investments resulted in strong cash flow.
Free cash flow for the 3rd quarter of 2021 was $400 million bringing year-to-date free cash flow to $925 million, up $411 million over the same period last year.
Year-to-date free cash flow conversion remains strong.
With this cash flow performance, we further strengthened our already solid investment grade balance sheet by repaying in the quarter the remaining $184 million due on our 2022 senior notes.
At quarter end, the company had ample liquidity of approximately $2 billion, consisting of $920 million of cash and nearly point $1.1 billion of combined availability on our bank debt facilities.
During the 3rd quarter of 2021, the company repurchased 1.7 million shares of common stock for $160 million.
Through September 30, 2021, the company returned $516 million to shareholders through share repurchases and dividends equating to approximately 56% of year-to-date free cash flow.
We remain focused on consistently generating strong free cash flow returning at least 50% to investors over time and maintaining an investment grade balance sheet.
Now turning to our 2021 outlook for key financial items, general corporate expenses are expected to range between $150 and $155 million.
Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $500 million.
For interest expense, we've narrowed our estimated range to be between $125 and $130 million and finally, we expect our 2021 effective tax rate to be 26% to 28% of adjusted pre-tax earnings and our cash tax rate to be 18% to 20% of adjusted pre-tax earnings.
During the 3rd quarter, our company continued to perform well, giving us great momentum as we finish the year.
In the 4th quarter, we expect US residential repair and remodeling and new construction markets as well as our global commercial and industrial end markets to remain strong.
Based on current trends we are seeing across the enterprise, we anticipate the impact of inflation to be at or slightly above what we experienced in Q3.
Given our pricing actions throughout the year, we expect each of the businesses to maintain a positive price cost mix in Q4.
Moving through the quarter, we will continue to closely monitor and manage inflation supply chain disruptions and the regional impacts of COVID on our businesses.
Through the first 3 quarters of the year, our commercial and operational execution has generated strong financial results and we expect this to continue in Q4 delivering earnings in the quarter close to last year.
Now consistent with prior calls, I will provide a more detailed business specific outlook for the 4th quarter.
Starting with Insulation, we expect year-over-year growth in our North American residential fiberglass insulation business and anticipate our volumes to be up mid to high single digits versus prior year.
We expect price realization, similar to what we experienced in Q3.
With the recently announced December increase having more impact as we get into the first quarter of next year.
In our technical and global insulation businesses, volumes should grow low to mid single digits with ongoing demand for our products in global building and construction applications.
Similar to residential installation, we would expect price realization in these businesses to be similar to what we saw in Q3.
In terms of inflation, we expect material and energy cost increases in the 4th quarter to be higher than what we experienced in Q3 and anticipate that continued price realization will result in a positive price cost mix in the quarter.
Additionally, we expect our fixed cost absorption to improve by approximately $5 million versus prior year.
Given all this, we expect to see strong earnings growth in Q4 versus prior year with EBIT margins of approximately 15%.
Moving on to composites, in the 4th quarter, we expect revenue to improve year-over-year primarily driven by continued price realization and favorable mix which we would expect to more than offset volume declines of mid-single digits for the quarter.
We anticipate composites pricing will improve by mid single digits offsetting the impact of additional inflation and that we should benefit from the recovery of $15 to $20 million of curtailment costs versus 4th quarter 2020.
Overall, we expect to realize strong earnings growth in the quarter versus prior year with EBIT margins of approximately 14% and in roofing, we anticipate the market to finish up for the year, but expect a more difficult comparison to the 4th quarter of prior year with market volumes down mid-teens driven by the expectation for a more normal winter season,;ower storm demand and the likelihood of ongoing supply chain disruptions.
We would expect our volumes to largely in line with the market.
Roofing pricing is expected to be favorable in Q4 based on the continued realization of our previously announced price increases.
Although, less than what we saw in Q3 due to the lower volumes.
Additionally, in terms of revenue, we expect a headwind from mix in the quarter, similar to what we saw in Q3.
Overall, we anticipate 4th quarter Roofing EBIT margins of approximately 20% on lower volumes and a narrowing but positive price cost mix.
With that, view of our businesses, I'll close with a couple of enterprise items.
Our team remains committed to generating strong operating and free cash flow.
In terms of capital allocation, our priorities remain focused on reinvesting in our business especially productivity and organic growth initiatives returning at least 50% of free cash flow to shareholders over time through dividends and share repurchases and maintaining an investment grade balance sheet.
In addition, we continue to evaluate investments and acquisitions that leverage our commercial, operational and geographic strengths and expand our building and construction material product and system offering.
One last note before moving on to the Q&A session, I'd like to remind everyone, we will be hosting a virtual Investor Day on Wednesday.
Ken and I will be joined by members of our executive leadership team to discuss the company's strategic priorities, financial objectives and initiatives to drive long-term stakeholder value.
We hope you will join us in 2 weeks.
In closing, our team is proud of the outstanding operational and financial performance we delivered in the 3rd quarter and are excited by the opportunities we have to grow our company, help our customers win in the market and deliver value to our shareholders. | compname reports q3 adjusted earnings per share $2.52.
q3 adjusted earnings per share $2.52.
q3 sales rose 16 percent to $2.2 billion. | 1 |
dollargeneral.com under News & Events.
We also may reference certain financial measures that have not been derived in accordance with GAAP.
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As a testament to their efforts, our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments.
The quarter was highlighted by net sales growth of 16% in our combined nonconsumable categories, a 208 basis point increase in gross margin rate and double-digit growth in diluted EPS.
Despite what continues to be a challenging operating environment, we are increasing our sales and diluted earnings per share guidance for fiscal 2021 to reflect our strong first quarter performance.
John will provide additional details on our outlook during his remarks.
As always, the health and safety of our employees and customers continue to be a top priority while meeting the critical needs of the communities we serve.
And we believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17,000 stores located within 5 miles of approximately 75% of the US population.
Overall, we are executing well against our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.
Now let's recap some of the top line results for the first quarter.
As we lapped our most difficult quarterly comp sales comparison of the year, net sales decreased 0.6% to $8.4 billion, driven by a comp sales decline of 4.6%.
Notably, comp sales on a 2-year stack basis increased a robust 17.1%, which compares to the 15.9% 2-year stack we delivered last quarter.
Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size.
And while customers continue to consolidate trips, on average they continue to spend more with us compared to last year.
From a monthly cadence perspective, comp sales increased 5.7% in February despite a headwind from inclement weather across the country.
For the month of March, which represents our most difficult monthly sales comparison of the year, comp sales declined 11.2%.
Importantly, beginning in mid-March and in line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first two weeks of the month, especially in our nonconsumable categories.
Comp sales declined 4.3% in April, and while year-over-year growth in nonconsumable sales moderated in comparison to March, they were positive overall despite a more challenging lap.
Overall, each of our three nonconsumable categories delivered a comp sales increase for the quarter.
Of note, comp sales growth of 11.3% in our combined nonconsumable categories and 29.8% on a comparable 2-year stack basis significantly exceeded our expectation and speaks to the continued strength and sustained momentum in these product categories, enhanced by the benefit from stimulus.
Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data.
Importantly, we continue to be encouraged by the retention rates of new customers acquired over the past several quarters and are working hard to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives.
In addition, we recently published our third annual Serving Others report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics, and we look forward to continued progress on our journey as we move ahead.
Collectively, our first quarter results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value.
We operate in one of the most attractive sectors in retail and believe we are well positioned to continue advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward.
In short, I feel very good about the underlying business and we are excited about the opportunities that lie ahead.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless we specifically note otherwise, all comparisons are year-over-year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit, which we believe was positively impacted in the quarter by a significant benefit to sales, particularly in our nonconsumables categories from the most recent round of government stimulus payments.
Gross profit as a percentage of sales was 32.8% in the first quarter.
As Todd noted, this was an increase of 208 basis points and represents our eighth consecutive quarter of year-over-year gross margin rate expansion.
This increase was primarily attributable to: higher initial markups on inventory purchases, a reduction in markdowns as a percentage of sales, a greater proportion of sales coming from our nonconsumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased transportation costs, which were primarily driven by higher rates.
SG&A as a percentage of sales was 22%, an increase of 152 basis points.
This increase was driven by expenses that were greater as a percentage of net sales, the most significant of which were store occupancy costs, disaster expenses related to winter storm Uri, retail labor and depreciation and amortization.
Moving down the income statement.
Operating profit for the first quarter increased 4.9% to $908.9 million.
As a percentage of sales, operating profit was 10.8%, an increase of 56 basis points.
Our effective tax rate for the quarter was 22% and compares to 22.2% in the first quarter last year.
Finally, earnings per share for the first quarter increased 10.2% to $2.82, which reflects a compound annual growth rate of 38% over a 2-year period.
Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders.
Merchandise inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall and a 17.6% increase on a per store basis as we cycled a 5.5% decline in inventory on a per store basis, driven by extremely strong sales volumes in Q1 2020.
In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select nonconsumable categories to better support the sales momentum we were seeing in the business.
And while out of stocks remain higher than we would like for certain high-demand products, we continue to make good progress with improving our in-stock position and are pleased with the overall quality of our inventory.
The business generated significant cash flow from operations during the quarter totaling $703 million, a decrease of 60% but which reflects a compound annual growth rate of 11% over a 2-year period.
This decrease was primarily driven by higher levels of improving inventory positions, including the pull forward of certain inventory purchases I mentioned earlier.
Total capital expenditures for the quarter were $278 million and included: our planned investments in new stores, remodels and relocations; distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 5 million shares of our common stock for $1 billion and paid a quarterly cash dividend of $0.42 per common share outstanding at a total cost of $100 million.
At the end of Q1, the remaining share repurchase authorization was $1.7 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3 times adjusted-debt-to-EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continue to operate at a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business.
Despite continued uncertainty, as Todd mentioned, we are increasing our full year guidance for sales and earnings per share due to our strong Q1 outperformance, which we believe was aided by the latest round of stimulus.
For 2021, we now expect the following: net sales in the range of a 1% decline to an increase of 1%; a same-store sales decline of 5% to 3% but which reflects growth of approximately 11% to 13% on a 2-year stack basis and earnings per share in the range of $9.50 to $10.20, which reflects a compound annual growth rate in the range of approximately 20% to 24% or in the range of approximately 19% to 23% compared to the 2019 adjusted diluted earnings per share over a 2-year period, which is well above our long-term goal of delivering at least 10% annual earnings per share growth on an adjusted basis.
Our earnings per share guidance continues to assume an effective tax rate in the range of 22% to 23%.
With regards to share repurchases, we now expect to repurchase approximately $2.2 billion of our common stock this year compared to our previous expectation of about $1.8 billion.
Let me now provide some additional context as it relates to our full year outlook.
First, there could be additional headwinds and tailwinds this year, the timing, degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions.
Given the unusual situation, I will now elaborate on our comp sales trends thus far in May.
From the end of Q1 through May 23, comp sales declined by approximately 7% as we continue to cycle extremely difficult prior year comparisons.
As a reminder, comp sales growth for the month of May in 2020 was 21.5%.
And while we are nonetheless encouraged with our sales trends, we remain cautious in our 2021 sales outlook, given the continued uncertainty that still exists, the unique comparisons against last year and the anticipation of fading tailwinds from the most recent round of government stimulus.
That said, as you think about the comp sales cadence of 2021, we continue to expect our performance to be better in the second half, given a more difficult comp sales comparison in the first half.
Turning to gross margin.
As a reminder, gross margin in 2020 benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates in more clear and sensitive nonconsumables categories.
As we move through 2021, we expect pressure in our gross margin rate as we anticipate a less favorable sales mix, an increase in markdown rates as we cycle abnormally low levels we saw in 2020 and higher fuel and transportation costs.
Also, please keep in mind the second and third quarters represent our most challenging laps of the year from a gross margin rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020.
With regards to SG&A, while we continue to expect ongoing expenses related to the pandemic in 2021, overall, we currently anticipate a significant reduction in COVID-19 related costs compared to the prior year.
Additionally, we continue to expect about $60 million to $70 million incremental year-over-year investments in our strategic initiatives this year as we further their rollouts.
This amount includes approximately $23 million in incremental investments made during the first quarter.
However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
In closing, we are very proud of the team's execution and performance which resulted in another quarter of exceptional results.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives.
Let me take you through some of the more recent highlights.
Starting with our nonconsumables initiative or NCI.
As a reminder, NCI consists of a new and expanded product offering in key nonconsumable categories.
The NCI offering was available in over 7,300 stores at the end of Q1, and we remain on track to expand this offering to a total of more than 11,000 stores by year end, including over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach.
We're especially pleased with the strong sales and margin performance we continue to see across our NCI product categories.
Notably, this performance is contributing to an incremental comp sales increase in nonconsumable sales of 8% in our NCI stores and 3% in our NCI Lite stores as compared to stores without the NCI offering.
Given our strong performance to date, coupled with the added flexibility of a more streamlined approach, our plans now include completing the rollout of NCI across nearly all of the chain by year-end 2022.
Moving to our newest concept, pOpshelf, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened three new pOpshelf locations, bringing the total number of stores to eight.
And while still early, we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin.
In fact, year one annualized sales volumes for our first eight locations are trending between $1.7 million and $2 million per store, with an average gross margin rate of about 40%, which we expect will climb as we continue to scale this exciting initiative.
As a reminder, this compares to year one sales volumes of about $1.4 million for a traditional Dollar General store and a gross margin rate of about 32% for the overall chain in 2020.
For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger-format Dollar General market stores.
Importantly, we currently estimate there are about 3,000 pOpshelf store opportunities potentially available in the Continental United States.
And when combined with pOpshelf's compelling unit economics, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.
Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated products.
The primary objective of DG Fresh is to reduce product cost on these items, and we continue to be very pleased with the savings we are seeing.
In fact, DC Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases.
And we expect this benefit to grow as we continue to optimize our network and further leverage our scale.
Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the continued rollout of additional products, including both national and private brands.
In total, at the end of Q1, we were delivering to more than 17,000 stores from 10 facilities and now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year-end as communicated on our Q4 call.
Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative.
During the quarter, we added nearly 18,000 cooler doors across our store base and are on track to install approximately 65,000 cooler doors this year.
Notably, the majority of these doors will be in high-capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection, all enabled by DG Fresh.
In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
Our proven high-return, low-risk real estate model continues to be a core strength of our business.
In the first quarter, we completed a total of 836 real estate projects, including 260 new stores, 543 remodels and 33 relocations.
In addition, we now have produce in more than 1,300 stores.
For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total.
We also now plan to add produce in more than 1,000 stores, which compares to our previous expectation of approximately 700 stores.
As a reminder, we recently made key changes to our development strategy, including establishing two of our larger footprint formats, which each comprise about 8,500 square feet of selling space as our base prototypes for nearly all new stores going forward.
With about 1,200 square feet of additional selling space compared to a traditional store, these larger formats allow for expanded high-capacity cooler counts, an extended queue line and a broader product assortment, including NCI, a larger health and beauty section with about 30% more feet of selling space and produce in select stores.
We are especially pleased with the sales productivity of these larger formats as average sales per square foot are currently trending about 15% above an average traditional store, which bodes well for the future as we look to grow these unit counts in the years ahead.
In total, we expect more than 550 of our real estate projects this year will be in these formats as we look to further enhance our value and convenience proposition while driving additional growth.
Next, our digital initiative, which is an important complement to our brick-and-mortar footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers.
One such example is contactless payment, which is now available in the vast majority of the chain, further extending our convenience proposition, particularly for those seeking a more contactless shopping experience.
Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
And we are pleased with the growing engagement we are seeing across our digital properties.
Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of digital engagement and customer loyalty.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions.
This zero-based budgeting approach, internally branded as Safe to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset.
Our Fast Track initiative is a great example of this approach where our goals include: increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts, both around rolltainer and case pack optimization, which have led to even more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates.
Self-checkout was available in more than 3,400 stores at the end of Q1, which represents more than double the store count at the end of Q4.
And we are pleased with our results including customer adoption rates as well as positive feedback both from customers and employees.
Our plans consist of a broader rollout this year, and we are focused on introducing this offering into the vast majority of our stores by the end of 2022 as we look to further enhance our convenience proposition while extending our position as an innovative leader in small-box discount retail.
Our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we continue to create new jobs and opportunities for career advancement.
In fact, more than 12,000 of our current store managers are internal promotes, and we continue to pursue innovative opportunities to further develop our teams, including our recent announcement to partner with a leading training provider to deliver more personalized training solutions to our employees.
Importantly, we believe these efforts continue to yield positive results across our organization and are an important driver of our consistent and strong execution.
At the store level, we continue to be pleased with our robust internal promotion pipeline and store manager turnover, which continues to trend below historic levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we continue to make great progress against our operating priorities and strategic initiatives, and we are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders.
In closing, I am proud of our team's performance and we are pleased with our strong first quarter results, which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions us well going forward. | compname posts qtrly adjusted diluted earnings per share of $3.96.
quest diagnostics inc - raises full year 2021 outlook to reflect higher than anticipated covid-19 testing volumes.
quest diagnostics inc - q3 reported diluted earnings per share (eps) of $4.02.
quest diagnostics inc - qtrly adjusted diluted earnings per share of $3.96.
quest diagnostics inc - had a strong q3, as covid-19 molecular volumes increased throughout summer.
quest diagnostics inc - in late summer we experienced some softness in base business across country, but saw an overall rebound in september.
quest diagnostics inc - base business continued to improve sequentially in q3 which speaks to ongoing recovery.
quest diagnostics inc - q3 revenues of $2.77 billion, down 0.4% from 2020.
quest diagnostics inc - sees fy net revenues $10.45 billion to $10.60 billion.
quest diagnostics inc - sees fy adjusted diluted earnings per share $13.50 - $13.90.
quest diagnostics inc - sees fy reported diluted earnings per share $14.69 - $15.09. | 0 |
During today's call, we will reference non-GAAP metrics.
Looking at second quarter results, we are pleased with our performance.
Second quarter were up 3% versus a year ago and up 7% sequentially from the first quarter.
Our second quarter results demonstrate the strength of our business model with replacement part sales providing valuable stability as we grew market share in key markets and geographies.
During this quarter, we also built momentum in first-fit sales in our Engine segment, and we're seeing increases of incoming orders across our Industrial segment.
We are pleased to see the uptick in second quarter sales and incoming orders within our first-fit equipment businesses.
While this creates mix pressures in the short term, it also sets the stage for replacement parts in our razor to sell razor blade strategy and provides continued confidence that the worst of the pandemic-related economic impacts are behind us.
We played the long game during the pandemic, maintaining our disciplined focus on the future and avoiding the temptation to make potentially shortsighted decisions on our cost structure.
During the second quarter, we took planned full actions with a longer view toward optimizing our organization and our cost structure, primarily in Europe.
We incurred $14.8 million in restructuring expense and expect annualized savings of approximately $8 million once the restructuring activities are completed over the next 12 months.
Excluding the impact from our restructuring actions, gross margin was up 30 basis points from the prior year as lower raw material costs, including benefits from our procurement initiatives more than offset the increasing pressure from an unavoidable mix of sales.
With continuing momentum, we expect full year sales to be up 5% to 8% over 2020, including favorability from FX of about 3%.
We're also projecting adjusted operating margin to increase 60 to 100 basis points, driven largely by gross margin strength.
Finally, our company remains in a strong financial position.
We had solid cash conversion during second quarter, and our balance sheet is in good shape with our net debt to EBITDA ratio sitting at 0.7 times.
Our balance sheet gives us ample capacity to pursue our strategic initiative to move into the life sciences market via acquisitions and continue to invest in organic growth opportunities.
We're delivering on our strategic and financial objectives so far in fiscal 2021, and we are planning for a strong finish to the year.
Scott will talk more about our forecast later in the call.
But first, let me provide some additional color on recent sales trends.
Total second quarter sales were up 2.6% from the prior year or 0.2% in local currency.
Total Engine segment sales rose over 6%, and Industrial was down 4%.
Geographically, the Asia-Pacific region led our positive performance as we continued to see very good growth in China.
In the Engine segment, the sales increase was driven by meaningful growth in both Off-Road and Aftermarket.
The growth was partially offset by a slight decline in On-Road and a drop in Aerospace and Defense.
Off-Road growth was widespread with sales in all major geographic regions up from the prior year.
Importantly, our incoming order rates and backlog point to building momentum through the second half of fiscal 2021.
Within Off-Road, our second quarter sales in China were up about 70%.
We are seeing momentum in the market with construction equipment build rates remaining at high levels.
We are also seeing strong growth of PowerCore in China, and several new PowerCore programs for Tier three upgrades have gone into production.
On-Road sales were down about 1% in the quarter, which is our best year-over-year result since fiscal 2019, signaling to us that the second quarter was the cyclical trough in this business.
Our view is supported by external data with order rates for Class eight trucks launching higher in the past several months and higher build rates projected in the coming quarters.
With increasingly favorable market conditions, combined with our strong share in North America heavy-duty trucks, we are optimistic about our opportunities to drive growth in our On-Road business.
Second quarter sales of Aftermarket were up over 7% year-over-year, and they were also up 4% sequentially from the first quarter, which is atypical and serves as another indicator that market conditions are improving.
In China, second quarter sales of Engine Aftermarket were up over 30%.
We are beginning to see service parts benefit from new equipment under warranty, which includes an increasing percentage that have proprietary PowerCore and PowerPleat air cleaners installed.
Overall, PowerCore sales increased about 9% in second quarter with strong growth in both first-fit and replacement parts.
As I mentioned earlier, in China, we are seeing significant growth, which we expect to continue as PowerCore becomes more mainstream.
Aerospace and Defense, which represents about 3% of our business, faced another tough quarter due primarily to the ongoing pandemic-related weakness in commercial aerospace while sales for helicopters continue to perform well.
As we expect, the time line for recovery in commercial aerospace to be protracted, we took restructuring actions within the quarter to improve our cost structure and better position the organization for the current business environment.
Turning now to the Industrial segment.
Second quarter sales were down about 4%, including a 3% benefit from currency.
We continue to face pressure on sales of dust collection sale products within Industrial Filtration Solutions, or IFS, as utilization rates were lower and customers remain cautious in making capital investments.
Once again, a bright spot in the quarter was Process Filtration.
Our Process Filtration for the food and beverage market with our LifeTec brand continues to grow, particularly on the replacement side.
Overall Process Filtration sales increased in the high teens with contributions from both first-fit and replacement.
And we see a long runway for further expansion of this business.
We are making new inroads with some of the world's biggest food and beverage companies, and we are also gaining share with existing customers.
The sales process for these massive brands involves winning at the parent and then selling one plant at a time, which is why we continue to grow our sales force and invest in new tools and resources.
We launched LifeTec five years ago with fewer than 10 salespeople, and we're on track to be over 100 by the end of this fiscal year.
Sales of Gas Turbine Systems, or GTS, were down 3.5% in second quarter as large project deliveries, though a smaller part of our business, were less than the prior year.
Our replacement parts business, on the other hand, delivered another quarter of double-digit growth.
We continue to win share of aftermarket while being selective in which large turbine projects we pursue.
The team has done a tremendous job of improving the profitability of GTS, and our more focused approach is clearly paying off.
In Special Applications, we again saw very good growth in integrated venting solutions as we continue to drive adoption in the automotive market with our high-tech products.
However, overshadowing these wins were continuing softness in disk drive filters and lower sales of membrane products.
Second quarter results highlight the strength of our diversified portfolio of businesses and disciplined focus on the long game.
We are well positioned to benefit from the recovery in cyclical end markets, and we continue to press forward on our strategic initiatives, including the recently announced investments to grow our life science business.
I'll talk more about that later.
As Tod said, we are pleased with our second quarter performance.
Sales were up 2.6% from the prior year, and adjusted operating income grew 7.6%.
Given the uneven macroeconomic environment, it was a strong quarter in terms of both absolute growth and leverage.
Looking ahead, we plan to build on that momentum.
As I said many times, we are committed to increasing levels of profitability and increasing sales.
I know I'm repeating myself, but I also want all of you to know that, that statement is a guiding principle for us.
One way we deliver on that commitment is through select optimization initiatives, which is how I would characterize the restructured actions we took in the second quarter.
Most of these activities are happening in Europe, and all of them support our long-term objectives.
For example, we are centralizing key aspects of our aerospace business, giving us a strong platform for when the market returns to growth.
We are moving the production of certain compressed air products to Eastern Europe, where we have an excellent team and a competitive cost structure.
And we are centralizing our European accounts payable and customer service functions to improve standardization and optimization, giving us the ability to leverage common tools as we grow.
The projects we initiated in the second quarter should generate annual savings of about $8 million once fully implemented with about $1 million realized in this fiscal year.
These actions drove a second quarter charge of $14.8 million and resulted in an operating margin headwind of about 220 basis points and an earnings per share impact of $0.08.
With that, I'll dig into our second quarter results a bit more.
As I said earlier, adjusted operating profit, which excludes restructuring charges, was up 7.6% from the prior year.
That translates to an adjusted operating margin of 13.4%, which is 60 basis points up from the prior year.
Second quarter adjusted gross margin grew 30 basis points to 34%, accounting for half the operating margin increase.
The price we paid for raw materials in second quarter was lower than last year due in part to our strategic procurement initiatives, and the gains were partially offset by an unfavorable mix of sales.
While we expect gross margin will be up in the back half of fiscal '21, the drivers are predictably changing.
As expected, raw materials will move from a tailwind to a headwind, and the pressure from mix is going to increase with the anticipated sharp growth in our first-fit businesses over the next two quarters.
As always, we remain focused on managing the price cost relationship.
Net pricing for the company was a push last quarter, and we will take a proactive stance as raw material costs trend higher.
We also remain focused on being deliberate with our operating expenses.
As a rate of sales, second quarter adjusted operating expense was 30 basis points favorable versus the prior year, continued benefits from lower discretionary expenses due in part to the pandemic-related restrictions were partially offset by higher incentive compensation.
Importantly, we continue to invest in our strategic priorities.
Compared with last year, we invested more on research and development, and we increased our headcount-related expense to drive growth in our Advance and Accelerate portfolio of businesses.
You can see the impact of these choices more prominent in our Industrial segment, where many of our high-growth businesses are reported.
If you exclude restructuring charges, the second quarter Industrial profit rate was down about 50 basis points from the prior year, reflecting incremental investments in businesses like Process Filtration and Venting Solutions.
On the other hand, solid growth in our Engine segment is creating leverage across the P&L.
The team is doing an excellent job of focusing on share gains and market expansion, especially in China, and they are also thinking long term.
We are aggressively pursuing share gains in new markets and driving higher aftermarket retention with innovative products.
We have great partnerships with many of the world's largest equipment manufacturers.
We will be leveraging those relationships as we all navigate inflationary pressures related to raw materials and fulfilling rapidly elevating demand.
Across our company, we believe the balanced approach we have taken throughout the pandemic puts us in a strong position to capitalize on the economic rebound.
Instead of making deep cuts to manage a short-term demand pressure, we focused on supporting our investors and making targeted investments into our strategic growth priorities.
While we anticipate uneven market trends will continue, we are confident in our long-term positioning.
Capital deployment is another area we have a disciplined and balanced approach.
We invested about $12 million in the second quarter, which is down more than 70% from the prior year.
With the economic environment improving and many of our new apps online, our focus is shifting toward driving productivity gains and working toward the operating margin targets we shared at our Investor Day in 2019.
We returned more than $57 million to shareholders through dividends and share repurchase, bringing our year-to-date total to almost $100 million.
Maintaining our dividend is a priority for us, and we have demonstrated our willingness and ability to grow it over a long period of time.
We have increased our dividend each calendar year for the past 25 years, making us part of the elite group included in the S&P High Yield Dividend Aristocrat index.
Our position on the dividend is the same as it was 65 years ago when we began paying it every quarter.
And I am proud of this trend.
Share repurchase is also an important part of our capital deployment priorities, but it's a bit more variable.
At a minimum, we plan to offset dilution from stock-based compensation in any given year, and we are on track to meet or exceed that objective this year.
Beyond that, our share repurchase is guided by our balance sheet metrics, strategic opportunities and overall market conditions.
Overall, our narrative is consistent over time.
Our year-to-date results demonstrate both the strength of our business model and the value we create by taking a long-term focused view.
We plan to build on this momentum in the back half of 2021.
So let me share some details on our expectations.
As Tod mentioned, we see building momentum in our first-fit business throughout the past quarter.
With this in mind, we expect sales this year to return to a pattern that is generally in line with our typical seasonality, where about 52% of our full year revenue occurs in the back half.
Therefore, we expect full year sales will increase between 5% to 8%, which includes the benefit from currency translation of about 3%.
In the Engine segment, full year sales are projected to increase between 8% and 12% with our first-fit business comprising a bigger piece of the recovery story in the back half.
We expect full year Off-Road sales to increase in the low 20% range with building strength in commodity prices driving an acceleration in equipment production in agriculture and other select markets.
In On-Road, we expect a full year increase in the low teens, driven by the strong rebound in global truck production rates.
We expect the momentum to continue in our Aftermarket business with a full year sales increase in the high single digits.
We expect to continue to benefit from improving equipment utilization trends globally and market share gains in the Asia-Pacific region, particularly in China, where PowerCore is experiencing significant growth.
Our Aerospace and Defense business is anticipated to decline in the high-teens digits overall as demand in the commercial aerospace is expected to remain depressed.
We do expect to see sequential improvements as we lap the pandemic-related impacts, and helicopter and ground defense programs continue to grow over time.
In the Industrial segment, full year sales are projected to be between a 2% decline and a 2% increase as recovery in the capital investment environment is still emerging.
We continue to press forward with market share gains during this period, and our investments in building the Advance and Accelerate portfolio are expected to continue to result in sales growth above the company average.
We expect IFS sales to be roughly flat for the full year, reflecting a return to growth in the back half of the year.
While uncertainty remains, we are seeing signs of increased quoting activity and expect we are well positioned to capitalize on any recovery in addition to our gains in share and continued progress with our innovative products in important markets like food and beverage.
Our GTS revenue is expected to increase by the mid-single digits, driven by continued growth in replacement parts.
In special applications, we are anticipating a decline in low single digits based on our year-to-date results and expected softness in the market for disk drive products.
At a company level, we are expecting an adjusted operating margin to increase to within a range of 13.8% and 14.2% compared to 13.2% in 2020.
This implies a sequential step up in our operating margin to 14.4% for the back half of the year and aligns with our commitment to increasing profitability on increasing sales.
Gross margin expansion continues to be an important lever for us.
We expect to benefit from our ongoing initiatives to drive cost efficiency in our operations and are positioned to gain leverage on a higher sales volume.
Over time, mix should also be a consistent factor in driving our gross margin up.
As we think about the near term, however, mix is likely to be a headwind as improving market conditions and our strong position with our large OEM customers will likely result in stronger first-fit sales growth in replacement parts.
We are also beginning to see increases in our input costs, including steel and freight rates, so we are expecting a cost headwind for the remainder of fiscal 2021.
We continue to invest in our customer relationships and in maintaining our position as a top-tier supplier.
We will continue to work to align our pricing with the increases in our input and supply chain costs.
Additionally, we expect to maintain a disciplined approach to our operating expenses and deliver further leverage in the back half of the year despite an expected full year headwind of approximately $20 million from increased incentive compensation, about 2/3 of which is in the back half of the fiscal year.
For our other operating metrics, we expect interest expense of about $13 million, other income of $2 million to $4 million, and a tax rate between 24% and 25%.
Capital expenditures are planned meaningfully below last year, reflecting the completion of our multiyear investment cycle.
Taking the midpoint of our sales and capex guidance for 2021 would put it at just over 2% of sales.
We expect to repurchase 1% to 2% of our outstanding shares.
Finally, our cash conversion was very good in the first half, and we continue to expect to exceed 100%, reflecting strong first half conversion and anticipated increases in working capital later in the fiscal year.
We have had a solid first half of our fiscal year and are expecting even better results in the second half.
I am very proud of what our employees have been able to achieve in this unprecedented time, and I'm optimistic about Donaldson's future.
As we saw during the first year of our fiscal year, improving economic conditions are complementing the benefits from consistently strong execution of our strategic priorities.
Of course, achieving the significant sales and profit growth projected in the second half is not without risks.
Costs are going up.
Demand for raw material is quickly increasing.
The global supply chain is getting stretched, and above everything else, the pandemic is still hanging over all of us.
While the pandemic is certainly a new occurrence, the other pressures are not.
We have successfully navigated them time and again due in large part to our talented employees and strong customer relationships.
As always, we will manage our costs, execute strategic price increases and pursue profitable sales.
It's a straightforward plan, and it has served us well for 106 years, giving me confidence we are in an excellent position to deliver a strong finish to fiscal 2021.
I will also say that I'm more excited than ever about our long-term prospects.
As a reminder, our strategic priorities include expanding our technologies and solutions, extending our market access and executing thoughtful acquisitions.
The recent announcement of our newly formed life sciences business development team represents a significant move that supports all those priorities.
As previously announced, we hired a new Vice President to build and lead the life sciences team and drive our growth strategy.
This team comes to Donaldson with tremendous industry experience, including strong M&A backgrounds.
With the leadership in place, we are now poised to drive our expansion plans into the fast-growing, highly technical and highly profitable life sciences markets.
While there are no specific details to share today, we are highly confident that technology-led filtration has a critical role in these spaces.
With our strong balance sheet and disciplined approach to capital deployment, we are well positioned to pursue acquisition opportunities that make strategic and financial sense.
And we are also enhancing our internal capabilities to drive organic growth.
Our new materials research center, which was completed last year, will further strengthen our material science capabilities.
The technical skills we gain can be used right away by fueling growth in our current markets, like food and beverage, and they can be used to support longer-term growth in broader life sciences markets.
We are committed to these new markets, and establishing the life sciences business development team is one step on a long journey, but it was an important step.
I'm excited about our opportunities and look forward to sharing our success with all of you over time.
One year ago, we were all wondering about how COVID-19 was going to ripple through the economy, and there were more questions than answers.
We all still have questions, but one thing that I am more certain about is the quality of our employees.
They are truly remarkable.
I've seen that personally, and we can all see it in our company's results. | compname reports q1 earnings per share of $0.61.
q1 earnings per share $0.61.
q1 2022 operating margin increased to 14.1% from 13.7% in 2021.
donaldson increases fiscal 2022 sales and earnings per share guidance.
raising our fiscal 2022 sales and earnings outlook.
macro-economic headwinds are creating a different path to achieving our results than we previously anticipated.
donaldson company - gross margin is under additional pressure as raw material, freight, and labor costs have climbed beyond our original expectations.
to partially mitigate pressure by raising prices in most markets.
fiscal 2022 gaap earnings per share is now expected to be between $2.57 and $2.73.
sales growth during first half of year is expected to outpace second half of year.
currency translation is expected to be a nominal headwind in fy22.
fy22 net sales are projected to increase between 8% and 12% year-over-year. | 0 |
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources.
We may refer to these materials during today's call.
While National Fuel's expectations, beliefs, and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially.
National Fuel will be participating in the Bank of America Global Energy Conference next week.
Please contact me or the conference planners to schedule a meeting with the management team.
As we reported in last night's release, National Fuels fourth quarter operating results were $0.40 per share.
Consistent with earlier quarters, lower commodity prices were the main driver, contributing to the $0.14 per share drop in operating results, contributing to non-cash ceiling test impairment charge.
Despite the drop in earnings, the quarter went as planned, with operating results right in line with our expectations.
Fiscal 2020 was a remarkable year for National Fuel.
Against the backdrop of a pandemic, we completed a highly accretive Appalachian acquisition and brought online a significant pipeline expansion project, all while continuing to safely and reliably operate our businesses across the natural gas value chain.
Looking ahead, the outlook for natural gas has improved significantly, and National Fuel is well positioned for meaningful earnings and cash flow growth.
We continue to see success with our expansion projects at our FERC-regulated pipeline businesses.
We placed our Empire North Project in service on September 15th.
As a reminder, this project is fully contracted, with the bulk of the commitments extending for 15 years.
The project is expected to add about $27 million in annual revenues.
It looks like the final capital cost will come in around $129 million, which is more than 10% below our initial cost estimate.
Constructing in placing this project into service safely on schedule and under budget in the midst of a pandemic was quite an accomplishment.
We continue to make progress on our FM100 Project, and Transco's companion Leidy South expansion is also on track.
As a reminder, all of the facilities for both projects are in Pennsylvania.
There are few permits still outstanding, and we expect to receive them this winter.
We've started to order longer lead-time items, and once we receive the remaining permits, we'll file for our notice to proceed.
All of this keeps us on pace to be in service near the end of calendar 2021.
And again as a reminder, FM100 will add approximately $50 million in annual revenues between the $35 million expansion component and the additional $15 million modernization rate step-up agreed to in our February rate case settlement.
Moving to our upstream and gathering operations.
We closed the acquisition of Shell's Appalachian assets back in July, and now have a few months of operations under our belt.
The transition could not have gone more smoothly, and we're very excited about the long-term benefits of this acquisition.
It added significant scale, lowered our per unit cost structure and added hundreds of highly economic development locations in Tioga County, which are supported by Company-owned gathering systems and valuable firm transportation, including our National Fuels Empire Pipeline.
In addition, production and reserves continue to be in line with our initial expectations, and as we spend more time operating the assets, we're finding additional efficiencies and revenue enhancement opportunities.
Seneca is currently operating a single rig that moves between our Eastern and Western development areas.
On last quarter's call, we discussed the possibility of adding a second rig prior to the start date of Leidy South.
Given both the meaningful improvement in natural gas prices for fiscal 2022 and our expectations on the timing of the FM100 in Leidy South projects, we've decided to move up the rig out into January.
This will allow us to line up first production with the in-service date of Seneca's new capacity.
It will also allow us to capture the benefits to higher winter pricing.
As you can see from last night's release, we've already hedged the fiscal 2022 production expected from the wells that will be drilled by the second rig.
Because we won't see production from these wells until late in calendar 2021, there is no impact to our fiscal 2021 production or earnings guidance.
Nevertheless, in spite of the incremental $60 million in capital associated with this rig, we still expect to generate in excess of $100 million of free cash flow from our upstream and gathering businesses.
While this increase in activity level differs from the approach taken by many of our peers, the strength of our balance sheet, our methodical approach to hedging and our significant depth of high-quality inventory allows us to take this step to accelerate value, while still generating significant free cash flow.
Over time, the second rig is expected to focus principally in our Eastern Development Area, where we have some of the most economic development opportunities in Appalachia.
If you recall, our valuation of the Tioga County acquisition was based solely on PDPs and the related gathering assets.
We did not attribute any value to the highly economic undeveloped locations.
By adding a rig, we are now able to pull forward the development of these properties, further enhancing the value of the assets, including growing throughput on our gathering facilities.
Our utility business continues to run smoothly in spite of the pandemic.
Our team has done a terrific job adapting to the new reality.
Because of the economic backdrop in our service territory, we've seen a drop in large volume commercial and industrial throughput.
In spite of the pandemic, we had a very successful construction season, replacing over 150 miles of older pipe on the system.
More than two-thirds of the spending associated with the program will be captured in our system modernization tracking mechanism.
Taking all this together, our outlook for earnings and cash flow growth is strong.
As a result of the improved outlook for natural gas prices, we are revising our earnings guidance up to $3.70 at the midpoint, an increase of more than 25% over our fiscal 2020 results.
Despite the backwardation in the natural gas curve, as we look to fiscal 22, the increased activity at Seneca, combined with the expected in-service date of the FM100 project and a continued modest growth in our utility segment are all expected to drive further earnings growth.
In September, we published our initial Corporate Responsibility Report.
This was an important step in furthering our ESG disclosures and highlighting our ongoing initiatives, while continuing the course we've been on for a number of years.
Over the past two decades, we've made significant investments to modernize our natural gas distribution, transportation and storage facilities.
This has significantly reduced emissions across our system.
For example, relative to 1990 levels, our utilities EPA Subpart W emissions are down by over 60%.
We recognize the importance of reducing the global carbon footprint, and we continue to find ways to further reduce our own emissions profile as we grow our business.
This is perhaps most evident on the Empire North project, where we installed our first electric motor-drive compressor station, which virtually eliminates combustion emissions from those operations.
We also continue to look for ways to incorporate renewable natural gas into our transportation and distribution systems.
This past year, we built our system's first interconnect with an anaerobic digester facility.
All of these initiatives highlight our natural gas will continue to be part of the long-term energy solution.
In closing, I'm excited about the future for National Fuel.
2020 was a year of challenges but also one of opportunity.
We've taken several critical steps that have strengthened the Company and positioned it for near-term growth.
When we look to fiscal 2022 and beyond, we expect to generate consistent, meaningful cash flow at current strip pricing.
This should more than cover our growing dividend and further improve our already strong balance sheet, giving us the flexibility to pursue additional growth opportunities as they arise.
Seneca had a strong fourth quarter.
We produced 67.3 Bcfe, an increase of around 14% compared to last year's fourth quarter.
Despite low-end basin and natural gas prices, which led us to voluntarily curtail about 6 Bcf, we achieved our largest quarterly production ever.
For the year, we curtailed 17 Bcf and annual net production came in just over 241 Bcfe.
This new fiscal year high for Seneca was supported by our development program and the impact of our recent acquisition.
For the year, capital expenditures, excluding the acquisition, ended up at around $384 million, a reduction of approximately $108 million or 22% from the prior-year.
Expenses on a per unit basis were down 8% from last year, and we're all within our fiscal 2020 guidance ranges.
PUD reserves increased by 359 Bcfe or 12% to just under 3.5 Tcfe, with the increase largely driven by our acquisition during the fourth quarter.
PUD developed reserves now make up approximately 84% of total reserves.
As a result of our recent acquisition, we now have substantial inventory of both Utica and Marcellus drill locations in Tioga, and our inventory has expanded to approximately 300 locations in the EDA.
Moving to the WDA, our near-term development is expected to shift toward the Rich Valley Beechwood Development Area, which is located immediately to the south of our CRV area, where we are focused over the past few years.
In the Rich Valley Beechwood area, we have around 100 Utica drill locations, and we'll be able to utilize our existing gathering trump line [Phonetic].
Based on results to-date, we believe the economics will be superior to those related to our WDA Utica return trips.
These pads are performing at or above our previously posted Utica type curve.
In California, we produced around 555,000 barrels of oil during the fourth quarter, a decrease of around 9% from last year's fourth quarter.
Year-over-year, oil production was largely flat, with a slight increase of 26,000 barrels.
Earlier this year, in order to cut costs as a result of low oil prices, we significantly reduced well work and steam volumes across most of our heavy oil fields.
This modestly impacted our production decline rates in these fields during our third and fourth quarters.
However, we are recently increasing volumes to previous levels in some of these fields, and we will continue to permit new wells to allow for return to drilling in the event oil prices improve.
As we are currently planning to differ much of our fiscal 2021 development program in California, we have budgeted only $10 million in capex, but again as prices rebound, our intention is to increase our activity in California to return to our development programs in Midway Sunset and Coalinga.
So moving to our fiscal 2021 guidance.
As Dave mentioned earlier, in connection with the continued development of the Leidy South and FM100 projects and a deep inventory of highly economic Utica development locations in Tioga as a result of our recent acquisition, we intend to add a second rig early in 2021.
This additional rig will focus on our EDA assets in both Lycoming and Tioga, and longer term, we would expect relatively balanced activity between the EDA and the WDA.
As part of our recent acquisition, we secured 100 million [Phonetic] a day on Dominion, with access to Transco Leidy line and the Leidy South project, providing us with optionality to utilize this capacity from Tioga, in addition to Lycoming and the WDA.
First production from the additional rig is expected in early fiscal 2022 to align with the expected Leidy South in-service date, allowing Seneca to utilize this 330 million [Phonetic] a day of incremental pipeline capacity to reach premium markets during the winter heating season.
As a result of adding the second rig for approximately nine months of the fiscal year, we are increasing our fiscal 2021 capex by around $60 million from our previous guidance to a total of $370 million at the midpoint.
Even with a second rig, we are forecasting a decrease in capital expenditures of around $15 million year-over-year.
Most of our production growth in fiscal 2021, forecasted to be up over 30% of the mid-point, should occurred during the first half of the year with a moderate decline during the back half, as we defer completion and flowback activity until the winter season when our new capacity is targeted to be in service.
Moving forward, we have 234 Bcf around 77% of our fiscal 2021 East Division gas production locked in physically and financially.
We have another 41 Bcf of firm sales providing basis protection.
So 90% -- around 90% of our forecasted gas production is already sold.
We currently estimate that we'll have around 30 Bcf of gas exposed to the spot market.
So as always these volumes are potentially at risk for curtailment.
And finally in California, around 50% of our oil production is hedged at an average price of just over $58 per barrel.
As Dave stated at the beginning of the call, National Fuels operating results for the quarter came in at $0.40 per share, adjusting for items impacting comparability, which was in line with our expectations.
Although our upstream business continued to face significant commodity price headwinds, each of our businesses performed well during the quarter, setting the Company up for a strong fiscal 2021.
One item of note during the fourth quarter was our effective tax rate, which at approximately 15% was much lower than expectations and the prior year.
Periodically, we're required to assess the appropriate tax rate to use for recording deferred tax assets and liabilities.
Our recently closed acquisition included significant additional firm transportation capacity to markets outside of Pennsylvania, which resulted in the forecasted percentage of total revenues allocable to Pennsylvania to be lower in the future.
As a result, we were required to remeasure the deferred taxes on our balance sheet to reflect the lower-expected state tax rate.
Since we are in a net liability position, we recorded the differences of benefit to deferred income tax expense, reducing our effective tax rate for the quarter.
Looking to fiscal 2021, we revised our earnings guidance higher to a range of $3.55 to $3.85 per share or $3.70 at the midpoint.
There are a couple of major drivers behind that increase.
First, we've increased our NYMEX assumption to $3 per MMBtu and correspondingly increased our in-basin pricing forecast to $2.50 in the winter months and $2.10 in the summer and shoulder months.
Second, as a result of the ceiling test impairment charge recorded during the quarter, we now expect DD&A at Seneca to be in the range of $0.60 to $0.65 per Mcfe.
This does not include any future impairments at Seneca.
Going in the other direction, reflecting recent changes in forward crude oil prices, we've reduced our WTI assumption to $37.50 per barrel and made a slight adjustment to our California basis differential, moving it down from 95% to 94% as a result of recent trends we are experiencing in the region.
Additionally, while the increase in natural gas prices is a significant benefit to earnings, there are a few natural offsets to this.
First in Pennsylvania, we are subject to the state impact fee.
This shows up in our other taxes line item on the income statement, and is calculated based upon the age of each well and the average NYMEX gas price for the year.
There is a tipping point into a higher tier as we hit the $3 per MMBtu mark.
So our updated forecast reflects this increased fee, which is approximately $3 million higher for the fiscal year.
Additionally, as John mentioned, we're forecasting return to normal steam volumes in California.
One of the key inputs in our steam generation is natural gas, and with the increase in pricing, we expect modestly higher LOE in the region, which is reflected in the slight widening of our guidance range now forecast between $0.83 and $0.86 per Mcfe.
Overall, these adjustments on the cost side are more than offset by the benefit of expected higher realizations on our natural gas production.
Further on production, as John mentioned, we continued to actively hedge as the forward curve moves up, and now have price protection on 77% of our natural gas volumes.
We also have 50% of our crude oil production hedged at $58 per barrel.
Moving to the regulated businesses.
As a reminder, we are forecasting a return to normal weather at the utility, which will drive a $5 million increase in margin year-over-year.
Combining this with $3 million of incremental revenue related to our New York system modernization tracker, we expect to see margin growth of approximately 2% for the year.
Going in the opposite direction, we now project O&M to increase approximately 3% to 4%, which is modestly higher than our previous guidance.
As a result, we now expect operating income to be relatively flat year-over-year.
At our pipeline and storage business, our assumptions remain unchanged for the year.
We still expect revenues to be in the range of $330 million to $340 million, and O&M expense to increase approximately 4% for the year.
On a consolidated basis, we are in line with our expectations for fiscal 2020.
Looking to this year, as Dave and John both mentioned, we expect Seneca's capital to increase by approximately $60 million, as a result of the increased Appalachian activity level.
All of our other guidance ranges remain unchanged.
So at the midpoint of our range, we expect spending to be $775 million.
Tying everything together, we now forecast our funds from operations to exceed capital spending by $50 million to $75 million on a consolidated basis.
This is a great outcome when considering our expectation that we will be constructing a large portion of the FM100 project in fiscal 2021, which is the most capital-intensive pipeline project in the Company's history.
Combining this free cash flow with the proceeds from our timber sale, which we expect to close next month, we don't expect any external financing needs [Indecipherable] seasonal working capital changes. | now projecting that fiscal 2021 earnings will be within the range of $3.55 to $3.85 per share. | 1 |
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As a testament to their efforts, our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments.
The quarter was highlighted by net sales growth of 16% in our combined nonconsumable categories, a 208 basis point increase in gross margin rate and double-digit growth in diluted EPS.
Despite what continues to be a challenging operating environment, we are increasing our sales and diluted earnings per share guidance for fiscal 2021 to reflect our strong first quarter performance.
John will provide additional details on our outlook during his remarks.
As always, the health and safety of our employees and customers continue to be a top priority while meeting the critical needs of the communities we serve.
And we believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17,000 stores located within 5 miles of approximately 75% of the US population.
Overall, we are executing well against our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.
Now let's recap some of the top line results for the first quarter.
As we lapped our most difficult quarterly comp sales comparison of the year, net sales decreased 0.6% to $8.4 billion, driven by a comp sales decline of 4.6%.
Notably, comp sales on a 2-year stack basis increased a robust 17.1%, which compares to the 15.9% 2-year stack we delivered last quarter.
Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size.
And while customers continue to consolidate trips, on average they continue to spend more with us compared to last year.
From a monthly cadence perspective, comp sales increased 5.7% in February despite a headwind from inclement weather across the country.
For the month of March, which represents our most difficult monthly sales comparison of the year, comp sales declined 11.2%.
Importantly, beginning in mid-March and in line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first two weeks of the month, especially in our nonconsumable categories.
Comp sales declined 4.3% in April, and while year-over-year growth in nonconsumable sales moderated in comparison to March, they were positive overall despite a more challenging lap.
Overall, each of our three nonconsumable categories delivered a comp sales increase for the quarter.
Of note, comp sales growth of 11.3% in our combined nonconsumable categories and 29.8% on a comparable 2-year stack basis significantly exceeded our expectation and speaks to the continued strength and sustained momentum in these product categories, enhanced by the benefit from stimulus.
Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data.
Importantly, we continue to be encouraged by the retention rates of new customers acquired over the past several quarters and are working hard to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives.
In addition, we recently published our third annual Serving Others report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics, and we look forward to continued progress on our journey as we move ahead.
Collectively, our first quarter results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value.
We operate in one of the most attractive sectors in retail and believe we are well positioned to continue advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape.
As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward.
In short, I feel very good about the underlying business and we are excited about the opportunities that lie ahead.
Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details.
Unless we specifically note otherwise, all comparisons are year-over-year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit, which we believe was positively impacted in the quarter by a significant benefit to sales, particularly in our nonconsumables categories from the most recent round of government stimulus payments.
Gross profit as a percentage of sales was 32.8% in the first quarter.
As Todd noted, this was an increase of 208 basis points and represents our eighth consecutive quarter of year-over-year gross margin rate expansion.
This increase was primarily attributable to: higher initial markups on inventory purchases, a reduction in markdowns as a percentage of sales, a greater proportion of sales coming from our nonconsumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased transportation costs, which were primarily driven by higher rates.
SG&A as a percentage of sales was 22%, an increase of 152 basis points.
This increase was driven by expenses that were greater as a percentage of net sales, the most significant of which were store occupancy costs, disaster expenses related to winter storm Uri, retail labor and depreciation and amortization.
Moving down the income statement.
Operating profit for the first quarter increased 4.9% to $908.9 million.
As a percentage of sales, operating profit was 10.8%, an increase of 56 basis points.
Our effective tax rate for the quarter was 22% and compares to 22.2% in the first quarter last year.
Finally, earnings per share for the first quarter increased 10.2% to $2.82, which reflects a compound annual growth rate of 38% over a 2-year period.
Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders.
Merchandise inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall and a 17.6% increase on a per store basis as we cycled a 5.5% decline in inventory on a per store basis, driven by extremely strong sales volumes in Q1 2020.
In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select nonconsumable categories to better support the sales momentum we were seeing in the business.
And while out of stocks remain higher than we would like for certain high-demand products, we continue to make good progress with improving our in-stock position and are pleased with the overall quality of our inventory.
The business generated significant cash flow from operations during the quarter totaling $703 million, a decrease of 60% but which reflects a compound annual growth rate of 11% over a 2-year period.
This decrease was primarily driven by higher levels of improving inventory positions, including the pull forward of certain inventory purchases I mentioned earlier.
Total capital expenditures for the quarter were $278 million and included: our planned investments in new stores, remodels and relocations; distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 5 million shares of our common stock for $1 billion and paid a quarterly cash dividend of $0.42 per common share outstanding at a total cost of $100 million.
At the end of Q1, the remaining share repurchase authorization was $1.7 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3 times adjusted-debt-to-EBITDA.
Moving to an update on our financial outlook for fiscal 2021.
We continue to operate at a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business.
Despite continued uncertainty, as Todd mentioned, we are increasing our full year guidance for sales and earnings per share due to our strong Q1 outperformance, which we believe was aided by the latest round of stimulus.
For 2021, we now expect the following: net sales in the range of a 1% decline to an increase of 1%; a same-store sales decline of 5% to 3% but which reflects growth of approximately 11% to 13% on a 2-year stack basis and earnings per share in the range of $9.50 to $10.20, which reflects a compound annual growth rate in the range of approximately 20% to 24% or in the range of approximately 19% to 23% compared to the 2019 adjusted diluted earnings per share over a 2-year period, which is well above our long-term goal of delivering at least 10% annual earnings per share growth on an adjusted basis.
Our earnings per share guidance continues to assume an effective tax rate in the range of 22% to 23%.
With regards to share repurchases, we now expect to repurchase approximately $2.2 billion of our common stock this year compared to our previous expectation of about $1.8 billion.
Let me now provide some additional context as it relates to our full year outlook.
First, there could be additional headwinds and tailwinds this year, the timing, degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions.
Given the unusual situation, I will now elaborate on our comp sales trends thus far in May.
From the end of Q1 through May 23, comp sales declined by approximately 7% as we continue to cycle extremely difficult prior year comparisons.
As a reminder, comp sales growth for the month of May in 2020 was 21.5%.
And while we are nonetheless encouraged with our sales trends, we remain cautious in our 2021 sales outlook, given the continued uncertainty that still exists, the unique comparisons against last year and the anticipation of fading tailwinds from the most recent round of government stimulus.
That said, as you think about the comp sales cadence of 2021, we continue to expect our performance to be better in the second half, given a more difficult comp sales comparison in the first half.
Turning to gross margin.
As a reminder, gross margin in 2020 benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates in more clear and sensitive nonconsumables categories.
As we move through 2021, we expect pressure in our gross margin rate as we anticipate a less favorable sales mix, an increase in markdown rates as we cycle abnormally low levels we saw in 2020 and higher fuel and transportation costs.
Also, please keep in mind the second and third quarters represent our most challenging laps of the year from a gross margin rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020.
With regards to SG&A, while we continue to expect ongoing expenses related to the pandemic in 2021, overall, we currently anticipate a significant reduction in COVID-19 related costs compared to the prior year.
Additionally, we continue to expect about $60 million to $70 million incremental year-over-year investments in our strategic initiatives this year as we further their rollouts.
This amount includes approximately $23 million in incremental investments made during the first quarter.
However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
In closing, we are very proud of the team's execution and performance which resulted in another quarter of exceptional results.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives.
Our first operating priority is driving profitable sales growth.
We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives.
Let me take you through some of the more recent highlights.
Starting with our nonconsumables initiative or NCI.
As a reminder, NCI consists of a new and expanded product offering in key nonconsumable categories.
The NCI offering was available in over 7,300 stores at the end of Q1, and we remain on track to expand this offering to a total of more than 11,000 stores by year end, including over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach.
We're especially pleased with the strong sales and margin performance we continue to see across our NCI product categories.
Notably, this performance is contributing to an incremental comp sales increase in nonconsumable sales of 8% in our NCI stores and 3% in our NCI Lite stores as compared to stores without the NCI offering.
Given our strong performance to date, coupled with the added flexibility of a more streamlined approach, our plans now include completing the rollout of NCI across nearly all of the chain by year-end 2022.
Moving to our newest concept, pOpshelf, which further builds on our success and learnings with NCI.
pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less.
During the quarter, we opened three new pOpshelf locations, bringing the total number of stores to eight.
And while still early, we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin.
In fact, year one annualized sales volumes for our first eight locations are trending between $1.7 million and $2 million per store, with an average gross margin rate of about 40%, which we expect will climb as we continue to scale this exciting initiative.
As a reminder, this compares to year one sales volumes of about $1.4 million for a traditional Dollar General store and a gross margin rate of about 32% for the overall chain in 2020.
For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger-format Dollar General market stores.
Importantly, we currently estimate there are about 3,000 pOpshelf store opportunities potentially available in the Continental United States.
And when combined with pOpshelf's compelling unit economics, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.
Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated products.
The primary objective of DG Fresh is to reduce product cost on these items, and we continue to be very pleased with the savings we are seeing.
In fact, DC Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases.
And we expect this benefit to grow as we continue to optimize our network and further leverage our scale.
Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the continued rollout of additional products, including both national and private brands.
In total, at the end of Q1, we were delivering to more than 17,000 stores from 10 facilities and now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year-end as communicated on our Q4 call.
Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative.
During the quarter, we added nearly 18,000 cooler doors across our store base and are on track to install approximately 65,000 cooler doors this year.
Notably, the majority of these doors will be in high-capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection, all enabled by DG Fresh.
In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.
Our second priority is capturing growth opportunities.
Our proven high-return, low-risk real estate model continues to be a core strength of our business.
In the first quarter, we completed a total of 836 real estate projects, including 260 new stores, 543 remodels and 33 relocations.
In addition, we now have produce in more than 1,300 stores.
For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total.
We also now plan to add produce in more than 1,000 stores, which compares to our previous expectation of approximately 700 stores.
As a reminder, we recently made key changes to our development strategy, including establishing two of our larger footprint formats, which each comprise about 8,500 square feet of selling space as our base prototypes for nearly all new stores going forward.
With about 1,200 square feet of additional selling space compared to a traditional store, these larger formats allow for expanded high-capacity cooler counts, an extended queue line and a broader product assortment, including NCI, a larger health and beauty section with about 30% more feet of selling space and produce in select stores.
We are especially pleased with the sales productivity of these larger formats as average sales per square foot are currently trending about 15% above an average traditional store, which bodes well for the future as we look to grow these unit counts in the years ahead.
In total, we expect more than 550 of our real estate projects this year will be in these formats as we look to further enhance our value and convenience proposition while driving additional growth.
Next, our digital initiative, which is an important complement to our brick-and-mortar footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers.
One such example is contactless payment, which is now available in the vast majority of the chain, further extending our convenience proposition, particularly for those seeking a more contactless shopping experience.
Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
And we are pleased with the growing engagement we are seeing across our digital properties.
Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of digital engagement and customer loyalty.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions.
This zero-based budgeting approach, internally branded as Safe to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset.
Our Fast Track initiative is a great example of this approach where our goals include: increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts, both around rolltainer and case pack optimization, which have led to even more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates.
Self-checkout was available in more than 3,400 stores at the end of Q1, which represents more than double the store count at the end of Q4.
And we are pleased with our results including customer adoption rates as well as positive feedback both from customers and employees.
Our plans consist of a broader rollout this year, and we are focused on introducing this offering into the vast majority of our stores by the end of 2022 as we look to further enhance our convenience proposition while extending our position as an innovative leader in small-box discount retail.
Our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we continue to create new jobs and opportunities for career advancement.
In fact, more than 12,000 of our current store managers are internal promotes, and we continue to pursue innovative opportunities to further develop our teams, including our recent announcement to partner with a leading training provider to deliver more personalized training solutions to our employees.
Importantly, we believe these efforts continue to yield positive results across our organization and are an important driver of our consistent and strong execution.
At the store level, we continue to be pleased with our robust internal promotion pipeline and store manager turnover, which continues to trend below historic levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we continue to make great progress against our operating priorities and strategic initiatives, and we are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders.
In closing, I am proud of our team's performance and we are pleased with our strong first quarter results, which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions us well going forward. | q1 earnings per share $2.82.
q1 sales $8.4 billion versus refinitiv ibes estimate of $8.28 billion.
raises financial guidance for fiscal year 2021.
qtrly same-store sales decreased 4.6%; increased 17.1% on a two-year stack basis.
reiterating its plans to execute 2,900 real estate projects in fiscal year 2021.
dollar general - believes q1 results were positively impacted by consumer behavior related to government stimulus payments.
sees 2021 net sales of 1% decline to increase of 1%.
sees 2021 same-store sales decline of 5% to 3%.
sees fy 2021 earnings per share $9.50 to $10.20.
sees share repurchases of about $2.2 billion in fiscal year 2021.
as of april 30, 2021, total merchandise inventories, at cost, were $5.1 billion versus $4.1 billion as of may 1, 2020. | 1 |
Today we have Vic Grizzle, our CEO; Brian MacNeal, our CFO to discuss Armstrong World Industries' third quarter 2021 results, our rest of the year outlook, and progress on our growth initiatives.
Both are available on our Investor Relations website.
These statements involve risks and uncertainties that may differ materially from those expected or implied.
We delivered strong third quarter topline growth, up 19% versus 2020 results with Mineral Fiber sales increasing 15% and Architectural Specialties sales improving 31%.
Adjusted EBITDA of $99 million was 8% ahead of prior year results.
We are pleased to have achieved these results against the backdrop of a choppy market recovery, increasing inflation, and supply chain disruptions throughout the construction industry.
Unrelated to these challenges, we also experienced a rare manufacturing equipment failure causing lower-than-expected production rates in September, which Brian will discuss in greater detail in a moment.
Despite these challenges and the rare production issue, we reaffirmed the midpoints of our full-year 2021 guidance and expect to have a strong finish to the year.
To that point, these continue to be unprecedented times.
Inflation remains a strain on raw material, freight, labor, and energy costs throughout the construction industry.
At AWI, we have moved proactively throughout the year to increase prices and stay ahead of these inflationary pressures.
And consistent with our performance over the past decade, we have successfully stayed ahead of inflation.
We recognize this is unique and it's a testament to the strength of our industry-leading service model and the high-quality innovative products we manufacture that allows us to earn those price increases in the marketplace.
Specifically within our Mineral Fiber segment, we reported third quarter AUV growth of 14% which is the highest level we've achieved since we separated from the flooring business in 2016.
And this growth was largely driven by like-for-like pricing improvements.
And not unrelated to inflationary pressures, supply chains throughout the economy have also been under unprecedented pressure.
Again our teams throughout the organization, have been on top of their game.
They have remained agile and dedicated to limiting disruptions to our customers and partners.
This is critical because of our best-in-class service model is an important component of our value proposition to our distributors and to the contractors who depend on them.
Because of this importance, we set a high bar for our service performance.
While many companies may track two or three service performance metrics, we track six as part of what we call our perfect order measure.
These include order fill accuracy, on-time delivery, shipping damage, billing accuracy, product defects, and returns.
And I can share with you with great satisfaction that this measure not only remained above our 90% threshold throughout 2021 for the Mineral Fiber segment in particular but it's improved in the third quarter.
So I'm proud of how our teams have executed to handle these unprecedented challenges internally to meet our customers' needs.
Now externally, these challenges have impacted our business in the form of project delays, impacting both our Mineral Fiber and Architectural Specialties segments.
Despite these challenges, Mineral Fiber sales volumes increased in the third quarter versus prior year on the strength of the R&R part of our business that has more than offset the impact of these project delays and the lower new construction activity.
Our sales rate per shipping day also showed sequential improvement in the quarter.
In fact, September sales rate per day eclipsed that of 2019, and the quarterly results for this metric has now improved sequentially for the last five quarters.
From a profitability perspective, the Mineral Fiber segment generated strong gross margins compared to prior year, reflecting positive like-for-like pricing, improved mix, and our ability to overcome the production headwind I mentioned earlier, with other productivity efforts, and in fact, this was the best gross margin level since 3Q of 2019.
Our WAVE joint venture delivered another strong quarter as they have maintained excellent pricing discipline to stay ahead of inflationary pressures.
We're also pleased with the performance of one of the Group's newest innovation called SimpleSoffit.
Now like many of our innovations, we've introduced SimpleSoffit drive efficiencies for our customers and for those who ultimately install our products.
Soffit framing is a common design feature that requires a significant use of labor and materials on commercial construction jobs and has a variety of complexities based on interior design and the accommodation of HVAC systems.
Given the pressures on labor, we realized creating savings in this area could be a significant value generator for our customers.
What the team at WAVE introduced are prefabricated soffit framing systems that are engineered using our automated design software to match the design specs and come prepackaged and easy to handle flat boxes.
Because of their design, our SimpleSoffit systems can be installed up to 3 times faster than traditional methods, with less material and labor hours.
SimpleSoffits are making a significant difference in terms of speed and cost on the sites where they have been used, including some high profile projects such as the new PG&E headquarters in California, The Kansas City International Airport and for hockey fans out there, the UBS Arena at Belmont Park, where the New York Islanders will drop the puck for the first time in mid-November.
We're very excited about how this new innovative product has gained traction and the value it's creating for our customers.
In the Architectural Specialties, the segment had a strong top-line quarter as well, improving -- and improving margin performance.
In addition to the contributions from our 2020 acquisitions, sales and earnings from the organic business rebounded nicely from prior year lows.
We've also successfully introduced price increases for these products and that is helping address some of the inflationary pressures on this segment as well.
New construction and major renovation activity improved but was uneven due to project delays, even with those challenges and our continued growth investments in this segment, Architectural Specialties' EBITDA margin improved 350 basis points sequentially and I expect these improvements to continue back above the 20% level.
We remain optimistic about the '22 and '23 outlook for Architectural Specialties, given the fact that we are on track to exit 2021 with a very strong order backlog and bidding activity remains robust.
As new construction activity regains momentum we expect sales growth to further accelerate in this segment.
The broader industry indicators that we track also support our growing optimism for both the AS and the Mineral Fiber segments.
As many of these have continued to improve or remained in positive territory in the third quarter.
GDP forecast remained above 5%, the Architectural Billing Index ended September well into expansionary territory at 56.6, up from August reading of 55.6, similar to the second quarter of Dodge data for both bidding and construction starts improved double-digits.
These are strong indicators for growth in 2022 and 2023 and with our recent investments, we are well-positioned to capture additional growth as the market recovers.
Today, I'll be reviewing our third quarter 2021 results and our updated guidance for the year.
On Slide 5, we begin with our consolidated third quarter 2021 results.
Adjusted net sales of $292 million were up 19% versus prior year.
Adjusted EBITDA grew 8% and EBITDA margins contracted 320 basis points.
EBITDA margins contracted due to continued investments in SG&A and lower manufacturing productivity.
Adjusted diluted earnings per share of $1.17 was 9% above prior year results.
Adjusted free cash flow was 28% above prior year results.
Our balance sheet remains healthy as we ended the quarter with $439 million of available liquidity, including a cash balance of $94 million and $345 million of availability on our revolving credit facility.
Net debt at the end of the quarter was $533 million and our net debt to EBITDA ratio of 1.5, as calculated under the terms of our credit agreement, remains well below our covenant threshold of 3.75.
In the quarter, we repurchased 187,000 shares for $20 million, for an average price of about $107 per share.
As of September 30, we had $544 million remaining under our repurchase program, which expires in December 2023.
Last week, we announced a 10% increase in our quarterly dividend, this is our third increase in the last three years and when paired with our share repurchases, is a reflection of our commitment to our balanced and disciplined capital allocation priorities that continue to be investing in the business, expanding into adjacencies through acquisitions, and returning capital to shareholders.
You can see our consolidated third quarter EBITDA bridge from the prior year results on this slide as well.
The $8 million adjusted EBITDA gain was primarily due to favorable AUV driven by positive like-for-like pricing and favorable channel mix, increased volume driven by the 2020 acquisitions, and contributions from WAVE equity earnings.
This favorability was partially offset by higher SG&A costs, increased input cost on freight raw, materials, and energy, and an increase in manufacturing cost driven by the 2020 acquisitions.
The increase in SG&A was driven by more normalized discretionary spending compared to the prior year cost reductions, an increase in variable compensation, investments for future growth in our Healthy Spaces and digital initiatives, and the 2020 acquisitions.
Not surprisingly, like many other manufacturing companies, we felt inflation impacts throughout our supply chain, albeit less than some other building product companies.
Our strong supplier partnerships have never been more important and our teams have done a great job of managing through this challenge.
We expect inflationary pressure to continue into the fourth quarter, we now see cost of goods sold inflation somewhere in the 4.5% to 5% range for the full year 2021.
As demonstrated historically and in this quarter, we will work to drive like-for-like pricing above inflation.
Our Mineral Fiber segment results are on Slide 6.
In the quarter, sales increased 15%, mostly due to favorable AUV previously mentioned.
We saw sequential improvement in our sales per shipping day metric and continue to track this closely in comparison to both 2020 and 2019.
AUV fell through to EBITDA at historical highs, as a result of the price increases we announced in February, May and August, and again is the outcome of our ability to price ahead of inflation.
Mineral Fiber segment adjusted EBITDA increased 10%, driven by the AUV gains and another strong quarter of equity earnings from the WAVE joint venture.
The team at WAVE has done a great job of pricing ahead of the steel inflation and managing issues across the supply chain.
These gains were partially offset by higher SG&A spending due to the return of prior-year cost reductions, increased variable compensation and investments to support our growth initiatives.
Input cost trended higher this quarter due to raw material, energy and freight inflation, which remains a top focus area for us as we end the year and prepare for 2022.
In addition, we experienced a $3 million headwind due to unplanned maintenance activities at two of our larger plants.
This caused downtime at both plants and drove lost productivity, higher scrap costs and additional freight cost to maintain our best-in-class service levels.
Both situations where remediated during the quarter and I'm happy to report that the plants are running very well in October.
This is an atypical event for AWI.
As many of you know, we consistently drive plant productivity year after year.
Moving to Architectural Specialties or AS segment on Slide 7.
Third quarter adjusted net sales grew 31% or $19 million with the 2020 acquisitions in terms of Turf, Moz, Arktura, contributing $16 million and organic sales increasing $3 million.
AS segment adjusted EBITDA increased 1% as improved sales from the 2020 acquisitions and the organic business more than offset project push outs, higher SG&A, and increased manufacturing costs.
The adjusted EBITDA margin for the segment improved 350 basis points sequentially from the second quarter but contracted 500 basis points when compared to the third quarter 2020 results.
This segment is still being pressured by inflationary conditions continued along with a recent spike in project delays due to commercial construction labor disruptions and supply chain challenges.
The project push outs are delaying some revenue to Q4 and 2022.
In September, we announced an additional round of price increases for AS products, which have already gone into effect.
We've had AS price increases in each quarter of 2021.
Slide 8 shows the drivers of our consolidated results for the nine-month period, including a breakout of the impact for our 2020 acquisitions.
Sales for the first nine months of the year were up 18% and adjusted EBITDA increased 10%.
The year-to-date results are driven by higher volumes as the second quarter lapped a prior year more significantly impacted by the pandemic, favorable AUV, and increased WAVE equity earnings, which were partially offset by higher SG&A spend and increased manufacturing in input costs.
Adjusted diluted earnings per share increased 12% to $3.28.
Slide 9 shows year-to-date adjusted free cash flow performance, which is flat versus the prior year.
Increases in cash earnings, working capital improvements, and WAVE-related dividends were offset by an increase in income tax payments and higher capex spending following a reduced prior year in an effort to manage cash and liquidity during the pandemic.
Our cash generation through the first nine months is in line with our expectations.
We summarize our updated guidance for 2021 on Slide 10.
Please note, this guidance update assumes no significant pandemic-related shutdowns or material job delays due to supply chain issues.
We are narrowing our guidance ranges for all key metrics and now we expect year-over-year revenue growth of 17% to 18%, adjusted EBITDA growth of 13% to 15%, adjusted earnings per share growth of 14% to 16%, and adjusted free cash flow of down 7% to 2%.
The right side of the page highlights updates for the prior -- from the prior guidance communicated in July.
You'll notice the increase in Mineral Fiber AUV range from 9% to 11% as our teams continue to do a great job of realizing price from our three Mineral Fiber increases this year.
We're bringing down the range of our Mineral Fiber volume to 1% to 2% as near-term choppiness remains and projects are delayed into the out months and 2022.
We continue to invest in our Healthy Spaces and digital initiatives and believe they will be meaningful contributors to our future growth.
But the larger impact on volume for the current year is the project delays previously discussed.
This is a shift in contribution between the 2020 acquisitions and the organic business to the AS segment as revenue impacts are felt from the project delays.
We now expect the 2020 acquisitions to contribute about 30% growth and AS organic in the mid-to-high single-digit range.
In conclusion, I'm proud of the work our teams have accomplished throughout the third quarter in the face of supply chain challenges and a renewal of COVID-19 concerns.
It certainly wasn't easy but they delivered a solid quarter.
These are challenging times but I remain optimistic that our investments in the future, whether it's in people, growth initiatives, innovation, or partnerships, will unlock the next level of growth for AWI.
Before we get into the Q&A session, let me share a little bit more about how we see our current position and the progress on key initiatives and what that means for the future here at Armstrong.
Inflation and supply chain challenges are likely to persist into next year.
But at AWI, we're demonstrating that we can manage our way through this, successfully delivering price ahead of inflation and minimizing the impact from supply chain disruptions.
Market conditions are continuing to improve albeit and an uneven and choppy-like fashion.
Despite the unevenness in the recovery, we have remained focused on strengthening our competitive advantage and improving our long-term growth trajectory.
Our strong financial position has allowed us to continue investing in our growth initiatives, such as Healthy Spaces and digital innovation and those efforts are progressing well and gaining traction.
Our Healthy Spaces product sales have continued to improve quarter-on-quarter and there are clear signs of the growing recognition of the role ceilings can play in ensuring indoor spaces are healthy.
For example, we have seen a significant uptick in our demand for health zone products.
This is the first line of our Healthy Spaces solutions.
As a reminder, these products were introduced a few years back to meet the needs of the healthcare environments in terms of disinfectibility and washability, which are now attributes important to any and all indoor spaces.
On a year-to-date basis, sales of these products have increased 38% versus 2020 and over 20% versus 2019 levels.
What's most encouraging is that approximately 60% of these sales are now coming from outside of the healthcare vertical.
This is validating the broader need and the transferability of existing Healthy Spaces solutions to more general-purpose applications such as offices, schools, and hospitality.
VidaShield and AirAssure, the two products that we introduced at the end of last year, again still early days, but the progress is encouraging.
Sales of these products in the third quarter doubled from the second quarter sales levels.
And we have more than doubled the number of active projects in the quarter and are conducting several trials on large-scale projects.
On the digital front, we continue to invest across several initiatives with a focus on speed and cost benefits for our customers.
One such initiative is project Works, which is our digital design and pre-construction service.
This service automates the design process from concept to builder materials, drastically increasing the speed of design while allowing design iterations along the way in minutes or in hours versus days.
In addition, once the design is complete, we can provide an accurate builder materials that makes the lives of contractors much easier.
This is a service that is deepening our collaboration with architects, designers, and contractors in a mutually beneficial way.
It's helping us secure additional specifications and ultimately to sell more products into more commercial spaces.
We are excited about the number of projects being processed by project Works and how it's strengthening Armstrong's leadership position in the commercial construction industry.
In summary, our advancement of digital and product innovation, despite the ongoing challenges of the evolving COVID pandemic is a testament to the power of focus we have as an America's-only ceiling and specialty walls company.
This power and focus has been critical throughout the pandemic as we kept all of our plants in operation and made no cuts to our sales and marketing efforts.
Our unique and powerful focus has also helped us manage through the challenges of inflation and supply chain disruptions to maintain our long track record of achieving price over inflation and maintaining our best-in-class service levels.
Throughout this uncertain period, we have not slowed our efforts to execute on our company strategy.
Our customer relationships are stronger now than ever and our ongoing product in digital innovation is providing important top-line growth opportunities.
As our markets continue to recover, we are in an excellent position to capitalize on this recovery and to deliver increased levels of value creation for our shareholders. | compname reports q3 adjusted earnings per share $1.17.
qtrly adjusted earnings per share $1.17. | 1 |
Our fourth quarter results reflected the continued positive trends in our largest businesses.
Harsco Environmental and the hazardous waste portion of our Clean Earth segment.
Overall, Harsco delivered both sequential and year-over-year growth in Q4, and EBITDA was consistent with our expectations.
With that said, we are very happy to have 2020 in our wake.
Harsco, like many other companies, faced challenges in 2020 that required us to shift our focus, essentially overnight to keeping our employees safe, our businesses resilient and our liquidity position strong.
At the same time, we closed the largest acquisition in Harsco's history in terms of revenue, ESOL.
Beyond its scale, ESOL required a complicated carve-out from its parent company, was in need of basic process discipline and was underperforming its market.
Additionally, in 2020, we made a step change in our ESG journey as evidenced by significant ratings upgrades, external recognition and improved metrics in nearly all areas.
It is clear that ESG is closely aligned with our strategy and central to the shifting identity of Harsco.
Looking back on what the Harsco team accomplished, I could not be more proud about the effort and the results.
There are many reasons to be optimistic about the direction of our company.
Most notably, the continued improvement in our end markets and the value creation potential of our environmental services businesses that represent about 80% of our revenue.
Our strategic focus is clear, and we look forward to executing the next major steps of our portfolio transformation as conditions warrant.
We have four principal objectives this year.
Apart from our primary objective of continuing to manage the impact of the pandemic on our people and on our businesses.
The first objective is to realize the targeted benefits of the Clean Earth and ESOL integration and prepare for accelerated growth in this new platform.
Second, enhancing the value proposition and the cash flow profile of Harsco Environmental by shifting the revenue mix further toward environmental solutions.
Third, increasing the enterprise value of our rail business through further operational improvements and backlog growth; and fourth, reducing our financial leverage to a level much closer to our target of about 2.5 times.
Regarding the Clean Earth platform, the benefits realized from the integration of ESOL were about twice what we expected in 2020.
We anticipate incremental benefits of about $20 million this year, also or about double those realized in 2020.
We still expect total benefits of $40 million to $50 million by the end of 2022 on a run rate basis.
Although external integration costs are behind us, we will incur about $10 million of cost this year for branding and IT initiatives that will not repeat in 2022.
Overall, while the negative impact of the pandemic on the business could not have been predicted, I'm pleased with our execution and the foundation we are building in this new platform.
In Harsco Environmental, it's terrific to have following seas after 18 months of medicine head seas.
I'm excited to see the development of the business this year, particularly in the areas of Altek, applied product sales and innovation.
As previously discussed, a significant amount of maintenance capital was deferred from 2020 to this year, and capital spending on new contracts will also be higher than in future years.
Nonetheless, the growth and cash flow trends in the business are favorable, and we are targeting free cash flow generation of 8% to 9% of revenue in 2022 on a path to 10-plus percent in future years.
Our Rail business was set up to have a very strong year in 2020, based on operational improvements and a record backlog.
The impact of COVID on capital spending in both the freight and transit sectors has been dramatic.
Although the freight sector is recovering, spending on maintenance of way equipment will lag by a few quarters.
And the transit sector remains particularly weak.
Another challenge for our business is overcoming the margin loss associated with a large Chinese aftermarket program that is winding down.
Fortunately, our backlog and the launch of new products and our global reach should enable us to outperform the market this year.
While our project SCOR met its objectives in terms of capacity and data analytics, it uncovered more opportunity to improve manufacturing costs than we had realized.
Just a few comments on our portfolio.
As noted previously, an aggressive slate of internal initiatives and our financial leverage will likely push the next major step in our portfolio transformation into next year.
We also continue to focus on the best avenue to create shareholder value with our Rail business.
But our strategic ambition remains clear, continuing our transformation to a pure-play environmental solutions company.
Now over to Pete.
Harsco's revenues totaled $508 million and adjusted EBITDA totaled $62 million in the fourth quarter.
Our revenues increased 27% over the prior year quarter, with ESOL contributing most of the growth followed by revenue increases within both our Environmental and Rail segments.
The revenue increase for Harsco Environmental is noteworthy as Q4 was the first year-on-year increase in revenues for the business in a number of quarters.
This reflects both successful execution of our strategy and the positive trends in the underlying markets.
Relative to the third quarter, revenues were a little changed as continued growth from the Q2 lows for environmental and hazardous waste processing were offset by increasing market pressures related to COVID within our Contaminated Materials and Rail businesses.
Our fourth quarter adjusted EBITDA of $62 million was near the high end of our previously disclosed guidance range.
EBITDA for Q4 improved both sequentially and year-over-year, reflecting the business reasons I mentioned earlier and the actions we undertook in response to the pandemic in 2020.
Harsco's adjusted earnings per share from continuing operations for the fourth quarter was $0.12, this adjusted figure excluded costs for the ESOL integration and the severance costs related to additional restructuring actions in environmental.
The actions in HE supplement those taken in the first quarter of 2020 and illustrate our focus on continuous improvement and further strengthening the business results.
The ESOL integration process remains ongoing, but our related external costs are now essentially complete.
For 2021, we don't expect to incur any significant external integration costs.
However, there will be other internal integration costs, which I'll outline later in my remarks.
Lastly, our free cash outflow was $8 million in the fourth quarter.
This outcome, while below our expectations, was largely the result of higher-than-anticipated capital spending and the timing of receivables collections.
With respect to receivables, some customers chose to manage payments at year-end, with this cash subsequently received by us in the first and second week of 2021.
And these factors are considered in our cash flow guidance for the current year, which I'll discuss later.
Revenues totaled $246 million and adjusted EBITDA was $52 million, representing a margin of 21%.
This EBITDA figure of $52 million compared to $51 million in the prior year quarter and $40 million in the third quarter of 2020.
Overall, these were very strong results for HE with attractive incremental margins against comparable periods.
We're very pleased with these results as they demonstrate the increasing resilience of the segment despite the persistent impacts of the pandemic.
Compared with the fourth quarter of 2019, the EBITDA change can be attributed to higher demand for Applied Products in North America and lower SG&A spending.
And this lower administrative spending is the result of our actions linked to the pandemic deflects our costs as well as permanent reductions, some of which were taken in the fourth quarter, as I mentioned earlier.
Steel consumption and production at our customer sites continues to improve.
The LST or steel production volume increase from the third quarter was strong, more than 10% sequentially.
Relative to the prior year quarter, customer LST also improved incrementally.
This marked our first positive year-on-year comp for LST since early 2019.
The increase was, however, modest, and the benefit was largely offset by a less favorable mix of services, as shown in our bridge.
It is encouraging nonetheless to see the market recovery accelerate and financial performance strengthen within the steel industry in recent months.
I would also emphasize that the industry continues to operate well below its normal utilization rates, which for our customers, averaged just over 75% in Q4.
So we look forward to further capitalizing on additional growth as the industry continues to recover.
Lastly, Harsco Environmental's free cash flow totaled $5 million in the quarter and totaled $69 million for the year.
This full year figure compares with free cash flow of $13 million in the prior year, with the improvement during 2020 driven by lower capex and cash generated from working capital.
For the quarter, revenues were $185 million, and adjusted EBITDA totaled $16 million.
Growth compared to the fourth quarter of 2019 reflects the inclusion of ESOL in our hazardous waste line of business.
This impact was offset by lower contributions from our contaminated materials business line, which continues to face pandemic-related impacts.
The change in our contaminated materials performance also reflects a challenging comp to the fourth quarter of 2019, which was a very strong period for the business from a mix point of view, both for soil and dredged material processing.
Also, as we've discussed before, our corporate cost allocation to Clean Earth also impacted the year-on-year EBITDA comparison.
Relative to the third quarter of 2020, revenues were approximately 5% lower, and adjusted EBITDA declined to $16 million.
These changes reflect lower soil and dredge revenues in Q4 and again, a less favorable mix across all way streams relative to the sequential quarter.
Hazardous waste volumes were modestly higher quarter-on-quarter.
Next, Clean Earth's free cash flow was again very strong for the quarter.
The segment's free cash flow totaled $17 million in the quarter and for the year, it totaled $55 million versus adjusted EBITDA of $58 million.
We are pleased with its results in the second half, and we remain ahead of our plan on integration.
ESOL contributed approximately $20 million of EBITDA in the second half of the year, which represents a meaningful improvement year-on-year.
The benefits realized from synergy or improvement initiatives now total approximately $10 million, with the largest improvements coming from disposal optimization and commercial levers.
This total was higher than our original goal for 2020.
Looking forward, we still have more work ahead of us to complete the ESOL integration this year.
Areas of focus and investment in the coming quarter will be IT integration, logistics, procurement, site productivity and additional commercial opportunities to name a few.
We remain confident that we will reach our improvement targets by year-end, and I'll discuss the anticipated 2021 benefits within our outlook in just a bit.
Rail revenues reached $77 million while the segment's adjusted EBITDA totaled approximately $2.5 million in the fourth quarter.
This EBITDA figure compares with a loss of $2 million in the prior year quarter.
The improvement relative to the prior year can be principally attributed to lower manufacturing costs and higher contracting contributions from new contracts in North America and Europe.
These positive factors were partially offset by lower short-cycle equipment and aftermarket results.
Relative to the third quarter of 2020, the changes in our aftermarket business also led to the slight decrease in EBITDA sequentially.
Lastly, let me highlight that our rail backlog remains healthy at just over $440 million, representing a slight decrease from the prior quarter as we continued production under our long-term contracts.
As we mentioned with our third quarter results, economic or business conditions within the rail maintenance-of-way market remained challenging.
Many customers continue to defer required maintenance spending and equipment replacement or upgrade expenditures.
This pandemic related trend continued throughout the entire fourth quarter.
With that said, rail industry metrics are improving, and we expect that Harsco Rail will begin to see the benefits from this positive trend in mid-2021.
For this reason, we are optimistic that business conditions will see improvement in 2020 as it progresses, putting our business in the right direction to achieve some of the financial goals we've discussed in the past.
Turning to slide nine, which is a high-level summary of our full year 2020 results.
For the full year, revenues increased to $1.9 billion, and adjusted EBITDA totaled $238 million.
Also, our free cash flow was $2 million.
Let me start by saying that given the extremely difficult environment we all saw in 2020, I am very proud of the extent and depth of the actions and processes we put in place as a result of the pandemic to protect our people, continue serving our customers and support our financial health.
From a financial point of view, we trimmed the capital spending by roughly $65 million and pushed out project spending.
We took advantage of the CARES Act legislation and deferred other payments.
We also took actions to reduce our cost structure by more than $20 million with some of these being permanent savings, as I mentioned earlier.
And secondly, the acquisition of ESOL accelerated our strategic transformation, and as I mentioned earlier, our integration work to date has exceeded our expectations.
Also related to ESOL, you will recall that we successfully raised capital to fund this acquisition during a period of extreme market volatility.
We ended the year with net debt of $1.2 billion, a leverage ratio of 4.6 times and liquidity of more than $300 million.
We are also now evaluating opportunities to take advantage of attractive credit markets to extend our debt maturities by another three years and provide even more financial flexibility.
Regarding our segment outlook on slide 10.
There is no need to remind everyone of the continuing volatility in the end markets caused by the pandemic.
However, we believe we have enough visibility in our businesses to provide outlook commentary for 2021.
Of course, this assumes there are no significant negative pandemic-related market developments from what we see presently.
With that in mind, in summary, each business is expected to show improvement compared with 2020.
Starting with Harsco Environmental, revenue is projected to increase 10% to 15%.
Adjusted EBITDA is projected to increase approximately 20% at the guidance's midpoint.
The business drivers for HE in the year will be higher customer output and related services demand, increased Applied Products volumes, growth initiatives and new contracts.
Next, for Clean Earth, we are guiding to adjusted EBITDA of $72 million to $78 million for the year on revenues of approximately $790 million.
We anticipate that CE's pro forma revenue growth will be within a range of 3% to 5%, while we expect double-digit pro forma EBITDA growth for the business.
Higher revenues will support the EBITDA growth, but the primary earnings driver for CE in 2021 will be integration or operational improvement benefits.
We expect to realize an uplift of roughly $20 million from our actions taken to date and those contemplated in 2021.
Most of these efficiencies will be operationally driven, including lower disposal and transportation costs.
We also anticipate some commercial benefits as well.
And as I alluded to earlier, these benefits will be partially offset by additional support costs and investments.
And it's important to note, a portion of these expenses, approximately $6 million to $8 million, comprising largely duplicative costs for IT integration and branding will not recur in 2022.
We've also allocated an additional $3 million of corporate costs to Clean Earth.
This allocation and the nonrecurring expenditures will total approximately $10 million for the year.
Lastly, for Rail, we project top line growth of 15% to 20% and adjusted EBITDA growth of 25% at the guidance's midpoint.
For the year, higher equipment, technology and contracting sales will offset the impact of a weaker parts mix, reduced Asian aftermarket demand and investments, including R&D.
And lastly, corporate costs are anticipated to be within a range of $33 million to $34 million.
Turning to our consolidated 2021 outlook on slide 11.
Our adjusted EBITDA is expected to increase to within a range of $275 million to $295 million.
This guidance translates to adjusted earnings per share of $0.59 to $0.76.
The earnings per share range contemplates interest expense of $63 million to $66 million and an assumed effective tax rate of 36% to 38%.
Lastly, we are targeting free cash flow before growth capital spending of $100 million.
And after considering all capex, our full year free cash flow should range from $30 million to $50 million.
This forecast anticipates net capital spending will be within a range of $155 million to $175 million.
And this amount compares with net capex of $114 million in 2020, with most of the increase attributable to growth and renewal expenditures in environmental that were deferred in 2020.
While capital spending will increase year-on-year, we will continue to employ strict spending discipline.
As in 2020, capex remains an important lever to support free cash flow.
Also at this point, I expect that our capital spending beyond 2020 will normalize to levels below our current year forecast.
Also note that our projected free cash flow ranges include cash payment deferrals from 2020, including those related to the CARES act of roughly $12 million to $15 million.
But looking past 2021, our cash flow generation will increase as capex normalizes and the cash payment deferrals from 2020 are behind us.
We expect to see consolidated run rate free cash flow generation in excess of 6% to 8% of revenue by the end of 2022.
So let me move to slide 12 with our first quarter guidance.
Q1 adjusted EBITDA is expected to range from $52 million to $58 million.
Compared with the first quarter of 2020, we expect HE results to improve due to lower administrative spending and a more favorable service mix.
Clean Earth results are projected to be modestly higher as ESOL contributions will offset the impact of lower contaminated soil and dredge volumes and the nonrecurring expenses I mentioned earlier.
We also assume that we'll be able to make up in March, some volume that was lost in January and February, due to weather conditions in the Northeast and in Texas.
Rail results are anticipated to be lower year-on-year as a result of lower aftermarket volumes and mix.
Also, corporate costs are expected to be modestly higher due to timing of expenditures and some normalization of costs.
Lastly, let me comment on this year's phasing.
As you'll likely conclude, we expect our results to strengthen as the year progresses.
And the factors to consider regarding this phasing include the seasonality of HE and Clean Earth, the impact of growth investments in the maturing of new sites in environmental, the timing of synergies at Clean Earth and the conversion of our rail backlog and anticipated improvements in the rail maintenance-of-way market.
While my wife and I are extremely excited about it and very much looking forward to my retirement and entering the next stage of our lives, it is hard not to have mixed emotions.
I look back fondly and proudly at my time here at Harsco, and there is so much I will miss.
Above all, Nick's excellent leadership, counsel and friendship these past six years, which I value immensely, for which I'm extremely grateful.
I will also greatly miss my colleagues on the executive leadership team who are far more than just colleagues.
And finally, I will miss the world-class global finance and IT organizations I've had the privilege to lead and the countless members of the Harsco team I've met and worked with, each of whom clearly reflects the values and culture of this exceptional organization.
Yes, I will certainly miss much, but rest assured I'll be watching eagerly and optimistically as a shareholder as Harsco continues to achieve success. | q4 adjusted earnings per share $0.12 from continuing operations.
q4 revenue $508 million versus refinitiv ibes estimate of $513.6 million.
2021 adjusted ebitda expected to increase to between $275 million and $295 million.
2021 free cash flow projected to increase to $30 million-$50 million.
sees 2021 adjusted earnings per share $0.59 - $0.76. | 1 |
Today's discussion will also reference certain non-GAAP financial measures such as operating income and accident share loss and combined ratios, excluding catastrophes, among others.
I will begin with some commentary on our full year financial highlights in the context of the business and economic environment.
I will then provide a strategic view of our segments and our 2020 accomplishments.
We reported outstanding results in the quarter and for the year, delivering strong operating earnings and significant value for our shareholders.
In the face of unprecedented challenges, our 4,300 employees and our company rose to the occasion in 2020.
We quickly and effectively adapted to the rapidly changing market conditions and customer expectations, while flexing our agile operating model and driving innovation across our organization and the insurance value chain.
In a year defined by the coronavirus pandemic, social unrest, economic disruption and challenging weather, we relied on and even further strengthened our unique, collaborative and nimble culture.
And made good on our promises to our agents, customers and communities.
And we continue to create value for our shareholders, generating exceptional profitability and high-quality premium growth despite the prevailing economic conditions.
Ultimately, thriving in ways we believe position our company for even greater success in 2021 and the years ahead.
For the year, we reported operating earnings per share of $9.32, up 14% from 2019 and a strong operating return on equity of 13.1%, in line with our long-term target.
Our performance on the year highlighted the overall effectiveness of our strategy, the resiliency of our business and our ability to drive sustainable, broad-based profitability.
In particular, I want to share the following financial observations: First, we managed well in spite of the changing market conditions, continuing to enhance our operating model and invest in our capabilities, positioning the company to deliver strong profitable growth going forward.
Despite the many economic challenges related to widespread business limitations and restrictions, we delivered net written premiums of $4.6 billion for the year, up from 2019.
After hitting a low mark in the second quarter, we delivered improved growth through the remainder of the year.
We expect exposure declines in 2020 will bounce back in 2021, as the economy continues to recover and distribution of the COVID-19 vaccines continues to ramp up.
Our resiliency in 2020 highlights the efficacy of our unique distribution strategy, the strength and commitment of our agent partnerships and our ability to provide a diversified portfolio of products and services to our customers and agents.
We are also very encouraged by improvements in the leading growth indicators, ranging from Commercial Lines PIF growth to increased consolidation activity with our top agents, and a gradual pickup in Personal Lines retention.
The momentum we have reestablished in our business position us well to accelerate growth as the economy continues to strengthen throughout 2021.
Second, we delivered strong underwriting results with an all-in combined ratio of 94.4% for the year and 88.1%, excluding catastrophes.
Our robust underwriting performance in 2020 went beyond the temporary frequency benefits we realized in personal auto.
In fact, we delivered returns at or above target in all three major business units while continuing to build our earnings consistency.
Though 2020 was an active catastrophe year for the P&C industry overall, the impact of cat on our business was considerably more modest.
Our strong performance relative to the industry is a reflection of the many prudent underwriting actions we have taken over several years as well as our continuing discipline with respect to property aggregation.
Our ability to outgrow the market, going forward, requires we consistently generate top quartile returns.
To that end, once again, we generated excellent returns in 2020, enabling us to take a more aggressive and opportunistic approach to growth in 2021 and beyond as the market provides opportunities.
Third, we continue to be prudent and responsible stewards of our shareholders' capital.
2020 marked the 15th consecutive year, in which the Hanover increased its ordinary dividend.
In addition, during the year, we repurchased approximately 2.2 million shares of our company's common stock, deploying $212 million in underscoring the confidence we have in our company's financial earnings and growth prospects.
2020 was a very strong year for us, and we begin 2021 feeling optimistic and confident.
We are well capitalized with a very strong balance sheet, a proven business strategy, unique and targeted distribution approach and responsive and innovative products and services.
We are intently focused on delivering value and outperforming the industry over the long term.
Turning now to our key strategic accomplishments for the year.
We successfully advanced our strategic imperatives and made important progress toward our vision to be the premier P&C franchise in the independent agency channel.
A franchise that delivers relevant and innovative risk management solutions while helping our agents transform the way customers experience and value insurance.
Our Personal Lines team delivered exceptionally strong earnings during the year, continuing to effectively manage its book of business, finding the right balance between rate and retention on our renewal book and maintaining our commitment to sustainable profitable growth.
As an account writer, we take a disciplined and long-term approach to renewal price across our home and auto policies, so as not to cause excessive disruption for customers and agents.
That said, we took pricing actions in the second half of 2020 to protect our profitable renewal book, and we'll continue to do so as market conditions warrant.
Those actions started to have a positive impact in the fourth quarter and in January.
And we should see retention improving throughout the year, eventually getting back to historical levels.
With respect to aggressive new business price competition, we believe some competitors in the Personal Lines auto sector are being shortsighted.
Pandemic related frequency benefits are temporary in nature, and we want to be responsive in our pricing without setting the stage for significant increases in the not-too-distant future.
As auto frequency returns to near-normal levels, we want to be positioned for growth and not have to drive outsized increases in recently acquired customers.
Additionally, we remain mindful of increased severity in the current environment due to higher intensity incidents and the reemergence of social inflation as the nation transitions out of the pandemic.
Our recent new business indicators are beginning to suggest a return to positive growth momentum.
We signed a record number of consolidation agreements with our partners in 2020, which we expect will provide a new business tailwind in 2021.
During 2020, we expanded our first lines product offerings with the introduction of Home Business Solutions, a suite of business insurance products for homeowners who manage home-based businesses.
In addition, we gained further momentum with our Hanover Prestige offering, which caters to customers with more complex insurance needs.
We added more than 7,000 new Hanover Prestige customer accounts during the year and exceeded our full year 2020 new business target, with new business growth nearly 30% higher than in the prior year.
We also expanded our Personal Lines footprint to 20 states in 2020, beginning to write business in Maryland on the heels of adding Vermont and Pennsylvania over the last couple of years.
We start 2021 with enormous optimism and believe that our agency relationships, consolidation commitments, customer centricity and expanded footprint will enable us to reestablish our prepandemic growth momentum in Personal lines.
We are also very pleased with the performance of our commercial businesses in 2020.
Our Commercial Lines team successfully navigated an especially difficult economic environment, while continuing to focus on growth in our most profitable segments.
Our diversified industry mix in Core Commercial enabled us to deliver solid growth in the most vibrant and growing industries, such as technology, life sciences, light manufacturing, financial services and educational institutions, while also enabling us to continue to manage profitability in select Property Lines.
In Specialty, we are achieving double-digit growth in management liability and Hanover Specialty property, which are among our most profitable businesses.
We continue to expand our products and capabilities, strengthening our offerings for financial institutions, retail E&S and cyber customers.
We also advanced our total Hanover strategy, leveraging our specialized capabilities across our Commercial Lines customer base.
Commercial Lines net written premiums were up both for the year and the quarter, as we capitalize on the hardening market to obtain rate, with fourth quarter Core Commercial rate increases of 6.4% and Specialty increases of 8.9%, up sequentially from 5.7% and 7.2% in the third quarter, respectively.
At the same time, we are seeing a tightening of new business versus renewal pricing, which indicates further market discipline and solid execution.
We believe there is more opportunity ahead to achieve additional rate increases with the continuation of many market catalysts, including low interest rates, ongoing pressure in larger liability account size segments and social inflation.
Across our commercial book, we are seeing rate meaningfully exceed loss trends.
Policy exposures and endorsements coming back and our policy counts continuing to grow.
These and other factors support our belief that our growth will accelerate throughout the year as the economy continues to recover and through continued market share gains with our agent partners.
Our broad industry offering and specialty expertise, combined with deep business insights and agency partnerships, positions us to drive growth in an improving economic climate and in a firm commercial rate environment in 2021.
One of the most profound takeaways for us coming out of 2020 was how quickly things can change.
More than ever before, our company flexed its agility and its innovative spirit, giving us even more confidence in our ability to continue to do so going forward.
We recognized, as never before, the opportunity that exists in becoming even more customer-centric.
Identifying ways to be more efficient and easier to work with in all aspects of customer and agency interaction, including policy acquisition, quoting and underwriting, customer service and claims settlement.
As an organization, we were well prepared to meet the demands of 2020, having invested significantly over the past several years to enhance our major underwriting and quoting platforms.
In fact, almost every area of our technology stack had been upgraded or replaced over the last five years to enable our business solutions with a more open environment.
Our Personal Lines TAP Sales platform now has been deployed in all of our Personal Lines markets, and we have started the rollout of our new small commercial underwriting and agent interface platform.
This new Commercial Lines TAP Sales platform will be deployed across the country by the end of 2021.
Additionally, prior upgrades to our major claims and billing systems allowed us to move to a virtual environment overnight, providing our agent partners and customers with a high level of service.
We are also bringing our customer and agent connectivity to the forefront of our digital road map.
Through multiple agency management systems and InsureTech solutions, we have and are committed to further enhance the overall effectiveness of data sharing between agents, customers and underwriters.
In 2020, we expanded customer online inquiry and self-service to commercial lines, while also driving efficiencies with e-billing and e-delivery in Personal Lines.
Innovation also is playing a key role in claims, as we increasingly use digitization and technology platforms to virtually complete auto estimates and reinspections using Hanover staff.
The same is true on the property side of the business.
Global 360, our downloadable self-service application with virtual interactive inspection capabilities, now processes more than half of the losses that previously would have been adjusted in person.
The ability to innovate in an agile and thoughtful way is becoming one of the most crucial competitive advantages for insurance companies, and we believe we have what it takes to continue to innovate efficiently.
We're proud of the accomplishments we've made to date, but it's our growth mindset and innovative culture that will enable us to embrace the opportunities ahead.
In a year defined by rapid change, economic and social strain and new customer expectations, we elevated our focus in inclusion and diversity and are committed to making ours an even more inclusive and diverse organization.
During the year, we made important strides, including the further development of our employee-led business resource groups, continued unconscious bias and inclusive leadership training in the publication of our inaugural inclusion and diversity report, which is available on our website.
These important initiatives have been central to our business success over the last few years and will enable us to prosper well into the future.
In parallel, we are advancing our sustainability goals by further incorporating environmental, social and governance factors as we manage our company's investment portfolio, addressing environmental risks and implementing practices that promote and encourage environmentally responsible behavior.
These steps are essential in helping us continue to attract and retain outstanding talent, sustain our competitive advantage and maintain top quartile performance in our rapidly changing world.
I am extremely proud of our 2020 performance, which reflects the inherent strength of our company, the effectiveness of our strategy and the versatility of our business model.
We begin 2021 in a position of strength, both operationally and financially and look to the year ahead with great optimism.
We have a proven and unique business strategy, deep partnerships with the best independent agents in our industry and the talent and drive needed to deliver superior value for all of our stakeholders.
For the quarter, we reported net income of $164.6 million or $4.43 per diluted share compared with $109.8 million or $2.76 per diluted share in 2019.
After-tax operating income for the quarter was $112 million, or $3.02 per diluted share compared with $80.2 million or $2.01 per diluted share in the prior year quarter.
For the year, net income was $358.7 million or $9.42 per diluted share compared with $425.1 million or $10.46 per diluted share in 2019.
Operating income for the year was $355 million or $9.32 per diluted share compared with $331.6 million or $8.16 per diluted share in 2019.
Our fourth quarter earnings reflected a combined ratio of 92.4%, an improvement from 96.2% in the fourth quarter of 2019 due to prior underwriting and rate actions, favorable loss frequency and favorable prior year development.
Our combined ratio for the full year improved to 94.4% from 95.6% in 2019, again, reflecting mix improvements and favorable loss frequency, partially offset by higher cats.
Fourth quarter 2020 catastrophes totaled $35.1 million or 3% of earned premium, which was below our catastrophe load assumption of 3.6%.
Full year catastrophes totaled $286.7 million or 6.3% of earned premium.
While full year cat losses were above our expectations due to a particularly active Q2 and Q3, our overall cat loss experience compared favorably with the industry as a whole.
In fact, more than half of our cats above our expectations stem from losses associated with social unrest.
This underscores the effectiveness of our prior aggregation management initiatives.
Our diversified business mix and prudent risk management practices should continue to serve us well over the long term.
That being said and considering changes in weather patterns in certain geographies in the U.S., we believe it is prudent to increase our catastrophe load for 2021 from 4.6% to 4.9%.
Even though our PMLs and 10-year averages remain relatively stable.
We believe it is thoughtful to assume higher weather-related catastrophe losses going forward, which should appropriately impact our pricing targets and return expectations in cat prone lines.
Excluding catastrophes, we delivered a full year combined ratio of 88.1%, well below our original guidance of 91% to 92%.
Our full year 2020 expense ratio of 31.6% was flat with 2019, short of our original expectations due to higher variable agent and employee compensation costs from better-than-expected profits.
We expect to achieve a 30 basis point expense ratio improvement for full year 2021, which puts us right on track with our long-term expense ratio savings target of 20 basis points per year.
We executed well on our original cost management and efficiency targets for 2020.
We also achieved additional savings to address the lower premiums earned during the year due to lack of growth and premium returns.
For the most part, these savings are permanent in nature, giving us confidence in our expected 31.3% expense ratio in 2021.
For the year, we recorded favorable prior year reserve development of $15.5 million or 0.3 points of the combined ratio.
This was driven primarily by continued favorability in Workers' Comp, partially offset by pressure in auto bodily injury and commercial multi-peril.
Our conservative approach to reserves reinforces our commitment to react quickly to trends in order to mitigate the potential for issues down the road.
From that standpoint, we concluded 2020 with a very strong balance sheet.
This is a direct result of our reserving consistency and discipline.
Several years of prudent underwriting and pricing actions in certain specialty lines and in commercial auto, in addition to other initiatives to enhance profitability.
We continue to prudently hold COVID reserves, although loss activity has been limited.
Our mix of business, specifically not writing travel, trade credit or event cancellations, and our use of ISO based forms has served us well during the pandemic.
Turning to underwriting results in each of our businesses.
With the full year now behind us, I will focus my comments on our full year 2020 results, but will mention quarterly movements where relevant.
Personal Lines reported a full year combined ratio, excluding catastrophes, of 84%, down from 91.6% in 2019.
This improvement was driven primarily by personal auto.
Our personal auto ex-cat accident year loss ratio was 61.3% in 2020, an improvement of 10.3 points from the prior year, as a result of the claims frequency benefit associated with the pandemic.
While frequency has declined across our footprint, we benefited less in the second half of the year than in the second quarter, as stay-at-home orders and business restrictions eased to varying degrees.
Going forward, we expect frequency will gradually return to historical norms and anticipate ending 2021 with fourth quarter frequency relatively in line with levels before the pandemic.
Overall, we expect our Personal Lines loss ratio in 2021 will, of course, increase from 2020, but should remain a little lower than 2019, primarily due to the timing of remaining loss frequency benefits diminishing throughout the year.
In homeowners, our 2020 ex-cat current accident year loss ratio was 49.1%, up 1.2 points from 2019 due to some elevated fire and property losses.
We continue to take strong rate of 5% in homeowners, not including the inflation adjustment in the year, and we expect profitability in 2021 to be relatively in line with ex-cat results in 2020.
Personal Lines net premiums written declined 0.5% for the full year, including the impact of the premium refunds issued in the second quarter.
We believe our customer-centric strategy and high level of engagement with agents will continue to drive growth once the benefit of frequency subsides.
During the year, we appointed 170 new agents and achieved record consolidation signings.
Turning to Commercial Lines.
Our full year combined ratio, excluding catastrophes, improved 1.2 points to 90.9%, primarily reflecting a decrease in our current accident year loss ratio due to meaningful underlying improvement in other Commercial Lines and temporary frequency benefits in commercial auto.
The loss ratio in our commercial auto book improved 5.8 points to 63.8%.
We have generally only reacted to the favorable results in the auto property coverages, while maintaining our prudent approach to liability reserving and pricing.
Our commercial multi-payroll loss ratio increased 1.5 points to 57.7% due to some elevated large property loss activity in the first and third quarters of 2020 and to a lesser extent, in the fourth quarter.
Our review of the portfolio does not suggest any major systemic concerns.
However, we continue to actively monitor our business mix and take rate where appropriate.
Our workers' comp loss ratio remained essentially flat at 60.9%.
While underlying loss trends remain favorable, we are maintaining our conservative approach to reserves, given the current rate environment and uncertainty about future claims.
Other Commercial Lines loss ratio improved 2.9 points to 53.6%, which underscores the success of prior year profit improvement actions in our Specialty property and programs businesses.
Our Specialty portfolio is now delivering above target returns and growing the fastest.
Commercial lines net premiums written grew 1% in 2020, driven by solid momentum in our Specialty Lines, where rates remained on a strong upward trajectory with sequential increases each quarter of the year.
New business submissions continued their steady upward trend off of their March lows.
Core Commercial retention remains at historical highs at 86.2%, while cancellation and endorsement activity moderated.
Small commercial submissions and consolidations are trending positively, and we continue to achieve pricing above long-term loss trends.
Premium growth in Core Commercial ticked slightly lower in the fourth quarter compared to the third quarter, in part due to exceptionally robust new business performance in the fourth quarter of 2019.
Looking ahead, we expect our underlying commercial lines loss trends to remain relatively stable.
Similar to personal auto, we anticipate commercial auto frequency will return to historical norms by the end of 2021.
While overall rate will likely exceed loss trend, we remain very prudent with our liability selections, given the continued risk of social inflation and uncertainty around workers' comp profitability, in light of the many years of rate decline in that line.
We expect the overall Commercial Lines loss ratio in 2021 to be fairly consistent with 2020.
We believe growth will continue to accelerate in this business going forward, aided by strong rate trends and continued economic recovery.
Turning to our investment performance.
We generated net investment income of $70.2 million for the fourth quarter and approximately $265 million for the year.
This was ahead of our midyear guidance for 2020 and reflective of better-than-expected investment partnership performance.
Lower yields continue to pressure our portfolio, and we expect that trend to continue into 2021.
Cash and invested assets at year-end were $9 billion, with fixed income securities and cash representing 85% of the total.
Our fixed maturity investment portfolio has a duration of 4.8 years and is 96% investment grade.
We have a high-quality, well-laddered and diversified portfolio with a weighted average rating of A+.
Moving on to equity and capital position.
We thoughtfully managed our capital throughout 2020, even with the broader market uncertainty and economic volatility.
In October, we executed $100 million accelerated share repurchase agreement, which closed last week, underlining our commitment to be responsible and prudent managers of capital.
Combined with activity earlier in the year, we returned approximately $212 million to shareholders in 2020 through share repurchases, including the final delivery of all shares.
Under the ASR agreement, we repurchased 2.2 million shares or 6% of the outstanding shares since the beginning of 2020.
Underscoring the confidence that we have in our strategy and growth prospects, we paid $99.5 million in dividends to our shareholders throughout the year and increased our recurring dividend payment in December 2020 by 7.7%.
With broad-based profitability, expense discipline and an effective capital allocation strategy, we continue to target a return on equity of 13% or higher over the longer term.
Our book value per share of $87.96 increased 4.3% during the quarter, and 15.8% from December 31, 2019, driven by operating income and both realized and unrealized gains in our investment portfolio, partially offset by the payment of our regular quarterly dividends.
Overall, I am very pleased with our full year performance, which reflects the clear execution of our strategic goals, financial discipline and commitment to delivering top quartile returns.
I'm incredibly confident in the trajectory of our company and our ability to continue building on the strong momentum we have established.
We expect overall net written premium growth in the mid-single digits, driven by growth in our most profitable businesses.
We anticipate acceleration in premium growth throughout the year.
However, first quarter 2021 maybe a little lower than full year, impacted by inherent difficulties with a direct comparison to the pre-pandemic first quarter of 2020 and the timing of the economic recovery.
While the second quarter comparison will benefit from customer premium returns in the second quarter of 2020.
We expect net investment income to remain flat compared to 2020, as the impact of lower new money yields will be offset by higher operational cash flows.
Our expense ratio should decrease by approximately 30 basis points in 2021 to 31.3%.
The combined ratio, excluding catastrophes, should be in the range of 90% to 91%.
We've set our cat load for the year at 4.9%, as I mentioned earlier.
And we expect an effective tax rate to approximate the statutory rate, which is 21%.
Our first quarter cat load is expected to be 4.7%, slightly below our full year ratio. | compname reports q4 earnings per share $4.43.
compname reports fourth quarter net income and operating income of $4.43 and $3.02 per diluted share, respectively.
full year net income and operating income of $9.42 and $9.32 per diluted share, respectively.
full year combined ratio of 94.4%.
q4 operating earnings per share $3.02.
q4 earnings per share $4.43. | 1 |
During today's call, we Will also reference non-GAAP metrics.
I want to start by welcoming Charley to the team.
He joined Donaldson last week after two decades on the sell side, which included 15 years of covering our company.
He already knows us well, so our Investor Relations program is in good hands.
Turning to the quarter, we feel good about our results.
First quarter sales were up 3% sequentially, which is not typical seasonality, signaling that the worst of the impact from the pandemic on our business may be behind us.
Sales of replacement parts outperformed first-fit by a wide margin providing valuable stability, and we saw continued evidence of share gains in strategically important markets and geographies helped in part by our robust portfolio of innovative products.
First quarter profit performance was another highlight.
Gross margin was up 60 basis points from the prior year resulting in the highest first quarter gross margin in four years, and the best sequential improvement in at least a decade.
We reduced operating expenses by 5% while maintaining investments in our strategic growth priorities, particularly as they relate to the Industrial segment.
And altogether, we had a decremental operating margin of only 4% which we view as very positive given the uneven economic environment.
Finally, our company remains in a strong financial position.
We had excellent cash conversion during the quarter and our balance sheet is solid.
We're on track to deliver our strategic and financial objectives in fiscal '21 and we'll talk about those plans later in the call.
But first, let me provide some additional color on recent sales trends.
Total sales were down 5.4% from prior year or 6.4% in local currency.
In the Engine segment more than a third of the decline came from Aerospace and Defense, due largely to the significant impact from the pandemic on commercial aerospace.
We have a great team and strong customer relationships, so we expect our Aerospace business Will recover.
In the meantime, we are pursuing optimization initiatives to put our cost structure on a firmer footing during this rough patch.
In our other Engine businesses trends seem to be improving.
On-Road sales were down 21% in the quarter, which is still a steep decline, but notably better than the past few quarters.
Although Class 8 truck production in the US remains depressed, order rates are increasing and third party forecast for the next calendar year suggest the Class 8 recovery is on the horizon.
Should that happen, we believe our strong position with OEM customers would give us nice momentum in the On-Road first-fit market.
In Off-Road, trends were mixed by region.
In Europe, sales from new Exhaust and Emissions programs were not yet enough to offset the lower rate of production for programs already in place.
In the US, lower production of construction and mining equipment is still a headwind for Off-Road but we had a meaningful sequential increase in first quarter and year-over-year trends are also improving.
We had a very strong quarter in China with Off-Road sales up more than 50%.
Their economic recovery appears to be under way and we are also benefiting from new relationships with Chinese manufacturers that want our high-tech products, including PowerCore.
China [Indecipherable] is more heavy duty equipment than any other country in the world and our team is doing an excellent job building and strengthening relationships with large local customers.
While we expect to have some variability in quarter-to-quarter trends, we are also confident that we have a long runway for growth in China.
First quarter sales and aftermarket were down only slightly from the prior year and they were up 6% from the prior quarter.
All of the year-over-year decline in aftermarket came from the US.
The independent channel is still being impacted by the oil and gas slowdown, which we partially offset with pricing actions implemented earlier this calendar year.
And large OE customers are still tweaking inventory to match demand.
Outside the US, aftermarket performed very well.
In Europe, first quarter sales were up 4% in local currency as conditions improved in Western Europe.
In China, first quarter sales of Engine aftermarket were up more than 30% reflecting strong growth in both channels.
We are gaining share with the new OEM customers and end users are paying greater attention to equipment maintenance.
Part of our success in China is due to PowerCore which is growing rapidly from a small base.
Importantly, PowerCore continues to do well outside of China.
Global sales of PowerCore replacement parts were up in the low single-digits last quarter and we set another record.
PowerCore is our most mature example of how our razor to sell razor blade strategy works and the brand is still going strong after 20 years.
Turning now to the Industrial segment.
First quarter sales were down about 6% including a benefit from currency of about 2%.
The decline was driven primarily by Industrial Filtration Solutions or IFS.
The pandemic is creating a headwind in terms of equipment utilization and a lower willingness to invest.
Quoting activity for new dust collectors was down in the first quarter and the quote-to-order cycle remains elongated.
Generally, customers are focusing on must do projects, while deferring expansion in productivity investments to a future date.
With the market under pressure, we are focused on building our brand and gaining share.
We have strengthened our capabilities related to market analysis and virtual selling and our e-commerce platform gives us incredible reach.
We also continue to leverage our technology advantage and we are encouraged by the opportunity that presents in an underserved market like China.
For quarter -- first quarter sales of dust collectors were up modestly in China and the needs in that region are changing in our favor.
Some manufacturers are dealing with compliance upgrades related to the Blue Sky initiative, while others are going beyond the minimum requirements and striving for better air quality.
That shift represents an exciting opportunity for us, so we Will continue to invest for growth in that region.
Process Filtration for the food and beverage market is another exciting opportunity.
We launched our LifeTec brand filter late in 2016, and we have seen tremendous growth since then.
Sales of Process Filtration parts were up again last quarter with a low single-digit increase which partially offset the pandemic related pressure on sales of new equipment.
Our strategy for growing Process Filtration is solid.
We are focused on winning new contracts with large global manufacturers which gives us the opportunity to sell their plants.
Some of these customers have hundreds of plants, so we are once again doubling our sales team for Process Filtration.
We also made an organizational change to better align our team with the needs of our food and beverage customers.
While these type of optimization initiatives are standard work for us, I'm calling it out because during our fourth quarter call, we said Process Filtration sales were about $50 million of fiscal 2020.
Following our reorganization that number is more like $68 million.
Our IFS numbers are unchanged, but we wanted you all to have the right baseline as we talk about year-over-year trends in this exciting business.
Trends across the balance of our Industrial segment were mixed.
Sales of Gas Turbine Systems were up 11%, driven by strong growth of replacement parts and we continue to gain share.
In Special Applications, we faced pressure from the secular decline in the disk drive market, combined with lower sales of our membrane products.
We partially offset the decline with strength in our Venting Solutions business, which is also benefiting from share gains as we expand into new markets including the auto industry.
Overall, we see strong evidence of how our diverse business model is providing some insulation from the pandemic.
We are gaining share in strategically important markets and geographies.
We are investing to keep the momentum and we continue to show progress on our initiatives to increase gross margin.
I'll talk more about our longer term plans in a few minutes.
He's got great perspective and he is a strong addition to our team.
We are excited to have him join us and I hope you all Will have a chance to connect or reconnect with him soon.
Now turning to the quarter, like Tod said, we are pleased with our results.
Economic conditions were better than what we had in the fourth quarter and we made progress on our strategic initiatives.
First quarter margin was a highlight for us in terms of year-over-year and quarter-over-quarter performance.
Versus the prior year operating margin was up 50 basis points, driven entirely by gross margin.
That translates to a decremental margin of 4%, but that's probably not the level to expect over time.
For a better comparison, I'd point you to our sequential trends.
First quarter sales were up 3% from the fourth quarter and our operating profit was up almost 6%.
That yields in incremental margin of 24.5%, which is in line with our longer term targets from Investor Day and several points ahead of our historic average.
As I've said many times, we are committed to increasing levels of profitability and increasing sales, and we have solid plans to keep driving margins higher.
We saw evidence of those actions last quarter.
So let me share some details.
First quarter gross margin increased 60 basis points to 35% despite the impact from the loss of leverage and higher depreciation.
On the other hand, gross margin benefited from lower raw material costs.
Our procurement team has done an excellent job capturing cost improvements by working with existing suppliers and identifying new ones, which added to the benefits from lower market prices.
We also had a favorable mix of sales in the first quarter, specifically aggregate sales of our Advance and Accelerate portfolio which includes a significant portion of our replacement part sales along with many of our higher tech businesses outperformed the company and our Advance and Accelerate portfolio also comes with a higher average gross margin.
As we continue to drive investments into these businesses, we are shifting more weight toward higher margin categories.
Over time, mix should be a constant factor in driving up our gross margin.
Our strong gross margin performance in the first quarter was complemented by disciplined expense management.
Operating expenses were down 5% from the prior year, which resulted in a slight increase as a rate of sales.
We had significant savings in discretionary categories like travel and entertainment, due in large part to pandemic related restrictions.
At the same time, we continue to invest in our strategic priorities.
We are building teams and adding resources to areas like R&D, Process Filtration, Connected Solutions and dust collection.
These investments are tilted heavily toward the Industrial segment, which contains most of the Advance and Accelerate businesses.
Given that dynamic, we are not surprised that the first quarter Industrial profit margin was down slightly.
Importantly first quarter gross margin was up in both segments, so we feel good about where we ended.
As our investments translate to grow, we expect our margin and return on invested capital Will go up over time.
Moving down the P&L, first quarter other expense of $1.5 million compared with income in the prior year of $2.6 million.
The delta was largely due to a pension charge and the impact of certain charitable options.
During the first quarter we contributed to Donaldson Foundation and there was also a charge for securing face masks that were billed to frontline workers in our communities.
We generally spread these contributions over our fiscal year, so the impact is more timing related than a change in trajectory for us.
I also want to share some highlights of our capital deployed in the first quarter.
As expected capital expenditures dropped meaningfully from the prior year, with our large projects related to capacity expansion mostly complete, we are turning our attention to optimization and productivity initiatives.
We returned more than $40 million of cash to shareholders last quarter, including a repurchase of 0.3% of outstanding shares and dividends of $27 million.
We have paid a dividend every quarter for 65 years and we are on track to hit another milestone next month.
January marks the five-year anniversary of when we were added to the S&P High Yield Dividend Aristocrats Fund.
So this anniversary signals that we have been increased our dividend annually for the past 25 years.
We are proud of this record and we intend to maintain our standing in this elite group.
As we look to the balance of fiscal '21, there are still plenty of reasons to be cautious.
The magnitude and ultimate impact from the pandemic are still unknown and we continue to face uneven economic conditions.
Given these dynamics, we feel prudent to hold back on detailed guidance, but we did want to expand our information provided during our last earnings call.
In terms of sales, we expect second quarter Will end between a 4% decline and a 1% increase from the prior year and that means sales should be up sequentially from the first quarter.
We also expect a year-over-year sales increase in the second half of fiscal '21, and sales are planned to migrate toward a more typical seasonality meaning that second half Will carry slightly more weight than the first.
We are modeling a full year increase in operating margin driven by gross margin.
Our productivity initiatives should ramp up over the fiscal year and we expect benefits from lower raw material costs and mix Will still contribute to a higher gross margin, but to a lesser extent than what we have been seeing.
Of course the caveat to the gross margin impact from a strong recovery, while we Will be happy of our first-fit businesses accelerate beyond our expectations, that could create a scenario or mix close from a tailwind to a headwind.
That's obviously a high-grade problem and we would address situation if that's the case.
As the rate of sales, we intend to keep fiscal '21 operating expenses about flat with the prior year.
Specifically, the second half of the year, we are still expecting headwinds from higher incentive compensation and planning a return to a more normal operating environment, we would anticipate year-over-year increase in expense categories that have been significantly depressed by the pandemic.
But as always, we are exploring optimization initiatives to offset these headwinds.
I am confident that we can maintain an appropriate balancing -- balance, allowing us to invest in our longer term growth opportunities by driving efficiency elsewhere in the company.
For our full year tax rate, we are now expecting something between 24% and 26%.
The forecast oriented is more now than last quarter, simply due to having a clarity with the first quarter complete.
There were no changes to our other planning assumptions.
So let me share some context.
Capital expenditures are planned meaningfully below last year, reflecting the completion of our multi-year investment cycle.
Our long-term target is plus or minus 3% of sales and we would expect our capex to be below that level this year.
We plan to repurchase at least 1% of our outstanding shares which Will opt dilutions [Phonetic] with stock based compensation.
Should we see incremental improvement in the economic environment, it is reasonable to expect that we Will repurchase more than 1% this fiscal year.
Finally, our cash conversion is still expected to exceed 100%.
We had a very strong cash conversion in the first quarter driven by reduced working capital, lower capital expenditures and lower bonus payouts.
As sales trends improve versus the first quarter, we would expect our cash conversion to drift down a bit over the year, which is typical of a more favorable selling environment.
Stepping back to the numbers, our objectives for the year are consistent with what I shared last quarter, we Will invest for growth and market share gains in our Advance and Accelerate portfolio, execute productivity initiatives that Will strengthen gross margin, maintain control of operating expenses including the implementation of select optimization initiatives and protect our strong financial position through disciplined capital deployment and working capital management.
We had a solid start to the fiscal year, despite the pandemic fatigue [Phonetic] that I know everyone is feeling.
I am proud of what you all accomplished and I look forward to continued success.
I wish you and your family my best as you move to Europe.
The good news is we Will still work together.
This year we have a straightforward plan.
We play offense where we can and defense where we must.
Our defensive efforts are all about managing costs and one way we are doing that is through optimization.
The most significant example relates to productivity improvements in our plants, which are being enabled by the capital investments we made over the last two years.
But it's not just about large projects for us, our employees have a continuous improvement mindset and our culture has a shared commitment to operating efficiently.
Our teams are consistently finding ways to leverage tools and technology and their work allows us to deploy more resources to support our strategic growth priorities.
As we look forward, we are excited about those opportunities.
For example, food and beverage is the first step on our journey into life sciences.
We expanded production capabilities of our LifeTec filters and our new R&D facility in Minnesota, we believe we are in an excellent position to press forward.
At the same time we're pressing forward in our more mature markets, driven by our spirit of innovation, we continue to bring new technology to applications that have been using old technology for a long time.
A great example is a recently announced product for Baghouse dust collection.
Baghouses have used the same low-tech solution for decades, and they represent about half of the $3 billion to $4 billion industrial air filtration market.
Our game-changing product the Rugged Pleat Collector delivers improved performance and lower cost of operation for customers, heavy-duty applications like mining, wood working and grain processing.
So we Will deploy new technology to gain share in this significant market.
In the Engine segment, we continue to lead with technology which is critical given the size of the opportunity.
We are currently competing for projects with an aggregate 10 year value of more than $3.5 billion, telling us the market for innovation is healthy and we have a significant opportunity to win new business.
Our OE customers are working to improve fuel economy and reduce emissions from the diesel engine and they are also increasingly interested in growing their parts business.
Our products meet both of those needs.
We have a multi-decade track record of providing industry-leading performance and we can also show that our technical and design characteristics help our customers retain their parts business.
Based on the opportunities in front of us, we believe the diesel engine Will remain a valuable part of our growth story for a long time, but we also know the market is changing.
So our focus on growing the Industrial segment, while expanding our global share of the Engine market, including new technologies related to air filtration for hydrogen fuel cells puts us in a strong position for long-term growth.
I also want to touch on the role of acquisitions in our growth formula.
With capital markets recovering from the pandemic, we've been getting more questions lately about our philosophy.
So I thought I'd take a minute to realign everyone.
Our focus is very consistent with what we laid out 18 months ago at our Investor Day.
At a high level, we remain a disciplined buyer.
We're most interested in new capabilities and technologies, especially those that accelerate our entrance into strategically important markets.
And we are targeting companies that Will be accretive to our EBITDA margin.
As always, we Will pursue companies that align with our long-term plans versus simply buying share.
The filtration market is split between a small number of large companies, us included and a significant number of smaller companies.
The timing for executing an acquisition is always uncertain, so we Will continue to work our process.
Additionally, we recognize and appreciate that filtration is a high value market.
So our goal is finding the best opportunity at a reasonable price.
With a robust acquisition strategy and significant organic growth options we feel confident that we can continue to drive strong returns on invested capital for a long time to come.
The level of global coordination and collaboration continues to impress me and I believe we have done very well during the pandemic as a business and as a culture. | fiscal 2021 operating margin expected to be up from prior year, due to higher gross margin.
sales trends improving, with year-over-year growth anticipated in second half of fiscal 2021.
donaldson company - q2 sales expected to be up sequentially from q1, with a year-over-year change between a 4 percent decline and a 1 percent increase.
donaldson company - sales in h2 of fiscal 2021 expected to increase. | 1 |
Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.
Our actual results may differ from those projected due to risks and uncertainties with the Company's business.
Additional information regarding these factors can be found in the Company's SEC filings.
Also, as a reminder, during today's question-and-answer session, we ask that you please limit yourself to two questions to allow time for everyone who wishes to participate.
Please requeue with any follow-up questions thereafter.
I am very pleased to report another outstanding quarter.
Demand continues to be strong across our footprint driving significant margin expansion as we maintain record occupancy, strong pricing power and disciplined cost control.
With this strong demand, we achieved average quarterly occupancy that was 420 basis points higher than last year.
We grew occupancy 170 basis points during the second quarter.
This has allowed us to be more aggressive with rates, which has helped to drive an increase in net effective rates by more than 50% through the end of June.
Our footprint continues to expand through both acquisitions and third-party management as we leverage our deep relationships.
The vast majority of our acquisitions were off market, including 13 stores from our third-party management portfolio through the first half of 2021.
We closed on a record $534 million of wholly owned acquisitions through the first half of this year, already matching our total acquisition volume of last year.
These acquisitions are expected to generate a blended year one cap rate of 4.5% and represent a nice mix of markets and maturity with almost one-third in lease-up and roughly 70% in the Sunbelt region.
In addition to $22 million of closed acquisition subsequent to the quarter end as well as an additional $80 million currently under contract, we have a strong late-stage pipeline of attractive opportunities that our team continues to work on.
Our third-party management portfolio totaled 340 stores at quarter end and we added 19 more stores in July as owners and developers are attracted to our operating performance and innovative technology platforms.
Our team has evaluated a record number of management opportunities this year and the pipeline continues to grow.
We also continue to show strong progress in Warehouse Anywhere.
Including rental income associated with these business customers, Warehouse Anywhere's year-to-date revenue is up almost 30% to a $14 million run rate including $9 million of annualized fee income.
Our tech-enabled enterprise and Lightspeed products have growing pipelines of companies in search of inventory management and last mile logistics support.
Many of these businesses would unlikely be using self-storage if it were not for the solutions provided by Warehouse Anywhere.
With the strong demand and performance, we exceeded our expectations substantially for the quarter and are therefore once again increasing our guidance for the remainder of the year.
We have increased the midpoint of our estimated adjusted funds from operations per share 8.5% to $4.74 this year, which would be 19.4% growth over 2020.
And with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.
Last night, we reported adjusted quarterly funds from operations of $1.20 per share for the second quarter, an increase of 27.7% over the same period last year.
Second quarter same-store revenue accelerated significantly to 14.7% year-over-year, more than double the 7.3% growth produced in the first quarter.
Revenue performance was driven by a 420 basis-point increase in same-store average quarterly occupancy.
That occupancy contributed to very positive rent roll-up and substantially lower discounting on the new rentals.
In the quarter, our same-store move-ins were paying almost 16% more than our move-outs.
This pricing power, along with our ability to push rates on existing customers, contributed to an 8.3% year-over-year growth of same-store in-place rates for the second quarter, up from just 1.3% growth in the first quarter of this year.
Discounts as a percentage of same-store rental revenue declined 60% year-over-year to 1.4% in the quarter.
Same-store operating expenses grew only 3.9% year-over-year for the quarter.
The largest negative variance during the quarter occurred in repairs and maintenance and real estate taxes.
The increases were partially offset by an 11% decrease in Internet marketing expenses.
The net effect of the same-store revenue and expense performance was a 320 basis-point expansion in our net operating income margin resulting in 20.2% year-over-year growth in same-store NOI for the second quarter.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing approximately $148 million of common stocks via our ATM program in the second quarter.
Our net debt to recurring EBITDA ratio decreased to 5 times, and our debt service coverage increased to a healthy 5.3 times at June 30th.
At quarter end, we had $360 million available on our line of credit, and we have no significant debt maturities until April of 2024 when $175 million becomes due.
Our average debt maturity is 6.2 years.
We have substantial liquidity available to continue growing our asset base with investment opportunities that provide our shareholders with attractive risk-adjusted returns.
Regarding 2021 guidance, we've substantially increased our same-store forecast, driven primarily by higher expected revenues and unchanged expense expectations.
Specifically, we expect same-store revenue to grow between 10.5% and 11.5%.
Excluding property taxes, we continue to expect other expenses to increase between 2.25% and 3.25%, while property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 13.5% to 14.5% growth in same-store NOI.
We have also increased our anticipated acquisitions by $325 million to between $800 million and $1 billion.
Based on these assumption changes, we anticipate adjusted FFO per share for 2021 year to be between $4.69 and $4.79. | q2 adjusted ffo per share $1.20. | 1 |
We have posted to www.
I hope everyone on the call is staying safe and healthy.
I'm pleased to update you on how we continue to respond to and overcome the challenges of the pandemic.
I'll first discuss our financial results, then we'll cover our performance with respect to our strategic priorities and operations and will end with our expectations for the remainder of 2021.
For the first quarter, organic growth was negative 1.8% which positions us for a very strong recovery for 2021.
Going forward, we expect to see positive organic growth.
The new disciplines, we have disclosed are as follows.
CRM Precision Marketing which includes our market consulting, digital and direct marketing agencies, CRM Commerce and Branding Consultancy includes our branding consultancies, shopper marketing and specialty production agencies, CRM Experiential includes our events agencies and CRM Execution & Support is unchanged for the most part, from our prior reporting and includes primarily our field marketing research agencies and our agency servicing the not-for-profit sector.
We believe this additional level of disclosure will allow you to have a better understanding of our operations.
Getting back to our organic growth by geography, in the United States organic growth was down 1% an improvement of over 8% from the fourth quarter.
Advertising and Media and CRM Precision Marketing were positive in the US while the rest of our disciplines, continued to be negative with CRM Experiential having the largest negative impact on our growth.
Europe continued to face significant challenges due to the pandemic in Q1.
Although overall, the markets continued to improve while the rollout of vaccine in Europe lags that of the United States and the UK.
Some countries like Germany and the Netherlands are starting to make progress.
The UK was down 6.4%, about half the decline in the fourth quarter.
CRM Precision Marketing, CRM Commerce and Branding Consultancy and health were all positive in the UK, primarily offset by a significant reduction in CRM Execution & Support due to our field marketing operations.
The Euro and the non-Euro markets were down 3.2% as compared to a negative 9.2% in Q4.
Multiple countries had positive growth in the quarter and the majority continued to improve sequentially.
As you turn positive in Q1 with organic growth of 2.5% Australia continued to perform well and we saw a significant return to growth in our events business in China which combined with improvements in the other operations in the market resulted in double-digit growth.
Latin America experienced negative 2.4% growth in Q1 and meaningful sequential improvement compared to the fourth quarter.
EBIT margin in the first quarter was 13.6% as compared to 12.3% in the first quarter of 2020.
EBIT improved due to the repositioning and cost management actions we took in 2020.
In 2021, our management teams are continuing to align cost with revenues and we're also seeing continued benefits from reductions in addressable spend.
While we expect addressable spend will not return to pre-COVID levels, travel and certain other addressable costs will likely increase during the course of 2021, as conditions improve.
Overall, our expectation is that operating margins for the full year of 2021 will exceed our 2020 operating margin, excluding repositioning costs incurred in Q2 of 2020.
Net income for the quarter was $287.8 million, an improvement of 11.5% from 2020 and earnings per share was $1.33 per share, a year-over-year increase of 11.8%.
Turning to our liquidity, the refinancing steps we took earlier in 2020 combined with our enhanced working capital processes and the curtailment of our share repurchase program, have positioned us extremely well.
We generated $383 million in free cash flow in the quarter and ended with $4.9 billion in cash.
Given the continuing improvements in our operations, strong liquidity and credit profile, our Board has approved the resumption of our share repurchases beginning in the second quarter.
This follows our recent decision to increase our dividend by 7.7% to $0.70 per share.
Both actions are a testament to the steady improvement in our results and our expectations for further improvement for the remainder of 2021.
Our traditional uses of our free cash flow paying dividends, pursuing accretive acquisitions and using our remaining cash for share repurchases is now fully back in effect.
Phil will cover our first quarter performance in more detail during his remarks.
Turning now to our strategy and operations.
In the midst of the pandemic, our key strategic objectives served us well.
These strategies are centered around hiring and retaining the best talent, driving organic growth by evolving our service offerings, improving operational efficiencies and investing in areas of growth.
As part of this process, we continue to make internal investments in our agencies across all practice areas during a very difficult year.
We made good progress on enhancing our capabilities throughout our portfolio, and we will continue to pursue investments with a specific focus in precision marketing, MarTech and digital transformation, commerce, media and healthcare.
We are also accelerating our pursuit of acquisitions in these areas and we've recently completed two transactions; Omnicom Health Group acquired US-based Archbow Consulting.
Archbow helps pharmaceutical and biotech companies design, build and optimize market access operations, product distribution and patient access.
These capabilities will deepen Omnicom's health group's consultative services to biotech and pharma companies across a broad spectrum from operations to marketing.
Also in the quarter Credera, our MarTech and digital transformation consulting business and part of Omnicom's Precision Marketing Group acquired Areteans.
Areteans will extend through their depth in digital transformation, digital marketing and e-commerce.
The company specializes in the design, delivery and implementation of real-time interaction and digital customer relationship management for some of the world's largest brands.
It expands our operations in Australia, India, New Zealand, Singapore and the UK.
Turning to Omni our data and insights platform, as I've mentioned in our last call; looking beyond our media business our practice areas are increasingly leveraging Omni to identify insights for their specific disciplines and clients.
Last quarter Omnicom Public Relations Group launched OmniEarned ID a solution that allows clients to evaluate the outcomes of Earned Media with the same precision as paid media.
More recently, our Health Group launched Omni Health which integrates key healthcare data sets within a privacy compliant ecosystem.
Since we launched Omni 3 years ago, we've continued to [Indecipherable] and insights platform.
As compared to other solutions built on limited -- open source approach -- connects more data sources across more media and commerce platforms to deliver better outcomes to our clients.
In Q2, we will be launching Omni 2.0 using next generation API connections to seamlessly orchestrate, identity sources and platforms -- insights and superior decisioning for our clients across all our networks and practice areas.
Just as important Omni 2.0 continues to build on our commitment to consumer privacy and transparency.
Our data neutral approach, which results in the most diverse compilation of data sets continues to be rooted in a robust data privacy compliance methodology.
This approach puts us in a strong position for a post-cookie world; a few points on this are, through our pioneering work creating data clean rooms, we have direct connections to the first-party data of many of our clients.
Because we are open source and data neutral, Omni works seamlessly across walled garden environments, as well as the broader ecosystem.
At the same time, we orchestrate datasets from about 100 privacy compliance sources to provide a comprehensive view of the consumer across devices.
As the marketplace and technologies continue to rapidly advance, we are confident, our talent, platforms and the strategies built on a foundation of our creative culture, give us a competitive advantage in effectively serving both new and existing clients.
As testament to this success, we've had several key new business wins this past quarter, including a multi-year agreement with Alliance, a leading financial services provider for creative development and production services.
Through this master framework agreement, Omnicom will produce work for Alliance on a global and local level, offering creative solutions to activate the global brand strategy for more than 70 countries, where Alliance operates.
In addition, after recently selecting OMD as its US media agency of record Home Depot has named BBDO as its creative agency of record.
Avocados from Mexico hired GSD&M as its agency of record.
TWBA\Chiat\Day LA was named Agency of Record for three new clients; Behr Paint, Moderna and Schwan's Company.
Through the strategic and creative accounts for Vanguard and Vantage and OMD won the media business for Dr. Scholl's.
In summary, we've made significant strides in evolving our services, capabilities an organization to better service our clients with data science and technology, while remaining grounded in our core strength of creativity.
I'm proud to lead a company with an extraordinary group of people who continually deliver the best creative work in our industry.
From their unwavering dedication, creativity and innovation came the number of industry awards and recognition.
Here are just a few highlights.
For the drums, wealth creator rankings Omnicom was the number one holding company for the fourth year in a row and BBDO won the network category.
[Indecipherable] was named campaign US's 2020 advertising agency of the year.
Critical Mass was named Ad Age's 2021 best places to work with.
BBDO, TBWA and Goodby Silverstein & Partners, were all named to Fast Company's prestigious list of Most Innovative Companies for 2021 making Omnicom the only holding company -- there are three agencies ranked in the top 10 in the advertising sector.
And PHD was named EMEA's Media & Network of the Year and UK Media Agency of the Year Campaign's UK Agency of the Year Award.
Our people have a wealth of knowledge, experiences and perspectives that lead us to this innovation and forward thinking look.
The diversity of our group is something that needs to be celebrated, prioritized and improved upon and it's a strategic focus for us in the year ahead.
With our launch of OPEN2.0 last year, we have made a clear action plan for achieving systemic equity across Omnicom.
We have more than doubled the number of DE&I leaders throughout Omnicom and we are establishing specific KPIs for our networks and practice areas to deliver on and to be measured by.
I look forward to sharing the progress we are making on DE&I on our future calls.
As I discussed earlier, we are confident in both our organic growth expectations and EBIT performance for 2021.
It has taken some time to turn the corner and we are now on a clear path to return to growth.
At the same time, we know that we must continue to monitor the COVID-19 situation and to adapt to any unforeseen challenges that may arise.
As we continue to enhance our operations, we are also evaluating what the future of work looks like at Omnicom; our leadership on a local and office level are working on gathering feedback from employees and clients to help us decide what the new normal will be; one where we can service our clients efficiently while also connecting with colleagues in the safest and most flexible way possible.
The incredible talent within Omnicom has helped us maintain business continuity through the lows of 2020 and overcome its challenges.
As John said, as we move through the first quarter of 2021, we continue to see an improvement in business conditions particularly when compared to the peak of the pandemic during the second quarter of 2020.
As we anticipated, we again saw a sequential improvement in organic revenue performance, a decrease of 1.8% in the first quarter of this year which is a considerable improvement in comparison to the last three quarters of 2020.
And now that we've cycled through a full year of operations since the start of the pandemic, we expect to return to positive organic growth in the second quarter and for the full year.
We continue to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories and the benefits from our repositioning actions taken back in the second quarter of 2020.
Turning to slide 3 for a summary of our revenue performance for the first quarter, organic revenue performance was negative $60.6 million or 1.8% for the quarter.
The decrease represented a sequential improvement versus the last three quarters of 2020, including the unprecedented decrease in organic revenue of 23% in Q2 11.7% in Q3 and 9.6% in Q4.
Regionally, although we continue to experience declines in the Americas, we continue to see improvement when compared to what we experienced over the previous three quarters.
In Europe, FX gains helped to offset negative organic growth and our Asia-Pacific region saw positive organic growth with a mixed performance by country.
The impact of foreign exchange rates increased our revenue by 2.8% in the quarter.
Above the 250 basis point increase we estimated entering the quarter, as the dollar continued to weaken against some of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 0.4% in line with our previous projection, and as a result our reported revenue in the first quarter increased 0.6% the $3.43 billion when compared to Q1 of 2020.
I'll return to discuss the details of the changes in revenue in a few minutes.
Returning to slide one, our reported operating profit for the quarter was $465 million, up 10.8% when compared to Q1 of 2020 and operating margin for the quarter improved to 13.6% compared to 12.3% during Q1 of 2020.
Our operating profit and the 130 basis point improvement in our margins this quarter was again positively impacted from our actions to reduce payroll and real estate costs during the second quarter of 2020, as well as continued savings from our discretionary addressable spend cost categories including T&E general office expenses, professional fees, personnel fees and other items, including cost savings resulting primarily from the remote working environment.
Our reported EBITDA for the quarter was $485 million and EBITDA margin was 14.2% also up 130 basis points when compared to Q1 of last year.
As we've discussed previously, we have and will continue to actively manage our cost to ensure they are aligned with our current revenues.
In addition to the overarching structural changes we made during the second quarter, we continue to evaluate ways to improve efficiency throughout the organization.
Focusing on real estate portfolio management, back office services, procurement and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
They increased by about $7 million in the quarter but excluding the impact of exchange rates, these costs were down by about 2.6%.
While it was a reduction in base compensation overall from the staffing actions we undertook during the second quarter of last year, it varies by agency, and certain of our agencies have added people as business conditions improved in their markets.
In addition third-party service costs were effectively flat on a reported basis and down slightly on a constant currency basis.
In comparison, these costs which are directly linked to changes in our revenue decreased nearly 40% in the second quarter of last year, 20% in the third quarter and 12.7% in the fourth quarter of 2020, consistent with the decline in our revenues across all of our businesses in those quarters.
Occupancy and other costs, which are less linked to changes in revenue declined by approximately $18 million reflecting our continuing efforts to reduce our infrastructure Call as well as the decrease in general office expenses since the majority of our staff has continue to work remotely.
In addition, finally, depreciation and amortization declined by 3.7 million.
Net interest expense for the quarter was $47.5 million compared to Q1 of last year and down $500,000 versus Q4 of 2020 -- 2020 our gross interest expense was down $1.5 million an interest income decreased by $1 million.
When compared to the first quarter of 2020, interest expense was down -- from $4.7 million, mainly resulting from $7.7 million charge we took in Q1 of 2020 in connection with the early retirement of $600 million of senior notes that were due to mature in Q3 of 2020.
That was offset by the incremental increase in interest expense from the additional interest on the incremental $600 million of debt we issued at the onset of the pandemic in early April 2020.
Net interest expense was also negatively impacted by a decrease in interest income of $6.4 million versus Q1 of 2020 due to lower interest rates on our cash balances.
Based on -- effectively flat in 2021 when compared to 2020.
Our effective tax rate for the first quarter was 26.8% up a bit from the Q1 2020 tax rate of 26% but in line with the range, we estimate for 2021 of 26.5% to 27%.
Earnings from our affiliates was marginally positive for the quarter, representing an improvement compared to the last year.
And the allocation of earnings to the minority -- year in our less than fully owned subsidiaries.
As a result, our reported net income for the first quarter was $287.8 million up 11.5% or 29.7% million when compared to Q1 of 2020.
Our diluted share count for the quarter decreased 0.3% versus Q1 of last year to 216.8 million shares.
As a result, our diluted earnings per share for the first quarter was $1.33 up $0.14 or 11.8% per share when compared to the prior year.
Returning to the details of the changes in our revenue performance on Slide 3, organic revenue performance improved again compared to the reductions in client spending, we experienced during the last three quarters.
We continue to see our clients across a wide spectrum of industry sector -- modify spending as they -- pandemic on their businesses.
While helped by FX -- was [Technical Issues] or up $20 million 0.6% from Q1 of 2020.
CRM precision marketing which includes our precision marketing and digital direct marketing agencies which were previously included in our CRM Consumer Experience discipline.
CRM commerce and brand comprised of the Omnicom Commerce Group and our brand consulting agencies; both previously included in CRM Consumer Experience CRM Experiential which includes our events and sports marketing businesses which was also included in CRM Consumer Experience and our CRM Execution and Support discipline which includes our field marketing, merchandising and point of sale, research and not-for-profit consulting agencies and remains largely unchanged.
Turning to the FX impact, on a year-over-year basis the impact of foreign exchange rates was mixed when translating our foreign revenues to US dollars.
The net impact of changes in exchange rates increased reported revenue by 2.8% or $95.7 million in revenue for the quarter.
While the dollar weakened against some of our largest major foreign currencies, we also saw some strengthening against the handful of others.
In the quarter, the dollar weakened against the euro, the British pound, the Chinese yuan and the Australian dollar while the dollar strengthened against the Brazilian real, the Russian ruble and the Turkish lira.
In light of the recent strengthening of our basket of foreign currencies against the US dollar and where currency rates currently are, our current estimate is that FX could increase our reported revenues by around 3.5% to 4% in the second quarter and moderate in the second half of 2021 resulting in a full year projection of approximately 2% positive.
These estimates are subject to significant adjustment as we move forward in 2021.
The impact of our acquisition and disposition activities over the past 12 months resulted in a decrease in revenue of $15.1 million in the quarter or 0.4% which is consistent with our estimate entering the year.
Our projection of the net impact of our acquisition and disposition activity for the balance of the year, including recently completed acquisitions and dispositions is currently similar to Q1.
As previously mentioned, our organic revenue decreased $60.6 million or 1.8% in the first quarter when compared to the prior year.
The impact of the COVID-19 pandemic on the global economy and on our client's planned marketing spend appears to be moderating in certain major markets.
As long as the COVID-19 pandemic remains a public health threat, global economic conditions will continue to be volatile.
We expect global economic performance and the performance of our businesses to vary by geography and discipline until the impact of the COVID-19 pandemic on the global economy moderates.
We expect to return to positive organic growth in the second quarter and for the full year.
For the first quarter -- the split was 59% for advertising and 41% for marketing services.
As for the organic change by discipline, advertising was up 1.2% Our media businesses achieved positive organic growth for the first time since Q1 of 2020 and our global and national advertise -- when compared to the last three quarters although performance mixed by agency.
[Technical Issues] 7.2% on a continued strong performance and the delivery of a superior [Technical Issues] service offering.
CRM commerce and brand consulting was down 4.2% mainly related to decreased activity in our shopper marketing businesses due to client losses in prior quarters.
CRM experiential continued to face significant obstacles due to the many restrictions from holding large events.
In the quarter, the discipline was down over 33%.
CRM Execution and Support was down 13% as our field marketing non-for profit and research businesses continue to lag.
PR was negative 3.5% in Q1 on mixed performance from our global PR agencies, and finally, our healthcare agencies again facing a very difficult comparison back to the performance of Q1 2020 when they experienced growth in excess of 9% were flat organically.
So the businesses remained solid across the group.
Now, turning to the details of our regional mix of business on page 5 you can see the quarterly split was 54.5% in the US, 3% for the rest of North America.
10.4% in the UK, 17.1% for the rest of Europe, 11.7% for Asia-Pacific, 1.8% for Latin America and 1.5% for the Middle East and Africa.
In reviewing the details of our performance by region, organic revenue in the first quarter in the US was down $18 million or 1%.
Our advertising discipline was positive for the quarter on the strength of our media businesses and our CRM precision [Technical Issues] which once again experienced our largest organic decline over 34% in the US while our other disciplines were down single-digits [Technical Issues] down 3.2%.
These were down 6.4% organically.
Our CRM precision marketing, CRM commerce and brand consulting and healthcare agencies continued to have solid performance.
They again were offset by reductions from our advertising, CRM Experiential and CRM Execution and Support businesses.
The rest of Europe was down 3.2% organically.
In the Eurozone, among our major markets Belgium, Italy and the Netherlands were positive organically.
Germany, Ireland and France were down single-digits while Spain was down double-digits.
Outside the Eurozone organic growth was up around 5% during the quarter and organic revenue performance in Asia-Pacific for the quarter was up 2.5%.
Positive performance from our agencies in Australia, Greater China and India, were able to offset decreases in Japan, New Zealand, Singapore and Indonesia.
Latin America was down 2.4% organically in the quarter.
Our agencies in Mexico and Colombia were positive in the quarter, a double-digit decrease from our agencies in Brazil offset that performance.
And lastly, the Middle East and Africa was down 10% for the quarter.
On Slide 6, we present our revenue by industry information for Q1 of 2021.
Again, we've seen general improvement in the performance across most industries when compared to the previous few quarters.
But the overall mix of revenue by industry was relatively consistent to what we saw in prior quarters.
Turning to our cash flow performance on Slide 7, you can see that in the first quarter, we generated $382 million of free cash flow, excluding changes in working capital which was up about $20 million versus the first quarter of last year.
As for our primary uses of cash on Slide 8 dividends paid to our common shareholders were up $140 million, effectively unchanged when compared to last year.
The $0.05 per share increase in the quarterly dividend that we announced in February will impact our cash payments from Q2 forward.
Dividends paid to our non-controlling interest shareholders totaled $14 million.
Capital expenditures in Q1 were $12 million, down as expected when compared to last year.
As we mentioned previously, we reduced our capital spending in the near term to only those projects that are essential or previously committed.
Acquisitions including earn-out payments totaled $9 million and since we stopped stock repurchases, the positive $2.7 million in net proceeds in net proceeds represents cash received from stock issuances under our employee share plans.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $210 million in free cash flow during the first 3 months of the year.
Regarding our capital structure at the end of the quarter, our total debt is $5.76 billion, up about $650 million since this time last year, but down $50 million as of this past year end.
When compared to March 31 of last year, the major components of the change were the issuance of $600 million of 10-year senior notes due in 2030, which were issued in early April at the outset of the pandemic.
Along with the increase in debt of approximately $80 million resulting from the FX impact of converting our billion-euro denominated borrowings into dollars at the balance sheet date.
While the change from December 31 was the result of just the FX impact of converting the euro notes.
Our net debt position as of March 31 was $863 million up about $650 million from last year-end, but down $1.5 billion when compared to Q1 of 2020.
The increase in net debt since year-end was the result of the typical uses of working capital that historically occur which totaled about $840 million and was partially offset by the $210 million we generated in free cash flow during the past three months.
Over the past 12 months, the improvement of net debt is primarily due to our positive free cash flow of $860 million.
Positive changes in operating capital of $537 million and the impact of FX on our cash and debt balances which decreased our net debt position by about $190 million.
As for our debt ratios, our total debt to EBITDA ratio was 3.1 times and our net debt to EBITDA ratio was 0.5 times and finally, moving to our historical returns on Slide 10. | q1 earnings per share $1.33.
q1 revenue rose 0.6 percent to $3.427 billion.
expect to achieve positive organic revenue growth beginning in q2 of this year and for full year 2021.
negative effects of covid-19 pandemic began to have a significant impact on our businesses late in q1 of 2020.
operating margin for q1 of 2021 increased to 13.6% versus 12.3% for q1 of 2020. | 1 |
During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results.
3M's performance in the second quarter was strong as we posted organic growth across all business groups and geographic areas.
Our team executed well and delivered increased earnings, expanded margins and robust cash flow.
From a macro perspective, the global economy continues to improve, though uncertainty remains due to COVID-19 and heightened concern over the increase in Delta variant cases.
We saw ongoing strength in many end markets, including home improvement, oral care and general industrial, along with a pickup in healthcare electric procedures.
We continue to work to mitigate ongoing inflationary pressures and supply chain challenges, as well as end-market dynamics such as the semiconductor shortage impacting automotive build rates and electronics.
We are also beginning to see a decline in pandemic-related demand for disposable respirators, which I will discuss on the next slide.
Looking forward, we will stay focused on investing in emerging growth opportunities, improving productivity and advancing sustainability.
We are confident in our ability to continue executing well in the face of COVID-19 uncertainties and are raising our full-year guidance for organic growth to 6% to 9%, and earnings per share to $9.70 to $10.10.
In the second quarter, we delivered total sales of $8.9 billion.
We posted organic growth of 21% versus a 13% decline in last year's second quarter, along with earnings of $2.59 per share.
We expanded adjusted EBITDA margins to over 27% and increased adjusted free cash flow to $1.6 billion with a conversion rate of 103%.
Strong cash flow allowed us to further strengthen our balance sheet while returning $1.4 billion to shareholders through dividends and share repurchases.
I am proud of our team's execution in a dynamic environment.
We are finding new ways to innovate for customers and improve our operational performance.
In addition to our strong day-to-day execution, we are investing to capitalize on favorable market trends and serve emerging customer needs.
I want to share a few impactful examples.
In healthcare, our innovative PREVENA therapy incision management system is the first and only medical device indicated by the U.S. FDA to help reduce surgical site infections in high-risk patients, helping lower the costly financial burden of complications, delivering on both improved clinical outcomes and cost savings for the healthcare system.
In automotive electrification, we are building on 3M's long history in consumer electronics and now expanding our solutions for the future of transportation, including new display technologies for both electric and internal combustion engines, helping us drive above-market growth in our automotive business.
In home improvement, we are building out a suite of innovations to help consumers personalize their homes, including our fast-growing line of command damage-free hanging solutions, $500 million franchise that leverages our world-class adhesive platform with even greater opportunities ahead.
We have increased opportunities across our businesses to apply 3M science and drive long-term growth, and we will continue to invest and win in those areas.
As you all have seen, the ongoing impact of COVID-19 is highly variable across geographies.
Since the onset of the pandemic, we have increased our annual respirator production fourfold to $2.5 billion by activating idle surge capacity and building additional lines, while shifting 90% of distribution into healthcare to protect nurses, doctors and first responders.
One of our strengths is to quickly adapt to changing marketplace needs.
Global demand reached its peak in Q1 of this year, which included stockpiling from governments and hospitals.
We are now seeing a deceleration in overall healthcare demand and our adjusting production, increasing supply to industrial and consumer channels while continuing to prioritize healthcare workers in the geographies seeing increased COVID-19 cases and elevated hospitalization rates.
As we do this, we are reducing overall output to meet end-market trends.
Like we have in the past, we are prepared to rapidly increase production in response to COVID-19-related needs or future emergencies when needed.
As I reflect on the first half, I am pleased with our performance.
We delivered strong sales and margin growth, along with good cash flow while building for the future and advancing sustainability with significant new carbon, water and plastic commitments.
In the second half, in addition to investing in growth, productivity and sustainability, we also must navigate ongoing COVID-19 impacts and continue taking actions to address inflationary pressures and supply chain challenges.
We will do this by driving an unrelenting focus on operational performance, which includes improving service, quality, operating costs and cash generation.
That wraps up my opening comments.
Companywide second-quarter sales were $8.9 billion, up 25% year on year or an increase of 21% on an organic basis.
Sales growth, combined with operating rigor and disciplined cost management, drove adjusted operating income of $2 billion, up 40%, with adjusted operating margins of 22%, up 240 basis points year on year.
Second-quarter GAAP and adjusted earnings per share were $2.59, up 44% compared to last year's adjusted results.
On this slide, you can see the components that impacted both operating margins and earnings per share as compared to Q2 last year.
A strong year-on-year organic volume growth, along with ongoing productivity, restructuring efforts and other items, added 4.1 percentage points to operating margins and $0.89 to earnings per share year on year.
Included in this margin and earnings benefit were a few items of note.
First, during the quarter, the Brazilian Supreme Court issued a ruling that clarified the calculation of Brazil's federal sales-based social tax, essentially lowering the social tax that 3M should have paid in prior years.
This favorable ruling added $91 million to operating income of 1 percentage point to operating margins and $0.12 to earnings per share.
Next, as you will see later today in our 10-Q, we increased our other environmental liability by nearly $60 million and our respiratory liabilities by approximately $20 million as part of our regular review.
In addition, we also incurred a year-on-year increase in ongoing legal defense costs.
We are currently scheduled to begin a PFAS-related trial in Michigan in October, along with the next step in the combat arms year plug multi-district litigation with one trial in September and one in October.
And finally, during the second quarter, we incurred a pre-tax restructuring charge of approximately $40 million as part of the program we announced in Q4 of last year.
Second-quarter net selling price and raw materials performance reduced both operating margins and earnings per share by 140 basis points and $0.17, respectively.
This headwind was larger than forecasted as we experienced broad-based cost increases for chemicals, resins, outsourced manufacturing and logistics as the quarter progressed.
As a result of these increasing cost trends, we now forecast a full-year raw materials and logistics cost headwind in the range of $0.65 to $0.80 per share versus a prior expectation of $0.30 to $0.50.
As we have discussed, we have been and are taking multiple actions including increasing selling prices to address these cost headwinds.
As a result, we expect continued improvement in our selling price performance in the second half of the year.
However, given the pace of cost increases, we currently expect a third-quarter net selling price and raw materials headwind to margins in the range of 50 to 100 basis points, which we anticipate will turn to a net benefit in the fourth quarter as our selling price and other actions start catching up to the increased costs.
Moving to divestiture impacts.
The lost income from the sale of drug delivery in May of last year was a headwind of 10 basis points to operating margins and $0.02 to earnings per share.
Foreign currency, net of hedging impacts, reduced margins 20 basis points while benefiting earnings by $0.08 per share.
Finally, three nonoperating items combined had a net neutral impact to earnings per share year on year.
This result included a $0.06 earnings benefit from lower other expenses, that was offset by higher tax rate and diluted share count, which were each a headwind of $0.03 per share versus last year.
We delivered another quarter of robust free cash flow with second-quarter adjusted free cash flow of $1.6 billion, up 2% year on year, along with conversion of 103%.
Our year-on-year free cash flow performance was driven by strong double-digit growth in sales and income, which was mostly offset by a timing of an income tax payment of approximately $400 million in last year's Q3, which is traditionally paid in Q2.
Through the first half of the year, we increased adjusted free cash flow to $3 billion versus $2.5 billion last year.
Second-quarter capital expenditures were $394 million and approximately $700 million year to date.
For the full year, we are currently tracking to the low end of our expected capex range of $1.8 billion to $2 billion, given vendor constraints and the pace of capital projects.
During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of $503 million.
Year to date, we have returned $2.5 billion to shareholders in the form of dividends and share repurchases.
Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure.
We ended the quarter with $12.7 billion in net debt, a reduction of $3.5 billion since the end of Q2 last year.
As a result, our net debt-to-EBITDA ratio has declined from 1.9 a year ago to 1.3 at the end of Q2.
Our net debt position, along with our strong cash flow generation capability, continues to provide us financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure.
I will start with our safety and industrial business, which posted organic growth of 18% year on year in the second quarter, driven by improving industrial manufacturing activity and prior pandemic impacts.
First, starting with our personal safety business, we posted double-digit organic growth in our head, face, gearing and fall protection solutions as demand in general industrial and construction end markets remains strong.
However, this growth was more than offset by a decline in our overall respiratory portfolio due to last year's strong COVID-related demand resulting in an organic sales decline of low single digits for our personal safety business.
Within our respiratory portfolio, second-quarter disposable respirator sales increased 3% year on year but declined 11% sequentially as COVID-related hospitalizations declined.
Looking ahead, we anticipate continued deceleration in disposable respirator demand through the balance of this year and into 2022.
Turning to the rest of safety and industrial.
Organic growth was broad-based, led by double-digit increases in automotive aftermarket, roofing granules, abrasives, adhesives and tapes and electrical markets.
Safety and industrial's second-quarter operating income was $718 million, up 15% versus last year.
Operating margins were 22.1%, down 130 basis points year on year as leverage on sales growth was more than offset by increases in raw materials, logistics and ongoing legal costs.
Moving to transportation and electronics, which grew 24% organically despite sustained challenges from semiconductor supply chain constraints.
Organic growth was led by our auto OEM business, up 76% year on year, compared to a 49% increase in global car and light truck builds.
This outperformance was due to several factors.
First, the regional mix of year-on-year growth in car and light truck builds were in regions where we have high dollar content per vehicle.
Second, a year-on-year increase in sell-in of 3M products versus the change in build rate.
Lastly, we continue to apply 3M innovation to vehicles, gaining penetration onto new platforms.
Our electronics-related business was up double digits organically with continued strength in semiconductor, factory automation and data centers, along with consumer electronic devices, namely tablets and TVs.
Looking ahead, we continue to monitor the global semiconductor supply chain and its potential impact on the electronics and automotive industries.
Turning to the rest of transportation and electronics.
Advanced materials, commercial solutions and transportation safety each grew double digits year on year.
Second-quarter operating income was $546 million, up over 50% year on year.
Operating margins were 22%, up 340 basis points year on year, driven by strong leverage on sales growth, which was partially offset by increases in raw materials and logistic costs.
Turning to our healthcare business, which delivered second-quarter organic sales growth of 23%.
Organic growth was driven by continued year on year and sequential improvements in healthcare electric procedure volumes as COVID-related hospitalizations decline.
Our medical solutions business grew mid-teens organically or up approximately 20%, excluding the decline in disposable respirator demand.
I am pleased with the performance of Acelity, which grew nearly 20% organically in the quarter as it helps us build on our leadership in Advanced Wound Care.
Sales in our oral care business more than doubled from a year ago as patient visits have nearly returned to pre-COVID levels.
The separation and purification business increased 10% year on year due to ongoing demand for biopharma filtration solutions for COVID-related vaccine and therapeutics, along with improving demand for water filtration solutions.
Health information systems grew high single digits, driven by strong growth in clinician solutions.
And finally, food safety increased double digits organically as food safety activity returns, along with continued strong growth from new product introduction.
Health care's second-quarter operating income was $576 million, up over 90% year on year.
Operating margins were 25.3%, up 880 basis points.
Second-quarter margins were driven by leverage on sales growth, which was partially offset by increasing raw materials and logistics costs, along with increased investments in growth.
Lastly, second-quarter organic growth for our consumer business was 18% year on year with strong sell-in and sell-out trends across most retail channels.
Our home improvement business continues to perform well, up high teens organically on top of a strong comparison from a year ago.
This business continued to experience strong demand in many of our category-leading franchises, particularly Command, Filtrete and Meguiar's.
Stationery and office grew strong double digits organically in Q2 as this business laps last year's COVID-related comparisons.
We continue to see strength in consumer demand for scotch branded packaging and shipping products, along with improved sell-in trends in Post-it Solutions and Scotch branded home and office tapes as retailers prepare for back to school and return to workplace.
Our home care business was up low single digits organically versus last year's strong COVID-driven comparison.
And finally, our consumer health and safety business was up double digits as we lap COVID-related impacts from a year ago, along with improved supply of safety products for our retail customers.
Consumer's operating income was $311 million, up 12% year on year.
Operating margins were 21%, down 160 basis points as increased costs for raw materials, logistics and outsourced hard goods manufacturing, along with investments in advertising and merchandising more than offset leverage from sales growth.
While uncertainty remains, we expect global economic and end-market growth to remain strong, however, continue to be fluid as the world wrestles with ongoing COVID-related impacts that we all see and monitor.
Therefore, there are a number of items that will need to be navigated as we go through the second half of the year.
For example, we anticipate continued sequential improvement in healthcare elective procedure volumes.
Also, we expect ongoing strength in the home improvement market and currently anticipate students returning to classrooms and more people returning to the workplace.
Next, we remain focused on driving innovation and penetration with our global auto OEM and electronics customers.
These two end markets continue to converge as highlighted by the well-known constraints in semiconductor chip supply.
This limited chip supply is expected to reduce year-on-year automotive and electronics production volumes in the second half.
As mentioned earlier, we expect demand for disposable respirators to wane and negatively impact second-half revenues by approximately $100 million to $300 million year on year.
Turning to raw materials and logistics.
As noted, we anticipate a year-on-year earnings headwind of $0.65 to $0.80 per share for the full year or $0.40 to $0.55 in the second half due to rising cost pressures.
We are taking a number of actions, including broad-based selling price increases to help mitigate this headwind.
And finally, the restructuring program we announced last December remains on track.
As part of this program, we expect to incur a pre-tax charge in the range of $60 million to $110 million in the second half of this year.
Thus, taking into account our first-half performance, along with these factors, we are raising our full-year guidance for both organic growth and earnings per share.
Organic growth is estimated to be 6% to 9%, up from the previous range of 3% to 6%.
We now anticipate earnings of $9.70 to $10.10 per share against a prior range of $9.20 to $9.70.
Also, as you can see, we now expect free cash flow conversion in the range of 90% to 100% versus a prior range of 95% to 105%.
This adjustment is primarily due to ongoing challenges in global supply chains, raw materials and logistics, which are expected to persist for some time.
Turning to the third quarter, let me highlight a few items of note.
First, we currently anticipate continued improvement in healthcare electric procedure volumes across most parts of the world.
Global smartphone shipments are expected to be down high single digits year on year, while global car and light truck builds, I expect to be down 3% year on year.
Relative to disposable respirators, we anticipate a year-on-year reduction in sales of $50 million to $100 million due to continued decline in global demand.
As mentioned earlier, we are anticipating a third-quarter year-on-year operating margin headwind of 50 to 100 basis points from selling prices, net of higher raw materials and logistic costs.
On the restructuring front, which I previously discussed, we expect a Q3 pre-tax charge in the range of $50 million to $75 million as a part of this program.
And finally, we expect higher investments in growth, productivity and sustainability in the quarter, along with higher legal defense costs as proceedings progress.
To wrap up, our team has delivered a strong first-half performance, including broad-based growth, good operational execution, robust cash flows and an enhanced capital structure.
With that being said, there's always more we can do and will do.
We continue to prioritize capital to our greatest opportunities for growth, productivity and sustainability, while remaining focused on delivering for our customers, improving operating rigor and enhancing daily management. | q2 adjusted earnings per share $1.75. | 0 |
The theme for our on-hold music today was coping with the chaos.
Last year when the pandemic began, we held a companywide conference call to share some of the lessons learned from the great financial crisis.
I started the call with the first line of the famous retro kicking palm if looks like this.
If you can keep your head when all about you are losing theirs and blaming it on you.
We went on to lay on a list of suggestions to help cope with the chaos that we knew it was headed our way.
Among other ideas, a few suggestions were included in our on-hold music today.
We knew that Queen and David Boy and our teams are going to find themselves under pressure.
And we new when that happened, we told them just to take the advice from the Eagles and take it easy.
We encourage them to embrace innovation, tail path, and as Boston reminds us, don't look back.
We said we rely on Camden's values and culture and do things our way because like Bon Jove, we were born follow.
And finally, we encourage them to get on board the REO speed wagon and roll with the changes.
At the end of the call, we showed a video that was produced by our Dallas Texas operations group during the great financial crisis.
That seem just as appropriate for what we faced at the beginning of the pandemic.
We thought you might find that interesting today.
So go ahead and roll the video.
When we held our first quarter earnings call, we are beginning to see an acceleration in both occupancy and pricing power across our markets.
The actual rate of acceleration that occurred since the call, which far exceeded our estimates and resulted in the improved earnings guidance we released last night.
Across the board, we are seeing a very strong performance and continued improvements in our operating fundamentals.
And in almost all cases where current rental rates exceed the pandemic levels.
The outlook from our third-party economists and data providers is also quite positive.
And they expect the apartment business will continue to thrive as we move into the second half of 2021 and into 2022.
Despite the ongoing levels of high supply in many markets, demand has been greater than anticipated, allowing positive absorption of newly delivered apartment homes.
Our occupation is currently 97%, leasing activity is strong, and turnover remains low.
So overall, I would say our outlook for Camden in the multifamily industry is very good.
We are excited to have entered the national market with the acquisition of two high-quality apartment properties.
Our acquisition and development teams continue to work hard and smart to find opportunities in a very competitive environment.
I want to give a shout out to our amazing Camden team members for doing a great job in taking advantage of this strong market.
Great customer service and sales acum is very important in a market like this.
We must deliver great customer service and support the Camden value proposition when asking for and getting double-digit rental increases from our customers.
Next up is our co-founder, Keith Oden.
Now for a few details on our second quarter operating results.
Same-property revenue growth was 4.1% for the quarter and was positive in all markets, both year-over-year and sequentially.
We have remarkable growth in Phoenix and Tampa both at 9.1%, Southeast Florida at 8.6%, Atlanta at 5.7% and Raleigh at 4.6%.
We thought the April new lease and renewal numbers we reported on last quarter's call were pretty good at nearly 5%.
But as Ric mentioned, pricing power continues to accelerate.
For the second quarter of '21, signed new leases were 9.3% and renewals were 6.7% for a blended rate of 8%.
For leases which were signed earlier and became effective during the end -- during the second quarter, new lease growth was 5.4% with renewals at 4% for a blended rate of 4.7%.
July 2021 looks to be one of the best months we've ever had with new signed -- signed new leases trending at 18.7%, renewals at 10.5% and a blended rate of 14.6%.
Renewal offers for August and September were sent out with an average increase of around 11%.
Occupancy has also continued to improve, going from 96% in the first quarter this year to 96.9% in the second quarter and is currently at 97.1% for July.
Net turnover ticked up slightly in the second quarter to 45% versus 41% last year due to the aggressive pricing increases we instituted, but it remains well below long-term historical levels.
Move-outs to home purchases also ticked up slightly from 16.9% in the first quarter this year to 17.7% in the second quarter, which reflects normal seasonal patterns in our markets.
So despite the constant headlines regarding increased number of single-family home sales, it really has not had an effect on our portfolio performance as the move-outs to purchase homes are still slightly below our long-term average of about 18%.
It's something we discuss internally often.
Our purpose or why is to improve the lives of our teammates, customers and shareholders, one experience at a time.
In our companywide meeting at the beginning of the pandemic, we shared the Star Wars video, and we emphasize that the chaotic months ahead would provide an extraordinary number of opportunities to improve lives one experience at a time.
We focused our efforts on improving our teammates lives who likewise focus their attention on improving our residents' lives.
The results have been truly amazing, and we could not be more proud of how Team Camden has performed throughout the COVID months.
Improving the lives of our team and customers has in turn improved the lives of shareholders, including the approximately 500 Camden employees who participated in the employee share purchase plan this year.
Before I move on to our financial results and guidance, a brief update on our recent real estate activities.
During the second quarter of 2021, as previously mentioned, we entered the Nashville market with a $186 million purchase of Camden Music Row, a recently constructed, 430-unit, 18-story community and the $105 million purchase of Camden Franklin Park, a recently constructed 328-unit, 5-story community.
Both assets were purchased at just under a 4% yield.
Also, during the quarter, we stabilized both Camden RiNo, a 233-unit $7 million new development in Denver, generating an approximate 6% yield in Camden Cypress Creek II, a 234-unit joint venture in Houston, Texas, generating an approximate 7.75% yield.
Clearly, our development program continues to create significant value for our shareholders.
Additionally, during the quarter, we began leasing at Camden Hillcrest, a 132-unit, $95 million new development in San Diego.
On the financing side, during the quarter, we issued approximately $360 million of shares under our existing ATM program.
We used the proceeds of the issuance to fund our entrance into Nashville.
Our existing ATM program is now fully utilized.
And in line with best corporate practices, we will file a new ATM program next week.
In the quarter, we collected 98.7% of our scheduled rents with only 1.3% delinquent.
Turning to bad debt.
In accordance with GAAP, certain uncollected revenue is recognized by us as income in the current month.
We then evaluate this uncollected revenue and establish what we believe to be an appropriate reserve, which serves as a corresponding offset to property revenues in the same period.
When a resident moves out OMS money, we typically have previously reserved all past due amounts, and there will be no future impact to the income statement.
We reevaluate our reserves monthly for collectibility.
For multifamily residents, we have currently reserved $11 million as uncollectible revenue against a receivable of $12 million.
Turning to financial results.
What a difference a year or a quarter can make.
Last night, we reported funds from operations for the second quarter of 2021 of $131.2 million or $1.28 per share, exceeding the midpoint of our guidance range by $0.03 per share.
This $0.03 per share outperformance for the second quarter resulted primarily from approximately $0.03 in higher same-store NOI, resulting from $0.025 of higher revenue, driven by higher rental rates, higher occupancy and lower bad debt and $0.05 of lower operating expenses driven by a combination of lower water expense and lower salaries due to open positions on site and approximately $0.02 in better-than-anticipated results from our non-same-store and development communities.
This $0.05 aggregate outperformance was partially offset by $0.01 of higher overhead costs, primarily associated with our employee stock purchase plan, combined with a $0.01 impact from our higher share count resulting from our recent ATM activity.
Last night, based upon our year-to-date operating performance and our expectations for the remainder of the year, we also updated and revised our 2021 full year same-store guidance.
Taking into consideration the previously mentioned significant improvement in new leases, renewals and occupancy, and our resulting expectations for the remainder of the year, we have increased the midpoint of our full year revenue growth from 1.6% to 3.75%.
Additionally, as a result of our slightly better-than-expected second quarter same-store expense performance and our anticipation of the trend continuing throughout the year, we decreased the midpoint of our full year expense growth from 3.9% to 3.75%.
The result of both of these changes is a 350 basis point increase to the midpoint of our 2021 same-store NOI guidance from 0.25% to 3.75%.
Our 3.75% same-store revenue growth assumptions are based upon occupancy averaging approximately 97% for the remainder of the year, with the blend of new lease and renewals averaging approximately 11%.
Last night, we also increased the midpoint of our full year 2021 FFO guidance by $0.18 per share.
Our new 2021 FFO guidance is $5.17 to $5.37 with a midpoint of $5.27 per share.
This $0.18 per share increase results from our anticipated 350 basis points or $0.21 increase in 2021 same-store operating results, $0.03 of this increase occurred in the second quarter, with the remainder anticipated over the third and fourth quarters and an approximate $0.06 increase from our non-same-store and development communities.
This $0.27 aggregate increase in FFO is partially offset by an approximate $0.09 impact from our second quarter ATM activity.
We have made no changes to our full year guidance of $450 million of acquisitions and $450 million of dispositions.
Last night, we also provided earnings guidance for the third quarter of 2021.
We expect FFO per share for the third quarter to be within the range of $1.30 to $1.36.
The midpoint of $1.33 represents a $0.05 per share improvement from the second quarter, which is anticipated to result from a $0.04 per share or approximate 2.5% expected sequential increase in same-store NOI, driven primarily by higher rental rates, partially offset by our normal second to third quarter seasonal increase in utility, repair and maintenance, unit turnover and personnel expenses.
A $0.015 per share increase in NOI from our development communities in lease-up, our other nonsame-store communities and the incremental contributions from our joint venture communities.
And a $0.02 per share increase in FFO resulting from the full quarter contributions of our recent acquisitions.
This aggregate $0.075 increase is partially offset by $0.025 incremental impact from our second quarter ATM activity.
Our balance sheet remains strong with net debt-to-EBITDA at 4.6 times and a total fixed charge coverage ratio at 5.4 times.
As of today, we have approximately $1.2 billion of liquidity, comprised of approximately $300 million in cash and cash equivalents and no amounts outstanding under our $900 million unsecured facility.
At quarter-end, we had $302 million left to spend over the next three years under our existing development pipeline, and we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks, earning approximately 25 basis points. | qtrly ffo $1.09 per share.
sees q3 ffo $1.14 - $1.20 per share. | 0 |
We are very pleased to report exceptional second-quarter financial and operational results.
The quarter exceeded expectations on several measures and puts us ahead of schedule in meeting our key priorities.
Turning to Slide 3.
I will reiterate our long-term objectives and progress in meeting them.
First, maximize cash flow over the next five years sustaining a reinvestment rate of less than 75%.
During the second quarter, we accelerated certain capital activity to effectively make up for lost time as a result of the Texas weather event in the first quarter.
Production came in ahead of expectations and capital came in lower, delivering free cash flow neutrality.
Our outlook from here for free cash flow and free cash flow yield is highly competitive for our sector and favorable compared to other market sectors.
Our second long-term objective is to improve the balance sheet by applying free cash flow to absolute debt reduction, targeting less than two times leverage by year-end 2022 and generating sufficient cash flow to exceed bond maturities due through 2024.
Our outlook on leverage is more favorable on two fronts.
Given the strength and price outlook for all three commodities since we constructed our plan in February, the target of less than two times leverage by the end of 2022 is now looking like less than one and a half times levered at the end of 2022.
Secondly, our second-quarter bond tender and new issuance reduced near-term maturities by nearly $400 million.
We now believe that free cash flow generation through 2024 will be sufficient to cover bond maturity through 2026.
I'll let Wade expand upon that great outcome.
Our third long-term objective is to maintain top-tier high-return inventory.
Our success here may be the most exciting of all.
Despite a particularly challenging 2020 and weather-related bumps during the first quarter, our team has continued to delineate and develop the Austin Chalk.
This is real value creation, as I will elaborate on later.
And the fourth long-term objective is to report differential ESG stewardship.
Today, we've posted our responses to the 2020 CDP questionnaire as well as posted the data in the format of the task force on climate-related financial disclosures or TCFD.
We will be posting additional ESG disclosures in the coming days including the Sustainability Accounting Standards Board, or SASB, framework updated for 2020 data.
Among reported ESG metrics, most notable are our reported 37% decline in greenhouse gas emissions intensity in 2020 versus 2019 and a 20% decline in methane intensity.
Turning briefly to Slide 4.
This chart depicts our highly competitive free cash flow yield as projected for 2022.
I'll start on Slide 5.
I think you'll find most of the information straightforward, so I'll just add some context to a few items.
Starting with production, we beat the top end of guidance with production at 12.4 million BOE or 136,500 BOE per day.
And this was due mainly to performance from the Austin Chalk, where both base production and new wells were stronger than we had modeled.
For the quarter, oil production percentage was a healthy 54%.
Capex of $214 million came in under our guidance range of $230 million to $240 million.
This related to timing as our capital expenditure estimate for the full year remains unchanged.
Drilling and completion activity is on schedule.
We drilled 22 and completed 45 net wells in the quarter.
For the first half of 2021, capital expenditures totaled $399 million, and we drilled 40 net wells and completed 62 net wells.
So we're roughly 60% through our capital program for the year.
In general, line item costs are tracking guidance, but I would expect LOE per BOE to tick up to the high end of the range in the third quarter as we have more workover scheduled during the quarter.
Turning to the balance sheet on Slide 7.
Here, we see the substantial reduction in near-term maturities due through 2024 which at second quarter end stood at $223 million including the revolver.
I'll also note that since quarter end, we redeemed the converts.
So for modeling purposes, assume that went on the revolver.
We termed out approximately $400 million in debt with the issuance of new six and a half percent notes due 2028.
The tender offer and issuance transactions went extremely well, was actually oversubscribed by 10 times.
It served the purpose of strengthening the balance sheet by removing any perceived risk associated with near-term maturities and positions us to reduce the highest cost debt sooner.
Updating our hedge positions on Slide 8, we have 75% to 80% of oil production and about 85% of natural gas production hedged the second half of 2021, details by quarter in the appendix.
As we previously stated, our methodology for hedging is aligned with our outlook for leverage, so you can expect a directionally lower percentage of production to be hedged in 2022.
To say it again, we now see debt-to-EBITDAX trending below one and a half times by the end of next year, and that is based on current strip and estimated cost.
So now turning to guidance on Slide 9.
Guidance for the year remains unchanged.
We did narrow the range around production to 47.5 million to 49.5 million BOE, and that range really relates to ultimate timing of wells coming on.
Third-quarter production is expected to range between 13 million to 13.2 million BOE or 141,000 to 143,000 BOE per day 53% to 54% oil.
This implies fourth-quarter production to be relatively flat with the third quarter.
In terms of cadence, the remaining capital activity will be heavier weighted to the third quarter, with the third-quarter capital guidance range forecasted to be between $170 million to $190 million.
I think we will lean toward the high end of full-yea capital guidance, accounting for some inflation that may kick in.
We're now expecting full-yea activity to include about 85 net wells drilled and 100 to 110 net wells completed.
This sets us up to low single-digit production growth in 2022 and of course substantial growth in free cash flow.
I'd just like to highlight a few operational accomplishments, skipping to Slide 11.
In the Midland Basin, I have to boast about the longest lateral ever in the state of Texas.
While we have previously confirmed drilling the 20,900 foot almost 4-mile long lateral which we drilled in 20 days, we now have the well on production.
And I can tell you and anyone with field experience would know, drilling out the plugs and cleaning out a well with a lateral this long is no easy feat.
The project went smoothly and the well has been on production since June 25.
Keep an eye out for the performance of the Clarice Starling Sundown D 4542WA well in Howard County, an aptly long name for a really long lateral.
Also in Midland, we just finished our first two simul frac operations on two pads located in Sweetie Peck and North Martin.
These operations went smoothly, and we were able to complete an average of 16 stages per day about twice the pace of a typical zipper frac, and we're able to complete as many as 24 stages in a day.
I think many of you already recognize that we are always in pursuit of commercially astute technical advancements.
I will also draw your attention to Slide 12, showing that SM is already recognized for drilling the longest laterals on average in the Midland Basin.
Our ability to do this is a result of our contiguous land positions and really good work by our land department in blocking up positions.
Longer laterals present a tangible benefit in terms of capital efficiency.
Wrapping these concepts together, longer laterals and simul frac operations in areas where the development design is amenable, we clearly have the potential to offer additional capital efficiencies.
We are often asked if we expect to keep improving our already efficient operations which we continue to run at around $520 per lateral foot.
It's hard to imagine material improvements, but this is a great example.
We will be working with the longer lateral and time effect concepts as successfully tested as we put together our 2022 operations plan.
Turning to Slide 14.
In South Texas, we have updated the Austin Chalk cumulative production plot which continue very favorably.
And on Slide 15, I will reiterate the great Austin Chalk 30-day peak rates we announced in June.
Three new wells averaged 3,300 BOE per day.
And the wells have an estimated breakeven oil price of just $24 per barrel.
We should have additional Austin Chalk results in the third quarter, and we look forward to sharing more with you.
Also, I will remind you that our transportation costs for natural gas in South Texas dropped by about $0.25 per mcf starting this month, another factor contributing to better economics in the South Texas program.
In summary, second-quarter results were outstanding, and we are on track to return to free cash flow generation starting in the third quarter and on track to deliver highly competitive free cash flow as measured by yield to market capitalization going forward.
Operationally, we have been able to keep costs flat and through our successful testing of longer laterals and simul-frac completions, we will seek to drive increased capital efficiencies through technology.
Keep watching for updates on our Austin Chalk results as we continue to successfully build grassroots inventory and asset value.
Again, we have posted CDP and TCFD responses which you can access on our website and expect more ESG-related disclosures in the coming days. | q4 earnings per share $1.08 from continuing operations excluding items.
q4 sales $282.7 million versus refinitiv ibes estimate of $254.3 million. | 0 |
It has now been over a year since the pandemic closed in on us all.
Let me first start with an expression of profound gratitude to the employees of Standex, our executive team and the Board of Directors.
The circumstances of the pandemic required a level of agility and responsiveness that would not have been possible without a high degree of collaboration, trust and a sense of common mission.
I'm proud of what we accomplished together.
As a result, Standex is emerging from the pandemic far stronger than when we entered it.
We had another solid quarterly performance with results ahead of our expectations and expect this momentum to continue with stronger financial performance in fiscal fourth quarter 2021.
At the Electronics segment, nearly half of the 35% year-on-year revenue increase in the third quarter reflected organic growth with solid demand for relays in solar and electric vehicle applications and reed switches for transportation end markets.
Overall, we are seeing strong demand across many of our product lines and all geographies at Electronics.
Our Scientific segment also had an excellent quarter with solid revenue and operating income growth year-on-year.
We continue to expect that revenue from COVID-related storage demand in fiscal 2021 will be at the higher end of our originally indicated $10 million to $20 million range.
At the Specialty Solutions segment, revenue and operating income sequentially increased 18.3% and 32.4%, respectively, as we see the early stages of recovery in our end markets.
From a strategic perspective, we continue to position Standex around products and platforms that optimize our growth and margin profile with strong customer value propositions.
Electronics segment backlog realizable in under one year increased approximately 26% sequentially as the demand in end markets, including electric vehicle and renewable energy, continues to trend positively.
Results and order flow at Renco Electronics were solid as we successfully leveraged their complementary customer base and end markets.
At the end of the third quarter, we also announced the divestiture of Enginetics Corporation.
Our Engineering Technologies segment will now be focused on our core spin forming capabilities with its strong value proposition, reducing material inputs and processing time, ultimately providing higher growth and margin opportunities for the segment.
The sale of Enginetics is also accretive to our margin profile.
ETG will continue to focus on serving the space, commercial aviation and defense end markets.
We are also further leveraging these demand trends and strategic initiatives with ongoing productivity and efficiency actions.
At the Electronics segment, we continue to make progress in the quarter, mitigating material inflation through changes in the reed switch production and material substitution.
We are on track to substantially complete this transition by the end of fiscal 2022.
We continue to allocate production capacity to our highest margin segment opportunities.
For instance, at the Specialty Solutions segment, Hydraulics aftermarket revenue increased 23% year-on-year in the third quarter.
These actions are complemented by a strong balance sheet and liquidity position, giving us the financial flexibility to deploy capital for our active pipeline of organic and inorganic growth opportunities.
Ademir will discuss these metrics in more detail.
In regard to our fiscal fourth quarter 2021 outlook, we expect slight to moderate sequential revenue increase and a more significant operating margin improvement compared to the third quarter of fiscal 2021.
Underpinning this outlook are the following.
Sequentially, we expect revenue growth for the Electronics, Engraving and Specialty Solutions segments.
However, the consolidated revenue increase sequentially will be partially offset by the absence of Enginetics, which contributed approximately $4 million in revenue in the third quarter and was divested at the end of the quarter.
We expect significant operating margin improvement sequentially compared to fiscal third quarter 2021 results.
This improvement will be driven primarily by Electronics, Engraving and Engineering Technologies.
Besides our financial results today, we are also pleased to announce that our Board of Directors has committed to nominating Robin Davenport of Parker-Hannifin for election to the Board of Directors at Standex's 2021 Annual Shareholder Meeting.
In the interim, Ms. Davenport will serve as an observer and advisor to our Board of Directors.
Robin is a highly accomplished and respected executive with comprehensive financial and global industry expertise in the manufacturing sector and significant experience and success in the areas of M&A, capital allocation and corporate strategy.
In my discussions with her, I found her to be very thoughtful and insightful in her views and believe she will be a valuable addition to the current Board of Directors' efforts.
I look forward to working closely with her and the current members of the Standex Board as we further execute our strategic and financial priorities.
Revenue grew approximately $17 million or 35.4% year-on-year with nearly half of the increase due to organic growth.
This growth reflected a broad-based geographic recovery, including a strengthening of demand for relays in solar and electric vehicle applications and reed switch demand in transportation end markets.
The recent Renco acquisition contributed revenue of $6.4 million and is proving to be a highly complementary fit with our magnetics portfolio.
Operating income increased approximately $4.3 million or 54.2% year-on-year, reflecting operating leverage associated with revenue growth, profit contribution from Renco and productivity initiatives, partially offset by increased raw material costs.
The pictures highlighted on slide four are examples of how we can leverage the technological advantages of reed switches to contribute to our growth in end markets such as electric vehicles and solar power.
In particular, reed switches, given their unique physical properties, are well suited to safety isolation testing for electric vehicles and battery management systems.
We also continue to capture attractive new customer wins to support our NBO pipeline.
In this case, we highlighted a magnetic motion system for a defense elevator application, which will contribute more than $11 million over the next three years.
Currently, our new business opportunity funnel has increased to $59 million across a broad range of markets and is expected to deliver $12.4 million of incremental sales in fiscal 2021.
Sequentially, in fiscal fourth quarter 2021, we expect a modest increase in revenue and slight operating margin improvement at Electronics compared to fiscal third quarter 2021.
Our outlook reflects a continued broad-based end market recovery, including further growth for relays in solar and electronic vehicle applications, supported by a healthy order flow with backlog realizable under a year increasing approximately $20 million or 26% sequentially in our third fiscal quarter.
Revenue increased approximately $600,000 or 1.7% year-on-year, and operating income was similar year-on-year, as expected, at $4.5 million.
The revenue increase reflected favorable foreign exchange impact, partially offset by the timing of projects.
Operating income was essentially similar year-on-year due to a less favorable project mix.
Laneway sales of $13.6 million were an approximate 5% sequential increase, reflecting growth in soft trim tools, laser engraving and tool finishing.
The picture on slide five highlights a recent customer win on the Ford F-150 platform for soft trim interiors.
Overall, we are seeing solid demand and backlog trends for our soft trim capabilities, further reinforcing the rationale behind our prior acquisition of GS Engineering, a leading provider of cutting-edge proprietary technology for the production of in-mold grained tools.
Since the acquisition, we have further rolled out GS technology on our global platform, positioning us well in the growing soft surface markets as the auto industry focuses on interior comfort of vehicles and increasingly replaces leather with sustainable materials.
In fiscal fourth quarter 2021, we expect a slight revenue and more significant operating margin increase compared to fiscal third quarter 2021 at the Engraving segment.
The expected sequential financial performance improvement reflects a more favorable geographic mix, project timing and increased soft trim product demand leveraged over productivity and cost initiatives.
Turning to slide six, the Scientific segment.
Revenue increased approximately $9.6 million or 65% year-on-year, reflecting continued positive trends in retail pharmacies, clinical laboratories and academic institutions, mainly attributable to demand for COVID-19 vaccine storage.
Operating income increased $2.6 million or approximately 81% year-on-year, due primarily to the volume increase balanced with investments to support future growth opportunities.
In fiscal fourth quarter 2021, we expect a moderate sequential decrease in revenue due to lower demand for COVID-19 vaccine storage combined with higher freight costs, which we expect to result in a sequential decrease in operating margin, although we still expect an operating margin above 20% in the quarter.
As shown on the picture on slide six, we provide comprehensive solutions with a broad product line.
We can meet customer requirements for different model sizes and temperature ranges across a wide variety of end markets, including pharmaceutical, medical, scientific, biotechnology and industrial.
Picture here is a clinic with a number of different medications in small quantities requiring a variety of our storage solutions.
Finally, I'm pleased with the progress the Scientific team is making in managing the pipeline of new product development projects, which will position the business well with future new sources of revenue.
Turning to the Engineering Technologies segment on slide seven.
Revenue decreased approximately $6.7 million, and operating income was about $1.9 million lower year-on-year, a 25.4% and 59.8% decrease, respectively.
On a year-on-year basis, fiscal third quarter 2021 results reflected the economic impact of COVID-19 on the commercial aviation markets and project timing in space and energy segments, partially offset by growth in defense end markets.
The decrease in operating margin was due to the lower volume, partially offset by productivity and cost initiatives.
In fiscal fourth quarter 2021, we expect revenue on a sequential basis to be similar to the prior quarter with growth in commercial aviation, defense and space, offset by the absence of Enginetics sales due to its divestiture at the end of fiscal third quarter 2021.
We expect a significant increase in operating margin, reflecting a continued broad-based end market recovery and favorable mix complemented by ongoing productivity initiatives.
As pictured on slide seven, we continue to win attractive long-term contracts with industry leaders to develop new platforms and the next-generation hypersonic programs.
Our manufacturing process utilizes spin forming technology, an inherently more efficient process.
We start with a plate as opposed to a large block of titanium and then shape it with less material waste and cost and achieve the same functionality and strength.
Specialty Solutions revenue decreased approximately $3.7 million or 11.9% year-on-year with an operating income decline of about $600,000 or 12.9%.
This decrease primarily reflected the economic impact of the COVID-19 pandemic on the segment's end markets, particularly in food service equipment.
I would like to commend the Specialty team for effectively managing their costs to nearly hold their margin rate despite the significant reduction in revenue.
Sequentially, Specialty Solutions revenue and operating income increased 18.3% and 32.4%.
We believe we are in the early stages of a recovery in food service and refuse end markets that we expect to continue into our fiscal fourth quarter.
In fiscal fourth quarter 2021, we expect a slight sequential increase in revenue, with operating margin expected to slightly decrease sequentially, reflecting material inflation, particularly at Hydraulics, which we are seeking to recover through pricing actions.
Pictured on the slide is a recent new product introduction, the milk and food merchandiser, developed primarily for the school market and offering several advantages, including flexibility to merchandise a wide assortment of products, easy loading/unloading and the product accessibility to young children.
As we return to more normalized patterns of experience outside the home, in-person learning and schools and indoor dining and restaurants, we are seeing a recovery in the school, restaurant and grab-and-go food end markets for products such as the food merchandiser.
First, I will provide a few key financial takeaways from our third quarter 2021 results.
We had solid performance in the third quarter as both revenue and adjusted operating margin increased sequentially and year-on-year.
Revenue increased sequentially at four of our five reporting segments, and we saw a strong recovery in many of our end markets.
From a margin standpoint, adjusted operating margin improved both sequentially and year-on-year, reflecting operating leverage associated with revenue growth and the impact of our cost efficiency and productivity actions.
Our cash generation and leverage statistics remain strong.
We reported a free cash flow of $12.4 million and have generated 92% free cash flow to net income conversion to the first nine months of fiscal 2021.
Also, our net debt to EBITDA, interest coverage ratio and available liquidity all improved sequentially.
We are entering our fiscal fourth quarter with positive demand trends, active pipeline of productivity and efficiency actions and an expectation for continued solid cash generation.
We expect our fiscal fourth quarter 2021 results will be stronger both sequentially and year-on-year.
On a consolidated basis, total revenue increased 10.8% year-on-year from $155.5 to $172.2 million.
Revenue increase mostly reflected strong organic growth at our Electronics and Scientific segments, contribution from our recent Renco acquisition and favorable FX, partially offset by the economic impact of COVID-19.
Renco contributed approximately 4.1%, and FX contributed 2.8% increase to the revenue growth.
As we expected, the COVID-19 economic impact was most evident in the commercial aviation and food service end markets, primarily impacting our Engineering Technologies and Specialty segments.
However, we are seeing signs of sequential recovery in both of these end markets as we enter the fourth quarter of fiscal 2021.
On a year-on-year basis, our adjusted operating margin increased 90 basis points to 12.2%, reflecting operating leverage associated with revenue growth, profit contribution from Renco and readout of our productivity actions, partially offset by increased raw material costs.
Interest expense decreased approximately 28% or $0.5 million year-on-year, primarily due to lower level of borrowings and a decrease in overall interest rate as a result of our previously implemented variable to fixed rate swaps.
In addition, our tax rate was 24.9% in the third quarter of 2021.
For fiscal 2021, we continue to expect approximately 22% tax rate with a rate in the low 20% range for the fourth quarter.
Adjusted earnings per share was $1.19 in the third quarter of 2021 compared to $0.96 a year ago.
We generated free cash flow of $12.4 million in the fiscal third quarter of '21 compared to free cash flow of $7.3 million a year ago, supported by improvements in our working capital metrics.
For the first nine months of fiscal 2021, we have generated 92% free cash flow to net income conversion, inclusive of approximately $8 million in pension payments, with $3 million of that amount paid in the fiscal third quarter of '21.
Standex had net debt of $82.1 million at the end of March compared to $90.9 million at the end of December, reflecting free cash flow of approximately $12.4 million, an additional $11.7 million in proceeds from the Enginetics divestiture.
This was partially offset by $8.6 million of stock repurchases, along with dividends and changes in foreign exchange.
Net debt for the third quarter of 2021 consisted primarily of long-term debt of $200 million and cash and equivalents of $180 million with approximately $82 million held by foreign subs.
Our key liquidity metrics reinforce our significant financial flexibility.
Standex's net debt to adjusted EBITDA leverage was approximately 0.8 at the end of the third quarter with a net debt to total capital ratio of 14.5%.
We had approximately $209 million of available liquidity at the end of the third quarter and continued to repatriate cash with approximately $6 million repatriated during the quarter.
To date, we have repatriated approximately $31 million and remain on plan to repatriate at least $35 million in fiscal 2021.
From a capital allocation perspective, we repurchased approximately 94,000 shares for $8.6 million.
There is approximately $27 million remaining on our current repurchase authorization.
We also declared our 227th consecutive quarterly cash dividend on April 28 of $0.24 per share.
Finally, we have reduced our fiscal 2021 capital expenditures range to between $22 million to $25 million from between approximately $25 million to $28 million.
We expect a slight to moderate revenue increase in the fiscal fourth quarter 2021 as compared to fiscal third quarter of 2021.
Underpinning this outlook is expected sequential revenue increases at Electronics, Engraving and Specialty Solutions, partially offset by the divestiture of Enginetics, which contributed approximately $4 million in revenue in the third quarter.
We expect a significant sequential operating margin increase in the fourth quarter as we leverage demand growth, particularly at Electronics, Engraving and Engineering Technologies as well as the productivity and efficiency actions that we have undertaken companywide.
Both from an operational and financial perspective, we have an active pipeline of initiatives to further strengthen our performance and drive cash generation as we approach fiscal 2022.
Our balance sheet position remains strong, and our liquidity metrics are strengthening.
We are well positioned to pursue an active pipeline of exciting organic growth opportunities, such as electric vehicles, renewable energy, smart grid and space commercialization as well as highly complementary acquisitions like Renco.
We remain focused on further growing our high-quality businesses with attractive growth and margin profiles.
As you saw in the examples shared today, we leverage our strong technical and applications expertise to provide customers a compelling value proposition. | compname posts q4 loss per share $0.06.
q4 loss per share $0.06.
full-year 2021 consolidated adjusted ebitda is expected to be $215 million to $230 million.
2021 domestic coke total production is expected to be about 4.1 million tons.
2021 capital expenditures are projected to be about $80 million. | 0 |
We'll jump right into it, while most of us in the Northeast still have power and Wi-Fi service.
The Kimco management team participating on the call today includes Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; Dave Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call.
Reconciliations of these non-GAAP financial measures can also be found on the Investor Relations area of our website.
Today, I'll give you an update on how we are confronting the challenges posed by COVID-19 and how we plan to move forward as parts of the country continue to struggle with the virus, while other parts really come back.
We'll also give an update on the transaction market, and Glenn will follow with a recap of the numbers for Q2 and our enhanced liquidity position.
The COVID virus is a challenge to our entire industry and one that we're addressing head on.
At Kimco, our great team, high-quality assets and strong balance sheet are helping us weather the pandemic and prepare for the future.
We have an effective strategy for dealing with COVID-19 and have made significant progress since our last call.
First, I would like to applaud the entire Kimco team for their tireless efforts in ensuring that our centers remain open and operating.
Our people are smart, passionate, dedicated and determined.
Simply put, they are the best at what they do.
And together, we continue to provide our shoppers, our tenants, our employees, our extended Kimco family and our local communities with a safe experience.
It is also worth noting that as a result of our national footprint, our best practices and lessons learned from the challenges faced early on in the Northeast are now being employed to help those areas in the Southeast and West in their time of need.
Our portfolio continues to withstand the pandemic's impact.
We have reached deferral modification agreements with the vast majority of our top 100 retailers who we deem nonessential and are forced to close in some capacity.
We believe our retailer partnerships are differentiators for Kimco.
And in these challenging times, tenant relations matter more than ever.
While working with our tenants to help them get to the other side, they have worked with us to remove certain lease restrictions that will enhance redevelopment opportunities and create long-term value for our shareholders.
Ironically, many of our tenant relationships have actually strengthened during the pandemic, which bodes well for our future success including the potential for opportunistic investments similar to the successful investment we made in Albertsons.
The operating metrics reported today for our repositioned portfolio reflect its quality and resiliency.
And in times of stress, quality is critical.
We continue to lease space even in these uncertain times.
In Q2, we executed 52 new leases totaling 256,000 square feet at a positive 22.9% spread and renewed 180 leases, covering 959,000 square feet at a positive 10.7% spread.
Combined, our spreads were a strong plus 12%.
New leasing and tenant retention efforts helped occupancy finish at 95.6% for the quarter.
Anchor occupancy was even stronger at 98.2%, and small shop occupancy was 88%.
Year-over-year, our anchor occupancy was flat, which, again, represents a strong result in the current environment and a further testament to our team and portfolio.
We continue to extend assistance to our small shop tenants who need help in these challenging times.
Our Tenant Assistance Program, or TAP, is a multi-pronged approach to provide valuable resources free of charge.
This program provides our small shop retailers with a free legal advisor to help navigate the numerous state and federal programs available for small businesses, which, by our account, has potentially resulted in over $20 million of PPP funding for our small shop tenant.
Our TAP program is also helping tenants activate outdoor areas to continue operations.
The national Kimco Curbside Pickup Initiative has been well received, and customers are utilizing the service more and more.
Retailers have told us that our curbside program stands as the best they've encountered and has had a positive impact on their operations.
We have also helped our restaurant tenants activate sidewalk cafes and green spaces to help with capacity constraints.
All of our efforts and initiatives to help our tenants are paying off.
For the month of April, we collected cash-based rent totaling 68%.
In May 66%, June 76%, and July is currently at 82%.
We are currently trending above our internal forecast for rent collection.
While this is encouraging, we remain mindful of the rollbacks occurring in certain hotspots and the simple reality is that the impact of the virus inhibits our industry's ability to forecast for the sense of confidence.
During the second quarter, we granted rent deferrals totaling 18.5% of base rent.
We fielded rent deferral requests for July that amounted to only 8% of scheduled rent and have worked out deferral plans for four basis points of total rent.
This is a significant improvement from the start of the pandemic when in April, we fielded deferral request that amounted to 39% of ABR.
At the end of July, our weighted average repayment period for deferrals is approximately nine months.
Currently, 94% of our tenants are open with only 3% of ABR subject to mandated closures.
Our development and redevelopment pipeline activity is currently focused on achieving multiple entitlement master plan approvals across the country.
Our goal is to entitle an additional 5,000 multifamily units in the next five years that will provide us with a total of 10,000 units by 2025.
While we are closely controlling our project expenses, our goal is to be ready to move forward with several projects when market conditions are right.
As for our Signature Series projects, we just received the temporary certificate of occupancy for the new Shoprite grocery anchor at The Boulevard Project on Staten Island.
We anticipate opening this fall, with the majority of other retailers opening in the spring of 2021.
At Dania Pointe, we recently completed construction and now 15 tenant fit-outs under way, including Urban Outfitters and Anthropologie.
The first multifamily building, the Avery Dania Pointe, which is on a ground lease, has begun moving in the first residence.
Our portfolio strategy is focused on having our grocery, home improvement and mixed-use anchored assets clustered in strong economic MSAs that serve the last mile.
These dense areas create significant barriers to entry and a favorable balance of supply and demand.
Our sophisticated retailers are utilizing these last mile stores as indispensable fulfillment and distribution centers.
This is a differentiator for Walmart, Costco, Target, Home Depot, Lowe's and all of our grocery anchors who continue to serve their customers in multiple ways: in-store shopping, buy online, pick up in store, curbside pickup and home delivery.
These services and conveniences are all part of what the consumer is now demanding.
And those with stores close to dense populations are outperforming pure e-commerce players on delivery times and cost efficiency.
We are witnessing a blurring of lines between the distribution, fulfillment and last mile stores.
We have also seen an uptick in demand from our essential retailers who are also looking for more last mile location.
Clearly, we are experiencing retail Darwinism play out in an expedited manner, and we believe we are well positioned to take advantage of the future of retail.
Finally, in addition to our team and portfolio, we continue to prioritize liquidity.
Glenn will give the details on how we bolstered our balance sheet by issuing our first green bond at an attractive rate, paid back our term loan and continue to push out our maturity profile.
We have our entire untapped $2 billion line of credit at our disposal, limited maturities on the horizon and received a further cash infusion from our Albertsons investment.
We believe our ongoing efforts to enhance our balance sheet and cash position will enable us to prosper and be opportunistic at a time of tremendous dislocation and well into the future.
While the current unpredictability of the virus and government action is making forecasting a challenge, we can continue to monitor the environment daily.
We meet regularly with our Board members to keep them up to date, review our cash projections and determine how and when to reinstate our dividend.
To be clear, it is our intention to pay an additional cash dividend in 2020, which, at a minimum, will cover our taxable income.
As I said at the outset, the companies that stand out in this environment are those with superior talent, superior asset quality and the superior balance sheet.
In these unsettled times, we believe we have the right combination to weather this storm and will be among the best positioned to preserve and succeed over the long term.
I would first like to echo Conor's sentiments on the Kimco team and the incredible efforts put forth during these challenging times.
It has been nothing short of inspirational.
On the business side, our strategy has been fairly straightforward, ensure the maximum amounts of liquidity and balance sheet strength to enable us to be opportunistic at the appropriate time.
We are confident that we have successfully accomplished the first part of the equation, and now we remain patient and ready for the latter.
Thus far, the transaction market has been fairly limited with most owners and lenders biding as much time as possible before deciding on a path forward with their assets.
Multi-tenant strip center transactions were down by 80% to 90% from April through July.
This is coming off a vibrant and active January and February, which was up 30% and 16% year-over-year.
The majority of the deals that did close from April to June were pre-COVID deals that were pushed over the finish line with both sides of the deal willing to compromise to get it done.
Post-COVID deals hitting the market have been sparse, with a few exceptions being smaller essential retailer anchored centers that have a very specific reason to consider a sale.
There has been very little capitulation between buyers and sellers in the bid-ask at this point.
We anticipate that come the fourth quarter and into the early parts of 2021, there may be some private owners and operators that ultimately make the decision to be market sellers.
That being said, we are starting to see investment opportunities loosening up in two distinct categories.
First, with our existing retailers.
Liquidity is more important than ever regardless of what category they operate within.
And all are looking to bolster cash and strengthen their balance sheets.
We have a proven history of unlocking value and working with retailers to weather a crisis and have started having multiple discussions around mutually beneficial ways to work with those companies that are real estate rich.
Between owned stores and distribution centers, there is substantial value in their holdings that can be used to enhance value for their business while providing a solid growing income stream for us.
The second category is with existing owners in need of offensive growth capital.
In many cases, the traditional sources of financing have dried up for retail property owners.
With the exception of down the fairway, neighborhood grocery-anchored or very strong credit junior lineups, lenders have become extremely cautious during this pandemic.
For those like Kimco with liquidity already raised, it presents the option to invest rescue capital to those in need.
And this is not specific to distressed or struggling properties.
This includes major market centers with growth opportunities that need capital to execute on the vision.
Whether coming in as a joint venture partner or a lender, there are excellent real estate locations that require investment capital, which we can assist with, and we're having those conversations regularly.
As for an update on our exploration of an investment vehicle, we have had productive conversations with multiple outside capital sources that are interested in partnering with Kimco on unique opportunities.
Because the set of opportunities are wide and varied, we continued to evaluate different structures that best reward Kimco shareholders.
We will have more updates as the PLUS business pipeline unfolds.
While we will be thoughtful and opportunistic with where we place that capital, we are starting to build a potential pipeline for these initiatives.
We believe it will take time and patience, but given our knowledge of the sector and broad relationships, we anticipate being able to unlock value for our shareholders in the coming years with this investment approach.
Now let me pass the call off to Glenn for the financial details of the quarter.
I'm going to focus my comments on second quarter results, including accounts receivable reserves, capital markets activities and our strong liquidity position.
For the second quarter 2020, NAREIT FFO was $103.5 million or $0.24 per diluted share as compared to $151.2 million or $0.36 per diluted share for the second quarter last year.
The reduction was mainly due to an increase in credit loss reserves of $51.4 million as compared to the second quarter last year, resulting from the ongoing COVID-19 pandemic.
On a positive note, we delivered incremental NOI of $1.9 million from our recently completed development projects at Lincoln Square, Grand Parkway, Mill Station and Dania Pointe.
We also reduced our financing costs by $3.5 million, achieved with $8.2 million of savings from the previous redemptions of $575 million of preferred stock, offset by higher interest expense of $4.7 million due to increased debt levels.
It is worth noting, although not included in NAREIT FFO but included in net income, we recognized realized gains totaling over $190 million or $0.44 per diluted share from the partial monetization of our Albertsons investment and an unrealized gain of $524.7 million on our remaining ownership stake in Albertsons.
We received over $228 million in cash from these transactions and used the proceeds to reduce debt.
As expected, our second quarter results were negatively impacted by the forced and voluntary closures of many of our tenants during the second quarter due to the ongoing COVID-19 pandemic.
Those most affected were tenants deemed nonessential and included many of our small shop tenants.
We have been working diligently to help as many tenants as possible with deferrals, but collectability for many is questionable and requires us to place those tenants on a cash basis.
So those tenants now on a cash basis, we reserved 100% of their outstanding accounts receivable.
We are continuing to monitor the situation closely.
Now let me provide some additional detail regarding the credit loss reserve for the second quarter of 2020.
We recorded a $40.1 million credit loss reserve against accrued revenues during the quarter and an additional $11.6 million reserve against noncash straight-line rent receivables.
As of June 30, 2020, our total uncollectible reserves stand at $56.1 million or 32% of our pro rata share of accounts receivable.
Of the total credit loss reserve, $22.5 million is attributable to tenants on a cash basis.
At the end of 2Q 2020, approximately 6.4% of our annual base rents are from cash basis tenants.
Any collections of the reserve amounts will be included in revenues in the period received.
In addition, we have a reserve of $21.6 million or 12.5% against straight-line rent receivables.
Turning to the balance sheet.
Our liquidity position remains strong with over $200 million of cash and $2 billion available on our recently closed revolving credit facility with a final maturity in 2025.
During the second quarter 2020, we obtained a fully funded $590 million term loan, further enhancing our liquidity position.
We subsequently repaid $265 million of this term loan with proceeds from the partial Albertsons monetization during the second quarter.
We finished the second quarter 2020 with consolidated net debt to EBITDA of 8.6 times and 9.4 times on a look-through basis, which includes our preferred stock outstanding and pro rata JV debt.
The increase is attributable to the credit loss reserve, which reduced EBITDA.
However, if we include the realized gains from the partial monetization of the Albertsons investment, the consolidated net debt to EBITDA would be 6.5 times and the look-through metric would be 7.3 times, the level similar to first quarter 2020 results.
Our weighted average debt maturity profile as of June 30, 2020, was 10.6 years, one of the longest in the REIT industry.
Subsequent to quarter end, we issued a 2.7%, $500 million green bond.
Pending investment in eligible green projects, the proceeds were used to repay in full the remaining $325 million outstanding on the April 2020 term loan and the early redemption of $200 million of the $484.9 million of bonds due in May of 2021.
We will incur an early redemption charge of approximately $3.3 million during Q3 2020.
Our consolidated debt maturities for 2021 of $425 million and our joint venture debt maturities of $195 million are quite manageable, given our liquidity position and availability on our $2 billion revolver and availability on the $150 million revolver in our KIR joint venture.
In addition, we continually monitor the bond market for opportunistic entry points.
As a result of the ongoing impact from the COVID-19 pandemic, we are not comfortable providing FFO or same-site NOI guidance at this point.
Regarding our common dividend, during 2020, we have so far paid dividends of $0.56 per common share.
It remains our intention during 2020 to take cash dividends at least equal to our taxable income.
We continued to evaluate the business in economic landscape and have monthly dialogue with our Board regarding the timing and the level of the common dividend.
Although these are challenging times with our abundant liquidity position, highly experienced and motivated team, along with our well-positioned portfolio, we are built to withstand the impact of the pandemic and thrive when we get to the other side of this unprecedented situation. | compname posts q4 adjusted earnings per share $1.21.
q4 adjusted earnings per share $1.21.
fee revenue of $555.2 million in q4 fy'21, an increase of 26% from q4 fy'20.
q1 fy’22 fee revenue is expected to be in the range of $535 million and $555 million.
q1 fy’22 diluted earnings per share is expected to range between $1.04 to $1.14. | 0 |
You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.
To begin my comments today, I'll review the highlights of our third quarter 2021 results.
I'll then touch on some exciting business development news, including electrification announcements with REE and our largest customer, General Motors.
And lastly, we'll discuss the ongoing supply chain challenges and our financial outlook.
After Chris covers the details of our financial results, we will then open up the call for any questions that you may have.
AAM delivered solid operating performance in the third quarter of 2021 despite unprecedented supply chain challenges that impacted industry production in the third quarter.
When we reported second quarter earnings, our expectation was that the worst of the shortage was behind us.
This turned out not to be the case.
Production volatility stemming from the semiconduct -- chip shortage took another leg down, which eventually forced OEMs to idle production at many facilities, including their full-size truck plants that were largely protected previously.
However, the AAM team did a great job in managing these obstacles and factors under our control, resulting in solid financial performance.
AAM sales for the third quarter of 2021 were $1.21 billion, down approximately 14% compared to $1.41 billion in the third quarter of 2020.
The decrease in our revenues on a year-over-year basis primarily reflects the impact of the semiconductor supply chain disruptions of nearly $245 million.
North American industry production was down approximately 25% according to third-party estimates.
Light truck production was down 20% year-over-year and volumes on our core platforms decreased significantly from a year ago.
The industry is at a point where a lack of inventory has begun to impact retail sales.
Days supply on key products that we support were at or below 30 days with certain platforms in single digits and large SUVs closer to 20 days.
Once the supply chain issues are resolved, which will take some time, we foresee an extended recovery to meet customer demand and replenish dealer inventories.
AAM is in a great position to benefit from the strong demand in light trucks, especially pickups and SUVs and the replenishment of crossover vehicles.
AAM's adjusted EBITDA in the third quarter of 2021 was $183 million or 15.1% of sales.
This compares to $297 million last year.
Excluding the impact of metal markets and currency, our EBITDA margins would have approximated 19%.
This is a testament to our optimization efforts and our strong cost control, yielding strong EBITDA conversion.
AAM's adjusted earnings per share in the third quarter of 2021 was $0.15 per share compared to $1.15 in the third quarter of 2020.
As for cash flow, we continue to generate positive free cash flow in the third quarter.
AAM's adjusted free cash flow was approximately $69 million.
Earlier this year, we announced a development agreement with REE.
We are pleased to share that we have secured an initial platform business award with our partner, and AAM plans to supply REE with high-performance electric drive units for its highly modular and disruptive REEcorner technology that enables full flat EV chassis for multiple applications.
This is a great electrification opportunity for AAM and its validation of our innovative industry-leading advanced electric drive technology, and we're excited to build upon this win with REE going forward.
Investors and other interested parties may have an opportunity to see our will and drive units and other EDU portfolio on display at trade shows beginning in January of 2022.
In addition, AAM announced today that we will be supplying track right differentials for the new GMC Hummer EV.
These differential subassemblies distribute power generated by the electric drive motor to the left and right wheels.
This enhances the experience for drivers looking for exceptional vehicle performance, both on and off road.
We are very happy to support GM on this great product, and we look forward to spy GM for their future electric driveline needs.
Our strategy and approach to the market continues to take hold.
Our opportunity to succeed in full electric drive units, subassemblies and components are well displayed with these two announcements.
As we all know, electrification is coming fast, and it's a great growth opportunity for AAM.
We have a strong product portfolio in EDUs and e-beam axles, gearboxes, subassemblies and components.
As such, our technology is guarding interest around the globe from new and established OEMs from small cars to light commercial vehicles.
We are in numerous discussions with manufacturers, and our business prospects look very positive.
Because of our deep driveline experience, we believe we have an edge among the competition, especially when it comes to systems integration and NVH.
Before I transition to Chris, I want to talk about the industry supply chain challenges and our financial guidance.
What the industry has and continues to experience is unprecedented.
A lack of semiconductor availability continues to drive high production volatility with very minimal warning.
Additionally, rising commodity costs, labor shortages, logistical challenges and port delays continue to stress the value chain.
We are hoping to see semiconductor stabilization over the next successive quarters, but it's difficult to ascertain when the industry will return to normal as global demand for chips remain strong and new capacity will take time to come online.
We expect this issue will continue well into 2022 and possibly into 2023.
That said, our priority at AAM is to execute our game plan, which means to produce high-quality products, deliver on time and be cost-efficient to support our customers and protect the continuity of supply regardless of the operating conditions, and we're doing just that.
One of the management's top priority is to diligently optimize the cost structure and improve efficiency, and we are doing that.
Now let's discuss our financial guidance.
Operating uncertainty continues in the fourth quarter, especially with the availability of semiconductors and rising commodity prices.
And as such, we have updated our guidance.
For the full year, we now target revenue in the range of $5.15 to $5.25 billion, adjusted EBITDA in the range of $830 million to $850 million and adjusted free cash flow of approximately $400 million.
In conclusion, we had a good and solid operating quarter.
We did what we do best, that is we delivered operational excellence.
The team delivered positive adjusted earnings and adjusted free cash flow under a very difficult operating environment.
We are confident that our strong operating fundamentals should support solid financial performance, especially as volumes recover over time.
In the meantime, we continue to secure our core truck, SUV and crossover business and generate strong cash flow to fund our electrification future.
In addition, we will continue to invest in advancing our electrification platform technology and our overall EV portfolio to serve multiple vehicle segments.
Our goal is to be the electrification supplier of choice for the broader OEM community, and we are making primary index-related inputs to metal materials that we purchase.
You may recall, we hedged this risk with our customers by passing through the majority, but not all of these index-related changes.
The metal portion of this column reflects these elevated pass-throughs on a year-over-year basis.
For the first three quarters of 2021, metal markets in a foreign currency have increased our revenues by approximately $212 million, and we expect this to be well over $300 million for the full year.
Now let's move on to profitability.
Gross profit was $165.6 million, or 13.7%, of sales in the third quarter of 2021 compared to $249.8 million in the third quarter of 2020.
Adjusted EBITDA was $183.2 million in the third quarter of 2021 or 15.1% of sales.
This compares to $297.1 million in the third quarter of 2020.
You can see a year-over-year walk down of adjusted EBITDA on Slide 8.
The return of COVID volumes added approximately $16 million, but was more than offset by the negative impact from the production volatility stemming from the semiconductor disruptions in the amount of $83 million.
Last year, we also had a $22 million benefit from an ED&D recovery and a customer settlement that did not recur in 2021.
But even through all these disruptions in the quarter, AAM still delivered $17 million of net performance.
As I just mentioned in our sales highlights, we are facing significant year-over-year increases in commodity metal markets.
The retained portion impacting this quarter plus foreign currency was $31 million.
You can see on our EBITDA walk, the dynamic this has on our margin calculations.
If you exclude the impact of this pass-through dynamic, our margins would have been significantly higher, as noted on our walk.
Let me now cover SG&A.
SG&A expense, including R&D, in the third quarter of 2021 was $90.5 million, or 7.5% of sales.
This compares to 4.7% of sales in the third quarter of 2020.
The AAM's R&D spending in the third quarter of 2021 was $34.7 million compared to $18 million in the third quarter of 2020.
Recall, we received significant engineering and development recovery last year of approximately $15 million.
The third quarter of 2021 incurred a sequential quarterly increase in R&D, in line with our expectations.
We will continue to focus on controlling our SG&A costs, while at the same time, investing in technologies and innovations to achieve our pivot to electrification.
We do expect R&D spend to increase in the coming quarters as we launch new programs and continue to pursue meaningful opportunities in the electric vehicle business as we experienced significant customer interest in our new products and technology.
Now let's move on to interest and taxes.
Net interest expense was $47 million in the third quarter of 2021 compared to $50.5 million in the third quarter of 2020.
We expect this favorable trend to continue as we benefit from continued debt reductions.
In the third quarter, we redeemed $100 million of our 6.25% notes due 2025 and refinanced the remaining $600 million balance.
In the third quarter of 2021, we reported an income tax benefit of $13.6 million compared to a benefit of $22.5 million in the third quarter of 2020.
As we near the end of 2021, we expect our effective tax rate to be approximately 10% to 15%.
We would also expect our cash taxes to be in the $25 million to $30 million range.
Taking all these sales and cost drivers into account, our GAAP net loss was $2.4 million, or $0.02 per share, in the third quarter of 2021 compared to an income of $117.2 million, or $0.99 per share, in the third quarter of 2020.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the third quarter of 2021 was $89.8 million compared to $249.5 million last year.
Capital expenditures net of proceeds from the sale of property, plant and equipment for the third quarter of 2021 was $33.2 million.
Cash payments for restructuring and acquisition-related activity for the third quarter of 2021 were $9 million.
The net cash outflow related to the recovery from the Malvern fire we experienced in September of 2020 was $3.5 million in the quarter.
However, we anticipate the Malvern fire to have a neutral cash impact for the full year as timing of cash expenditures and cash insurance proceeds aligned over time.
In total, we would expect $55 million to $65 million in cash payments for restructuring and acquisition costs in 2021.
Reflecting the impact of this activity, AAM generated adjusted free cash flow of $69.1 million in the third quarter of 2021.
From a debt leverage perspective, we ended the quarter with net debt of $2.6 billion and LTM adjusted EBITDA of $930.2 million, calculating a net leverage ratio of 2.8 times at September 30.
We are focused on improving the balance sheet and delivering on our goal to improve our leverage this year.
We have made meaningful progress in reducing our gross debt outstanding and reducing our leverage ratio by more than a full turn as of the end of the third quarter.
Before we move on to the Q&A portion of the call, let me close out my comments with some thoughts on our 2021 financial outlook.
We expect adjusted EBITDA to be in the range of $830 million to $850 million.
Just as a reminder, investors need to consider the impact of the metal market pass-throughs as it relates to our margin calculations when comparing from period to period.
In periods and environment such as this, it is meaningful.
We expect to generate approximately $400 million of adjusted free cash flow in 2021, or nearly 50% adjusted free cash flow to adjusted EBITDA conversion.
We expect our capital expenditures at less than 4% of sales as our capital reuse and optimization efforts continue to deliver results.
Our updated outlook is based on the latest and best information we have regarding customer production schedules.
We continue to assume our customers will prioritize building full-size pickup trucks and SUVs through the end of the year with minimal disruptions.
However, the operating environment remains choppy with multiple factors posing a risk to the supply chain.
As volumes begin to normalize, we should be in a great position to leverage that environment to generate profits and cash flow.
This in turn will be used to support our highly advanced research and development initiatives in electrification and solidly position us for future profitable growth aligned with our capital allocation priorities.
We have reserved some time to take questions.
So at this time, please feel free to proceed with any questions you may have. | compname reports q4 earnings per share of $0.54.
q4 earnings per share $0.54. | 0 |
These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may differ materially.
Factors that could cause results to differ include factors described in our third quarter 2021 report on Form 10-Q, our 2020 annual report on Form 10-K and other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
I'm pleased to report that AIG had another outstanding quarter as we continue to build momentum and execute on our strategic priorities.
We continue to drive underwriting excellence across our portfolio.
We're executing on AIG 200 to instill operational excellence in everything we do.
We are continuing to work on the separation of life and retirement from AIG.
And we're demonstrating an ongoing commitment to thoughtful capital management.
I will start my remarks with an overview of our consolidated financial results for the third quarter.
I will then review our results for general insurance, where we continue to demonstrate market leadership in solving risk issues for clients while delivering improved underwriting profitability and more consistent results.
I'll also comment on certain market dynamics, particularly in the property market, as well as recent CAT activity and related reinsurance considerations as we approach year-end.
Next, I'll review results from our life and retirement business, which we continue to prepare to be a stand-alone company.
I will also provide an update on the considerable progress we're making on the operational separation of life and retirement from AIG and our strong execution of AIG 200.
I will then review capital management, where our near-term priorities remain unchanged from those I have outlined in the past: debt reduction, return of capital to shareholders, investment in our business through organic growth and operational improvements.
Finally, I will conclude with our recently announced senior executive changes that further position AIG for the long term.
These appointments were possible due to the strong bench of internal talent and significantly augment the leadership team across our company.
Starting with our consolidated results.
As I said, AIG had another outstanding quarter, continuing the terrific trends we've experienced throughout 2021.
Against the backdrop of a very active CAT season and the persistent and ongoing global pandemic, our global team of colleagues continue to perform at an incredibly high level, delivering value to our clients, policyholders and distribution partners.
Adjusted after-tax income in the third quarter was $0.97 per diluted share compared to $0.81 in the prior-year quarter.
This result was driven by significant improvement in profitability in general insurance, very good results in life and retirement, continued expense discipline and savings from AIG 200 and executing on our capital management strategy.
In general insurance, global commercial drove strong top line growth.
And we were especially pleased with our adjusted accident year combined ratio, which improved 280 basis points year over year to 90.5%.
These excellent results in general insurance validate the strategy we've been executing on to vastly improve the quality of our portfolio and build a top-performing culture of disciplined underwriting.
One data point that I believe demonstrates the incredible progress we have made is our accident year combined ratio for the first nine months of 2021, which was 97.7%.
This represents a 770-basis-point improvement year over year, with 600 of that improvement coming from the loss ratio and 170 from the expense ratio.
In life and retirement, we again had solid results primarily driven by improved investment performance and increased call and tender income.
This business delivered a return on adjusted segment common equity of 12.2% for the third quarter and 14.3% for the first nine months of the year.
And we recently achieved an important milestone in the separation process by closing the sale of a 9.9% equity stake in life and retirement to Blackstone for $2.2 billion in cash.
We continue to prepare the business for an IPO in 2022 and we'll begin moving certain assets under management to Blackstone.
We ended the third quarter with $5.3 billion in parent liquidity after redeeming $1.5 billion in debt outstanding and completing $1.1 billion in share repurchases.
Year-to-date, we have reduced financial debt outstanding by $3.4 billion and have returned $2.5 billion to shareholders through share repurchases and dividends.
We expect to redeem or repurchase an additional $1 billion of debt in the fourth quarter and to repurchase a minimum of $900 million of common stock through year-end to complete the $2 billion of stock repurchase we announced on our last call.
Through these actions, we've made clear our continuing commitment to remain active and thoughtful about capital management.
Now, let me provide more detail on our business results in the third quarter.
I will start with general insurance, where, as I mentioned earlier, growth in net premiums written continued to be very strong and we achieved our 13th consecutive quarter of improvement in the adjusted accident year combined ratio.
Adjusting for foreign exchange, net premiums written increased 10% year over year to $6.6 billion.
This growth was driven by global commercial, which increased 15%, with personal insurance flat for the quarter.
Growth in commercial was balanced between North America and International, with North America increasing 18% and International increasing 12%.
Growth in North America commercial was driven by excess casualty, which increased over 50%; Lexington Wholesale, which continued to show leadership in the E&S market and grew Property and Casualty by over 30%; financial lines, which increased over 20%; and Crop Risk Services, which grew more than 50% driven by increased commodity prices.
In international commercial, financial lines grew 25%, Talbot had over 15% growth and Liability had over 10% growth.
In addition, gross new business in global commercial grew 40% year over year to over $1 billion.
In North America, new business growth was more than 50% and in International, it was more than 25%.
North America new business was strongest in Lexington, financial lines and retail property.
International new business came mostly from financial lines and our specialty businesses.
We also had very strong retention in our in-force portfolio, with North America improving retention by 200 basis points and International improving retention by 700 basis points.
Strong momentum continued with overall global commercial rate increases of 12%.
In many cases, this is the third year where we have achieved double-digit rate increases in our portfolio.
North America commercial's overall 11% rate increases were balanced across the portfolio and led by excess casualty, which increased over 15%.
Financial lines, which also increased over 15% and Canada, where rates increased by 17%, representing the 10th consecutive quarter of double-digit rate increases.
International commercial rate increases were 13% driven by EMEA, excluding specialty, which increased by 22%.
U.K., excluding specialty, which increased 21%.
Financial lines, which increased 24% and Energy, which was up 14%, its 11th consecutive quarter of double-digit rate increases.
Turning to global personal insurance.
We had a solid quarter that reflected a modest rebound in net premiums written in travel and warranty, offset by results in the private client group due to reinsurance cessions related to Syndicate 2019 and non-renewals in peak zones.
Shifting to underwriting profitability.
As I noted earlier, general insurance's accident year combined ratio ex CAT was 90.5%.
The third quarter saw a 150-basis-point improvement in the accident year loss ratio ex CAT and a 130-basis-point improvement in the expense ratio, all of which came from the GOE ratio.
These results were driven by our improved portfolio mix, achieving rate in excess of loss cost trends, continued expense discipline and benefits from AIG 200.
Global commercial achieved an impressive accident year combined ratio ex CATs of 88.9%, an improvement of 290 basis points year over year and the second consecutive quarter with a sub-90% combined ratio result.
The accident year combined ratio ex CAT for North America commercial and international commercial were 90.5% and 86.8%, respectively, an improvement of 370 basis points and 210 basis points.
In global personal insurance, the accident year combined ratio ex CATs was 94.2%, an improvement of 220 basis points year over year driven by improvement in the expense ratio.
Given the significant progress we have made to improve our combined ratios and our view that the momentum we have will continue for the foreseeable future, we now expect to achieve a sub-90% accident year combined ratio ex CAT for full year 2022.
After three years of significant underwriting margin improvement, we believe that the sub-90% accident year combined ratio ex CAT is something that not only will be achieved for full year 2022, but that there will continue to be runway for further improvement in future years.
As I said earlier, the third quarter was very active, with current industry estimates ranging between $45 billion and $55 billion globally.
We reported approximately $625 million of net global CAT losses with approximately $530 million in commercial.
The largest impacts were from Hurricane Ida and flooding in Europe, where we saw net CAT losses of approximately $400 million and $190 million, respectively.
We have put significant management focus into our reinsurance program, which continues to perform exceptionally well to reduce volatility, including strategic purchases for wind that we made in the second quarter.
Reinsurance recoveries in our International per occurrence, private client group per occurrence and other discrete reinsurance programs also reduced volatility in the third quarter.
We expect any fourth quarter CAT losses to be limited given that we are close to attaching on our North America aggregate cover and our aggregate cover for rest of the world, excluding Japan.
We have each and every loss deductibles of $75 million for North America wind, $50 million for North America earthquake and $25 million for all other North America perils and $20 million for international.
Our worldwide retention has approximately $175 million remaining before attaching in the aggregate, which would essentially be for Japan CAT.
Since 2012 and excluding COVID, there have been 10 CATs with losses exceeding $10 billion.
And nine of those 10 occurred in 2017 through the third quarter of this year.
Average CAT losses over the last five years have been $114 billion, up 30% from the 10-year average and up 40% from the 15-year average.
And through 2021, catastrophe losses exceed $100 billion and we're already at $90 billion through the third quarter.
This will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold.
I'll make three observations.
First, while CAT models tended to trend acceptable over the last 20 years, that has not been the case over the last five years.
Second, over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods.
If you add in wildfire, those numbers dramatically increase.
Third, industry losses compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect the significant increase in frequency in CATs.
To address these issues, at AIG, we've invested heavily in our CAT research team to develop our own view of risk in this new environment.
wind, storm surge, flood as well as numerous other perils in international.
We will continue to leverage new scientific studies, improvements in vendor model work and our own claims data to calibrate our views on risk over time to ensure we're appropriately pricing CAT risks.
Across our portfolio, our strategy and primary focus has been and will continue to be to deliver risk solutions that meet our clients' needs while aligning within our risk appetite, which takes into consideration terms and conditions, strategic deployment of limits and a recognition of increased frequency and severity.
The significant focus that we've been applying to the critical work we've been doing is showing through in our financial results as you've seen over the course of 2021 with improving combined ratios, both including and excluding CATs.
Now, turning to life and retirement.
Earnings continue to be strong and in the third quarter were supported by stable equity markets, modestly improving interest rates relative to the second quarter and significant call and tender income.
Adjusted pre-tax income in the third quarter was approximately $875 million.
Individual retirement, excluding retail mutual funds, which we sold in the third quarter, maintained its upward trajectory with 27% growth in sales year over year.
Our largest retail product, Index Annuity, was up 50% compared to the prior-year quarter.
Group retirement collectively grew deposits 3% with new group acquisitions ahead of prior year but below a robust second quarter.
Kevin and his team continued to actively manage the impacts from a low interest rate and tighter credit spreads environment and their earlier provided range for expected annual spread compression has not changed as base investment spreads for the third quarter were within the annual 8 to 6 points guidance.
With respect to the operational separation of life and retirement, we continue to make considerable progress on a number of fronts.
Our goal is to deliver a clean separation with minimal business disruption and emphasis on speed execution, operational efficiency and thoughtful talent allocation.
We have many work streams in execution mode, including designing a target operating model that will position life and retirement to be a successful stand-alone public company, separating IT systems, data centers, software applications, real estate and material vendor contracts and determining where transition services will be required and minimizing their duration with clear exit plans.
We continue to expect an IPO to occur in the first quarter of 2022 or potentially in the second quarter, subject to regulatory approvals and market conditions.
As I mentioned on our last call, due to the sale of our affordable housing portfolio and the execution of certain tax strategies, we are no longer constrained in terms of how much of life and retirement we can sell on an IPO.
Having said that, we currently expect to retain a greater than 50% interest immediately following the IPO and to continue to consolidate life and retirement's financial statements until such time as we fall below the 50% ownership threshold.
As we plan for the full separation of life and retirement, the timing of further secondary offerings will be based on market conditions and other relevant factors over time.
With respect to AIG 200, we continue to advance this program and remain on track to deliver $1 billion in run rate savings across the company by the end of 2022 against a cost to achieve of $1.3 billion.
$660 million of run rate savings are already executed or contracted, with approximately $400 million recognized to date in our income statement.
As with the underwriting turnaround, which created a culture of underwriting excellence, AIG 200 is creating a culture of operational excellence that is becoming the way we work across AIG.
Before turning the call over to Mark, I'd like to take a moment to discuss the senior leadership changes we announced last week.
Having made significant progress during the first nine months of 2021 across our strategic priorities and in light of the momentum we have heading toward the end of the year, this was an ideal time to make these appointments.
I'll start with Mark, who will step into a newly created role, global Chief Actuary and Head of Portfolio Management for AIG on January 1.
As you all know, over the last three years, Mark has played a critical role in the repositioning of AIG.
He originally joined AIG in 2018 as our chief actuary.
And this new role will get him back into the core of our business, driving portfolio improvement, growth and prudent decision-making by providing guidance on important performance metrics within our risk appetite and evolving our reinsurance program.
Shane Fitzsimons will take over for Mark as chief financial officer on January 1.
Shane joined AIG in 2019 and his strong leadership helped accelerate aspects of AIG 200 and instill discipline and rigor around our finance transformation, strategic planning, budgeting and forecasting processes.
He has a strong financial and accounting background having worked at GE for over 20 years in many senior finance roles, including as Head of FP&A and chief financial officer of GE's international operations.
Shane has already begun working with Mark on a transition plan and we've shifted his AIG 200 and shared services responsibility to other senior leaders.
We also announced that Elias Habayeb has been named chief financial officer of life and retirement.
Elias has been with AIG for over 15 years and was most recently our Deputy CFO and Principal Accounting Officer for AIG as well as the CFO for general insurance.
Elias has deep expertise about AIG.
And his transition to life and retirement will be seamless as he is well known to that management team, the investments team that is now part of life and retirement, our regulators, rating agencies and many other stakeholders.
Overall, I am very pleased with our team, our third quarter results and the tremendous progress we're making on many fronts across AIG.
I am extremely pleased with the strong adjusted earnings this quarter of $0.97 per share and our profitable general insurance calendar quarter combined ratio, which includes CATs, of 99.7%.
The year over year adjusted earnings per share improvement was driven by a 750-basis-point reduction in the general insurance calendar quarter combined ratio, strong growth in net premiums written and earned and a related 280-basis-point decrease in the underlying accident year combined ratio ex CAT.
life and retirement also produced strong APTI of $877 million, along with a healthy adjusted ROE of 12.2%.
The quarter's strong operating earnings and consistent investment performance helped increase adjusted book value per share by 3% sequentially and nearly 9% compared to one year ago.
The strength of our balance sheet and strong liquidity position were highlights in the period as we made continued progress on our leverage goals with a GAAP debt leverage reduction of 90 basis points sequentially and 350 basis points from one year ago today to 26.1%, generated through retained earnings and liability management actions.
Shifting to general insurance.
Due to our achieved profitable growth to date, together with demonstrable volatility reduction and smart cycle management, makes us even more confident in achieving our stated goal of a sub-90% accident year combined ratio ex CAT for full year 2022 rather than just exiting 2022.
Shifting now to current conditions.
The markets in which we operate persist in strength and show resiliency.
AIG's global platform continues to see rate strengthening internationally, which adds to our overall uplift unlike more U.S.-centric competitors.
As you recall, international commercial rate increases lagged those in North America initially.
But beginning in 2021, as noted by Peter in his remarks, International is now producing rate increases that surpass those strong rates still being achieved in North America and in some areas, meaningfully so.
These rate increases continue to outstrip loss cost trends on a global basis across a broadband of assumptions and are additive toward additional margin expansion.
In fact, for a more extensive view, within North America over the three year period, 2019 through 2021, product lines that achieved cumulative rate increases near or above 100% are found within excess casualty, both admitted and non-admitted.
Property lines, both admitted and non-admitted and financial lines.
We believe these levels of tailwind will continue driving earned margin expansion into the foreseeable future.
In the current inflationary environment, it's important to remember that products with inflation-sensitive exposure bases, such as sales, receipts and payroll, act as an inflation mitigant and furthermore are subject to additional audit premiums as the economy recovers.
Last quarter, we provided commentary about U.S. portfolio loss cost trends of 4% to 5% and in some aspects were viewed as being near term.
We believe that this range still holds but now gravitates toward the upper end given another quarter of data.
And in fact, our U.S. loss cost trends range from approximately three and a half percent to 10%, depending on the line of business.
From a pricing perspective, we feel that we are integrating these near-term inflationary impact into our rating and portfolio tools.
And we are not lowering any line of business loss cost trends since lighter claims reporting may be misconstrued as a false positive due to COVID-19 societal impacts.
It's also worth noting that all of our North America commercial Lines loss cost trends, with the exception of workers' compensation, are materially lower than the corresponding rate increases we are seeing.
This discussion around compound rate increases and loss cost trends collectively give rise to the related topic of current year loss ratio picks or indications and the result in bookings.
The strong market that we now enjoy, in conjunction with the significant underwriting transformation at AIG, has driven other aspects of the portfolio that affect loss ratios.
In many lines and classes of business, the degree that cumulative rate changes have outpaced cumulative loss cost trend is substantial.
And these lead to meaningfully reduced loss ratio indications between 2018 and the 2021 years.
Unfortunately, this is where most discussions usually cease with external stakeholders.
However, in reality, that is not the end of the discussion but merely the beginning.
Some other aspects that can have material favorable implications toward the profitability of underlying businesses are, one, terms and conditions, which can rival price in the impact.
Two, a much more balanced submission flow across the insured risk quality spectrum, thereby improving rate adequacy and mitigating adverse selection.
Three, strategic capacity deployment across various layers of an insurance tower, which can produce preferred positioning and ongoing retention with the customer.
And fourth, reinsurance that tempers volatility and mitigates net losses.
Accordingly, even if modest loss ratio beneficial impacts are assigned to each of these nuances, they will additionally contribute to further driving down the 2021 indicated loss ratio beyond that signaled by rate versus loss trend alone.
And these are real and these are happening.
So why are product lines booked at this implied level of profitability by any insurer?
Well, there is at least four reasons.
First, insurers assume the heterogeneous risk of others and each year is composed of different exposures, rendering so-called on-level projections to be imperfect.
Second, most policies are written on an occurrence basis, which means the policy language can be challenged for years, if not decades, potentially including novel series of liability.
Third, many lines are extremely volatile and even if every insured is underwritten perfectly -- even if every insured is underwritten perfectly.
And fourth, booking an overly optimistic initial loss ratio merely increases the chance of future unfavorable development.
Therefore, these types of issues require prudence in the establishment of initial loss ratio picks for most commercial lines of business.
Shifting now to our third quarter reserve review.
Approximately $42 billion of reserves were reviewed this quarter, bringing the year-to-date total to approximately 90% of carried pre-ADC reserves.
I'd like to spend a little time taking you through the results of our quarterly reserve analysis, which resulted in minimal net movement, confirming the strength of our overall reserve position.
On a pre-ADC basis, the prior-year development was $153 million favorable.
On a post-ADC basis, it was $3 million favorable.
And when reflecting the $47 million ADC amortization on the deferred gain, it was $50 million favorable in total.
This means that our overall reserves continue to be adequate, with favorable and unfavorable development balanced across lines of business, resulting in an improved yet neutral alignment of reserves.
Now, before looking at the quarter on a segment basis, I'd like to strip away some noise that's in the quarter so we don't get overly lost in the details.
One should think of this quarter's reserve analysis as performing all of the scheduled product reviews and then having to overlay two seemingly unrelated impacts caused by the receipt of a large subrogation recovery associated with the 2017 and 2018 California wildfires.
The first of these two impacts is the direct reduction from North America personal insurance reserves of $326 million, resulting from the subrogation recoveries.
As a result, we also had to reverse a previously recorded 2018 accident year reinsurance recovery in North America commercial Insurance of $206 million since the attachment point was no longer penetrated once the subrogation recoveries were received.
These two impacts from the subrogation recovery resulted in a net $120 million of favorable development.
So excluding their impact restates the total general insurance PYD as being $70 million unfavorable in total rather than the $50 million of favorable development discussed earlier.
This is a better framework to discuss the true underlying reserve movements this quarter.
This $70 million of global unfavorable stems from $85 million unfavorable in global CAT losses together with $50 million favorable in global non-CAT or attritional losses.
The $85 million unfavorable in CAT is driven by marginal adjustments involving multiple prior-year events from 2019 and 2020.
The $15 million non-CAT favorable stems from the net of $255 million unfavorable from global commercial and $270 million of favorable development, predominantly from short-tail personal lines businesses within accident year 2020, mostly in our International book.
Consistent with our overall reserving philosophy, we were cautious toward reacting to this $270 million favorable indication until we allow the accident year to season.
North America commercial had unfavorable development of $112 million, which was driven by financial lines' strengthening of approximately $400 million with favorable development and other lines led by workers' compensation with approximately $200 million, emanating mostly from accident years 2015 and prior and approximately $100 million across various other units.
North America financial lines were negatively impacted by primary public D&O, largely in the more complex national accounts arena and within private not-for-profit D&O unit, in addition to some excess coverage mostly in the public D&O space, with 90% emanating from accident years 2016 to 2018.
International commercial had unfavorable development of $143 million, which was comprised of financial lines' strengthening in D&O and professional indemnity of approximately $300 million led by the U.K. and Europe, but the accident year impacts are more spread out.
Favorable development was led by our specialty businesses at roughly $110 million with an additional favorable of approximately $50 million stemming from various lines and regions.
Now, as Peter noted, the changes we've made to our underwriting culture and risk appetite over the last few years, coupled with strong market conditions, are now showing through in our financial results.
U.S. financial lines, in particular, through careful underwriting and risk selection has meaningfully reduced our exposure to securities class actions or SCA lawsuits over the last few years.
Evidence of this underwriting change is best seen through the proportion of SCAs for which the U.S. operation has provided coverage.
In 2017, AIG provided D&O coverage to 67 insurers involved in SCAs, which represents 42% of all U.S. federal security class actions in that year.
Whereas in 2020, that shrunk to just 18% and through nine months of 2021 is only 15 insurers or 14%.
This is significant because roughly 60% to 70% of public D&O loss dollars historically emanate from SCAs.
The North America private not-for-profit D&O book has also been significantly transformed.
The policy retention rate here between 2018 and 2021, which is a key strategic target, is just 15%.
And yet it should also be noted that the corresponding cumulative rate increase over the same period is nearly 130%.
This purposeful change in risk selection criteria away from billion-dollar revenue large private companies and nonprofit universities and hospitals to instead a more balanced middle market book will also drive profitability substantially.
International financial lines has implemented similar underwriting actions with comparable three year cumulative rate increases, along with a singular underwriting authority around the world as respect U.S.-listed D&O exposure through close collaboration with the U.S. Chief Underwriting Office.
In summary, our reserving philosophy remains consistent in that we will continue to be prudent and conservative.
This is evidenced by our slower recognition of attritional improvements in short-tail lines from accident year 2020 and from the sound decision to strengthen Financial Line reserves, even though there are some interpretive challenges stemming from a difficult claims environment, changes within our internal claims operations over the last couple of years and potential COVID-19 impacts on claim reporting patterns.
All of these underwriting actions we've taken over the last few years make us even more confident in our total reserve position across both prior and current accident years.
Moving on to life and retirement.
The year-to-date ROE has been a strong 14.3% compared to 12.8% in the first nine months of last year.
APTI during the third quarter saw higher net investment income and higher fee income, offset by the unfavorable impact from the annual actuarial assumption update, which is $166 million pre-tax, negatively affected the ROE by approximately 250 basis points on an annual basis and earnings per share by $0.15 per share.
The main source of the impact was in the Individual retirement division associated with fixed annuity spread compression.
life insurance reflected a slightly elevated COVID-19-related mortality provision in the quarter.
But our exposure sensitivity of $65 million to $75 million per 100,000 population deaths proved accurate based on the reported third quarter COVID-related deaths in the United States.
Mortality exclusive of COVID-19 was also slightly elevated in the period.
Within Individual retirement, excluding the Retail Mutual Fund business, net flows were a positive $250 million this quarter compared to net outflows of $110 million in the prior-year quarter largely due to the recovery from the broad industrywide sales disruption resulting from COVID-19, which we view as a material rebound indicator.
Prior sensitivities in respect to yield and equity market movements affecting APTI continue to hold true.
And new business margins generally remain within our targets at current new money returns due to active product management and disciplined pricing approach.
Moving to other operations.
The adjusted pre-tax loss before consolidations and eliminations was $370 million, $2 million higher than the prior quarter of 2020, driven by higher corporate GOE primarily from increases in performance-based employee compensation, partially offset by higher investment income and lower corporate interest expense resulting from year-to-date debt redemption activity.
Overall net investment income on an APTI basis was $3.3 billion, an increase of $78 million compared to the prior-year quarter, reflecting mostly higher private equity gains.
By business, life and retirement benefited most due to asset growth, higher call and tender income and another strong period of private equity returns.
general insurance's NII declined approximately 6% year over year due to continued yield compression and underperformance in the hedge fund position.
Also, general insurance has a much higher percentage allocation to private equity and hedge funds, which is likely to change moving forward.
As respect share count, our average total diluted shares outstanding in the quarter were 864 million and we repurchased approximately 20 million shares.
The end-of-period outstanding shares for book value per share purposes was approximately 836 million and anticipated to be approximately 820 million at year-end 2021 depending upon share price performance, given Peter's comments on additional share repurchases.
Lastly, our primary operating subsidiaries remain profitable and well capitalized, with general insurance's U.S. pool fleet risk-based capital ratio for the third quarter estimated to be between 450% and 460%.
And the life and retirement U.S. fleet is estimated to be between 440% and 450%, both above our target ranges.
Operator, we'll take our first question. | qtrly total general insurance net premiums written $6.86 billion , up 24%.
qtrly gi accident year combined ratio, as adjusted, excluding catastrophe losses and related reinstatement premiums, was 91.1 versus 94.9.
as of june 30, 2021 book value per common share was $76.73 versus $ 71.68.
as of june 30, 2021 adjusted book value per common share was $ 60.07 versus $ 55.90.
in h2 2021, expect to repurchase at least $2 billion in common stock and reduce debt outstanding by $2.5 billion. | 0 |
As for the content of today's call, Kevin will start with a discussion of the business and Robert will follow with a recap of Dolby's financial results and provide our first quarter and fiscal 2022 outlook.
Our Q4 earnings per share came in above our midpoint, while revenue came in toward the low end of our guidance range.
Looking at the full year, we had a strong fiscal 2021 with 10% revenue growth and our highest operating margin since fiscal 2014, and we created considerable momentum across many of our growth initiatives, that will allow more people to be entertained by premium Dolby experiences.
Consumers can now easily record, edit and share their videos in Dolby Vision with their Apple iPhone.
Music in Dolby is being enjoyed by a significantly larger audience, with the launch of Dolby Atmos on to Apple Music, and we have the first partners, who will enable the Dolby Atmos music experience in the car, with Mercedes-Benz and Lucid Motors, and gamers can now play some of their favorite titles in Dolby Vision for the first time, on the latest Xbox.
During FY '21, our revenues benefited from robust increases in consumer device shipments, combined with increased adoption of Dolby Atmos and Dolby Vision, partially offset by a decrease in the cinema related revenues.
As we enter FY '22, we are expecting revenue growth in the mid to high single digits, as we anticipate a shift in those factors, with accelerating growth of Dolby Atmos and Dolby Vision and a partial recovery in cinema related revenues, offset by a macro slowdown in consumer device shipments.
It has been a dynamic environment.
Before Robert takes you through the numbers in more detail, including a discussion on our licensing end markets, I want to walk you through some of the most important factors, as we think about long-term revenue growth.
Our foundational audio technologies, increased adoption of Dolby Atmos and Dolby Vision and our opportunity to expand our addressable market with initiatives like dolby.io.
Let's start with our foundational audio technologies, which include Dolby Digital Plus, AC-4 and our audio patent licensing.
These foundational technologies made up roughly three quarters of our licensing business in FY '21, and have high attach rates across a diverse set of devices and end markets.
In FY '21, our foundational audio technologies grew about 11% year-over-year, due largely to robust global shipments of DCs and higher TV volumes, particularly in North America and Europe.
We also benefited from higher than normal true ups coming into the year.
As we look ahead to FY '22, industry analysts' reports indicate that we will not see the level of market growth we saw in the previous year, noting uncertainties around global supply constraints and consumer spending.
Of course, we partner with OEMs across multiple device categories, across all geographies and each of them is impacted differently.
When we take all of this into account, we expect a decrease in the low single digits for our foundational audio revenues.
Over the long term, we expect our foundational licensing revenue to generally reflect market trends and device shipments, driven by our strong presence across a wide set of consumer devices and markets, with opportunities to increase adoption in certain areas like mobile and automotive.
The remainder of our licensing revenue includes Dolby Atmos, Dolby Vision and our Imaging Patent Technologies, where growth is being driven primarily by new adoption and new licensees.
This portion of our licensing revenue also includes Dolby Cinema, where we expect strong year-over-year growth, as box office recovers from low attendance throughout FY '21, driven by the pandemic.
In total, this portion is approaching one quarter of our licensing revenue and grew nearly 20% in FY '21.
We see this growth accelerating to over 35% in FY '22.
Our continued momentum with Dolby Vision and Dolby Atmos is a key driver here, and I'd like to take a few minutes to highlight our progress in these areas.
Let me start with Dolby Atmos Music; the response from artists and consumers is clear.
Dolby Atmos creates a whole new way to enjoy music.
The engagement continues to build, with some of the world's most popular music artists like Justin Bieber and The Weeknd, describing the Dolby Atmos music experience as “game-changing,” and “an immersive world where you can feel every detail”.
We also recently launched a new venue, Dolby Live at Park MGM, where concert attendees will be able to enjoy their favorite artists with the ultimate Dolby Atmos Music experience, and then seek the experience in all the ways they enjoy music.
Amazon Music recently announced that they are making Dolby Atmos Music experiences more broadly available to their subscribers.
The music in Dolby experience significantly increases the value that Dolby brings, across a wide range of devices, including mobile, PC and speaker products.
Our growing presence in music has created a new value proposition for Dolby in the automotive space.
Mercedes-Benz announced last month, that they are adopting the Dolby Atmos Music experience in two of their top luxury cars, the Mercedes Maybach and the Mercedes-Benz S-Class.
And just yesterday, Chinese electric-car maker NIO, announced they are including Dolby Atmos in their ET7 model.
We are excited that these new partnerships add to our early momentum within automotive, that started with Lucid Air earlier this year, which is now on the road in the U.S.
We are just at the beginning of the significant opportunity we see ahead in this space.
This quarter, the launch of the iPhone 13 lineup again highlighted the capability to enable consumers to record and share their videos in Dolby Vision.
With a significant increase to the amount of Dolby Vision content being created through the iPhone, we are seeing a range of content platforms, now enabling support for Dolby Vision for the first time.
This quarter, Bilibili, one of China's largest social video sites, began to support the upload and sharing of user generated Dolby Vision content.
More recently, Vimeo became the first all-in-one platform to support playback of Dolby Vision content for the Apple ecosystem.
With more content platforms supporting Dolby Vision content to broader audiences and used cases, we look to drive increased adoption of Dolby Vision playback and capture across more devices, particularly in mobile and PC.
We are also building momentum to enable more live broadcast events in Dolby.
Comcast delivered the 2021 MLB World Series and playoff games in Dolby Vision on Fox Sports.
Thursday night football games will be available in Dolby Vision through Fox, and NBC will be delivering select college football games in Dolby Vision.
Growing the number of Dolby content experiences, especially live content with dedicated followings, provides more impetus for greater adoption of Dolby Vision and Dolby Atmos.
Gaming in Dolby Vision is now available on the Xbox series X and S, marking the first time gamers can enjoy playing in the combined Dolby experience.
Microsoft also expanded their support of the combined experience, by adding Dolby Vision to their Surface devices.
In the living room, we see our partners like Amazon, Xiaomi, TCL and Sky, highlight the combined Dolby Vision and Dolby Atmos experience in their latest TV launches, and we continue to garner support from streaming services with Hulu, adding Dolby Vision this quarter.
The newer soundbar products from LG and Sonos showcase support for Dolby Atmos, and in mobile, we saw new Android phones and tablets this quarter from Samsung, Xiaomi and Realme with Dolby technologies.
With a solid foundation and increasing adoption of Dolby Atmos and Dolby Vision, we are able to broadly address the world of premium content experiences like movies, TV and music, and are confident in our ability to drive continued growth.
With Dolby.io, our developer-first API platform, we see an opportunity to greatly expand our addressable market, by focusing on use cases that benefit from Dolby's unique experience in media and communications.
While our platform has broad applicability across a range of use cases, we are focusing where we think we can offer the most differentiation, virtual live performances, online and hybrid events, social audio, premium education, gaming and content production.
Each of these verticals represents an opportunity of hundreds of billions of minutes annually.
And collectively, we estimate the addressable market to be about $5 billion and growing.
With the breadth and depth of our expertise, we are enabling higher quality capture, processing and playback capabilities compared to what is currently available in the market.
Last quarter, we released a major platform update, which puts us in a position to address more of our potential customers' needs, by making our APIs more competitive on the number of concurrent users we can support.
As we focus on our target use cases and learn from our engagement with developers, we continue to introduce new APIs and features that address the needs of developers and improve the overall developer experience.
With these recent improvements, we are beginning to see increased self-service activity.
And with our new leadership in place, we are focused on increasing awareness and building the pipeline.
This quarter, we saw a number of new music distribution services, including UnitedMasters, integrating our music mastering API and enabling their users to create high-quality music tracks.
Also, Cloudinary recently launched an integration of Dolby.io's audio enhance APIs with their MediaFlows product, allowing their customers to easily improve the audio quality of their videos.
While we are still in the early days of Dolby.io, we are excited about the significant opportunity ahead.
Before I wrap up, let me spend a minute on our operating model.
We significantly increased operating margins in FY '21, due to a combination of gross margin improvements and reduced spending levels due to COVID.
We anticipate a partial return of some of these operating expenses in FY '22, like travel and events, as well as a few specific items like our 53rd week of payroll.
At the same time, on the strength of our operating model, including our improved gross margins, we will continue to generate higher operating margins, as compared to our pre-pandemic levels, while investing in our growth areas.
So in summary, we have a strong foundation and fiscal 2021 was highlighted by significant wins like Dolby Atmos on Apple Music, the first cars that will support Dolby Atmos and enabling Dolby Vision across a wider range of content, from live events to gaming to the user-generated content.
We see much of the opportunity ahead, as we drive broader adoption across more content and more devices, even as we seek to significantly expand our addressable market with Dolby.io.
All of this gives us confidence in our ability to drive long-term revenue and earnings growth, as we look to FY '22 and beyond.
Robert is an experienced leader, with a track record of guiding companies through growth, while delivering operational excellence and accountability.
Robert has been onboard for about four weeks now.
We are excited to have his expertise, as we work toward Dolby's next phase of growth.
And with that, I will hand it over to Robert, to take us through the financials in more detail.
I am very excited to be here and join the Dolby team.
I hope that in the near term I get a chance to meet you all, if not in person, at least virtually.
So let's go through the numbers for Q4 and full year 2021, and then I will take you through our outlook for fiscal year '22.
Total revenue in the fourth quarter was $285 million, which was within the total revenue guidance range we provided, and also included a favorable true-up of about $3 million for Q3 shipments reported, that were above the original estimate.
Revenue landed toward the low end of our guidance range, due to timing of the deal that pushed out of the quarter, and is now anticipated to result in revenue in fiscal year 2022.
With our Q4 results, full year 2021 revenues were $1.28 billion compared to $1.16 billion in fiscal year 2020, generating 10% year-over-year growth.
Within that, licensing revenue was $1.21 billion, while products and services revenue was $67 million.
On a year-over-year basis, fourth quarter revenue was about $14 million above last year's Q4, as we benefited from greater adoption of Dolby Vision and Dolby Atmos and higher cinema-related revenues, partially offset by lower true-ups.
Q4 revenue was comprised of $266 million in licensing and $19 million in Products and services.
Let's discuss the full year and year-over-year quarterly trends in licensing revenue by end market, and I will also highlight the key factors, as we look ahead to fiscal '22.
Broadcast represented about 39% of the total licensing in fiscal year 2021.
Our full year revenues grew by $36 million or 8% on a year-over-year basis, driven by higher adoption of Dolby Vision and Dolby Atmos in TVs and set-top boxes.
We also saw higher foundational audio revenues due to increased TV shipments in North America and Europe compared to fiscal 2020.
In Q4, we saw broadcast revenues decline from prior year's Q4, as we saw lower true-ups for foundational audio revenues on a year-over-year basis, partially offset by higher revenues from Dolby Vision and Dolby Atmos.
As we look out to fiscal 2022, we currently anticipate broadcast revenues to grow in the low single digits from fiscal '21, driven by higher adoption of Dolby Vision, Dolby Atmos and growth in our imaging patent programs.
These growth factors are projected to be partially offset by lower foundational audio revenues, as we see lower recoveries and lower true-ups on a year-over-year basis, and industry analysts are projecting TV shipments to be flat to down low single digits.
Mobile represented approximately 22% of total licensing in fiscal 2021.
Mobile revenue increased by $34 million or 15% compared to fiscal 2020, as our foundational audio revenues benefited from timing of revenues, and we saw higher Dolby Vision revenues from increased adoption.
Our Q4 mobile revenues were up about 2% compared to the prior year, due to higher adoption of Dolby Vision and Dolby Atmos.
In fiscal year '22, we anticipate that mobile revenues could grow mid to high single digits, driven by increasing adoption of Dolby Vision and Dolby Atmos, as well as growth in our imaging patent programs.
These factors will be partially offset by lower foundational audio revenues, due to timing of revenues under contract.
Consumer electronics represented about 15% of total licensing in fiscal year 2021.
On a year-over-year basis, CE licensing increased by $29 million or 19%, driven by higher foundational audio revenues, as a result of increased unit volumes in soundbars and AVRs, as well as higher recoveries.
We also saw growth from higher adoption of Dolby Atmos and Dolby Vision across CE devices.
Our Q4 CE revenues increased 28% compared to prior year, which was in line with full year growth drivers of both higher foundational audio revenues and growing adoption of Dolby Atmos and Dolby Vision.
As you look ahead to fiscal year '22, we see CE revenues relatively flat year-over-year.
We expect to see higher revenues from Dolby Vision and Dolby Atmos adoption, as well as increasing contributions from our imaging patent programs.
These growth drivers will be partially offset by lower foundational audio revenues, as industry analysts are estimating unit volumes in DMAs and soundbars to decrease year-over-year and we anticipate lower CE recoveries.
PC represented about 12% of total licensing in fiscal year 2021.
Our fiscal year '21 PC revenues were higher than prior year by about $10 million or 7%, driven by higher foundational audio revenues, as a result of strong PC shipments throughout the year and growing revenues from Dolby Atmos and Dolby Vision.
These growth factors were partially offset by lower recoveries compared to fiscal year '20.
Our Q4 PC revenues were about 7% higher compared to prior year Q4, driven by increased Dolby Vision and Dolby Atmos revenues.
As we look ahead to fiscal year '22, we see low to mid single digit growth in our PC revenues, as more PCs continue to adopt Dolby Vision and Dolby Atmos, as well as growth in our imaging patent programs.
Other markets represent about 12% of total licensing in fiscal year 2021.
They were up about $26 million or 21% year-over-year, driven by higher revenues from gaming, due to the console refresh cycle and higher foundational revenues related to patents.
In Q4, we saw other markets grow about 26% year-over-year due to increased Dolby Cinema revenues as theaters reopen, and higher revenues from gaming.
As we look ahead to fiscal '22, we anticipate that other markets revenues could grow at an even higher rate of over 25%, as we estimate Dolby Cinema revenues to continue momentum from Q4, as more people are able to return to the movies and we also see continued growth in gaming.
Beyond licensing, our products and services revenue was $67 million in fiscal year '21, compared to $83 million in fiscal year 2020.
Prior year included about two quarters of pre-pandemic activity related to our cinema products business, and included revenues for our communications hardware business, which we exited in early fiscal year '21.
Products and services revenue in Q4 was $19 million compared to $14 million in last year's Q4.
The year-over-year increase reflects higher demand in the cinema industry.
Total gross margin in the fourth quarter was 89.2% on a GAAP basis and 90% on a non-GAAP basis.
Operating expenses in the fourth quarter on a GAAP basis were $214 million.
Operating expenses in the fourth quarter on a non-GAAP basis were $189.9 million, compared to $176.5 million in the prior year.
Operating expenses were at the low end of our guidance for Q4.
Operating income in the fourth quarter was $40.4 million on a GAAP basis or 14.2% of revenue, compared to $30.1 million or 11.1% of revenue in Q4 of last year.
Operating income in the fourth quarter on a non-GAAP basis was $66.6 million or 23.4% of revenue, compared to $54.3 million or 20% of revenue in Q4 of last year.
On a full year basis, operating income was $344.4 million on a GAAP basis or about 26.9% of revenue, compared to $218.7 million or 18.8% in fiscal 2020.
Full year operating income in fiscal '21 on a non-GAAP basis was $450.7 million or about 35.2% of revenue compared to $317.9 million or 27.4% in the prior year.
Income tax in Q4 was minus 3% on a GAAP basis and 13% on a non-GAAP basis.
Our tax rate benefited from a number of discrete items, including return provision true-ups.
Net income on a GAAP basis in the fourth quarter was $44.2 million or $0.42 per diluted share compared to $26.8 million or $0.26 per diluted share in last year's Q4.
Net income on a non-GAAP basis in the fourth quarter was $60.4 million or $0.58 per diluted share, compared to $45.8 million or $0.45 per diluted share in Q4 of last year.
During the fourth quarter, we generated $110 million in cash from operations compared to $113 million generated in last year's fourth quarter.
We ended the fourth quarter with about $1.3 billion in cash and investments.
During the fourth quarter, we bought back about 1 million shares of our common stock and ended the quarter with about $291 million of stock repurchase authorization available going forward.
We also announced today a cash dividend of $0.25 per share, an increase of $0.03 or 14% compared to the prior quarter.
The dividend will be payable on December 8, 2021, to shareholders of record on November 30, 2021.
Now let's turn to guidance for fiscal '22.
We currently estimate total fiscal year '22 revenues could range from $1.34 billion to $1.4 billion.
This would result in about 5% to 9% of year-over-year growth as compared to the $1.28 billion in fiscal year 2021.
Within this, licensing revenue could range from $1.260 billion to $1.315 billion compared to $1.214 billion in fiscal year '21, which would result in a 4% to 8% year-over-year growth.
As I referenced earlier, discussing our revenue by end market, we expect strong growth in our other markets for increased Dolby Cinema and gaming revenues, as well as growth in mobile, PC and to a lesser extent, broadcast, due to increasing adoption of Dolby Vision and Dolby Atmos and growth in our imaging patent programs, partially offset by lower foundational audio revenues.
For products and services revenues, we anticipate this could range from $75 million to $90 million for fiscal year '22, with improvements in cinema products and growth in Dolby.io.
Gross margin for fiscal year '22 are expected to be relatively consistent with fiscal year '21.
Let me shift to operating expenses; we have several factors that impact our year-over-year expectations.
First, fiscal 2022 is a 53-week fiscal year for us, and that results in an extra week of payroll in Q1.
As Kevin mentioned, we also see a return of some expenses like travel and events that were lower during the pandemic.
In addition to normal annual merit increases that will typically go in effect in fiscal Q2.
Lastly, we continue to invest in areas like Dolby Vision, Dolby Atmos and Dolby.io.
With these considerations, we are estimating operating expenses for fiscal 2022 could range from $869 million to $889 million on a GAAP basis and between $750 million to $770 million on a non-GAAP basis.
With all of this, our business model remains very strong, as we expect to deliver operating margins between 24% to 26% on a GAAP basis, and between 34% and 36% on a non-GAAP basis.
Based on the factors above, we estimate that full year diluted earnings per share will range from $2.53 to $3.03 on a GAAP basis and $3.52 to $4.02 on a non-GAAP basis.
Let me shift to how that translates and what we see for fiscal Q1.
For Q1, we see total revenues ranging from $345 million to $375 million.
Within that, licensing revenues will range from $330 million to $355 million.
Note that in the prior year Q1, we benefited from a significant favorable true-up of over $21 million for Q4 fiscal '20 shipments, that was larger than normal, given the volatility of conditions during the pandemic.
Last year's Q1 also benefited from recoveries and timing of revenue under contract.
This was partially offset by increasing adoption of Dolby Vision and Dolby Atmos, and growth in our imaging patent programs.
Q1 products and services revenue could range from $15 million to $20 million.
Let me move on to the rest of the P&L outlook for Q1.
Q1 gross margin on a GAAP basis is expected to be 90% to 91%, and the non-GAAP gross margin is estimated to be about 91% to 92%.
Operating expenses in Q1 on a GAAP basis are estimated to range from $221 million to $231 million.
Operating expenses in Q1 on a non-GAAP basis are estimated to range from $190 million to $200 million, which contemplates the impact of the 53-week fiscal year.
Other income is projected to range from $1 million to $2 million for the first quarter.
And our effective tax rate for Q1 is projected to range from 18% to 19% on both a GAAP and non-GAAP basis.
Based on the combination of the factors I just covered, we estimate that Q1 diluted earnings per share could range from $0.71 to $0.86 on a GAAP basis and from $0.98 to $1.13 on a non-GAAP basis.
With that, let's move on to Q&A.
Operator, can you please queue up the first question. | q4 non-gaap earnings per share $0.45.
q4 gaap earnings per share $0.26.
sees q2 revenue $270 million to $300 million.
sees q1 2021 total revenue to range from $330 million to $360 million.
sees q1 2021 diluted earnings per share to range from $0.70 to $0.85 on a gaap basis.
diluted earnings per share on a non-gaap basis is anticipated to range from $0.97 to $1.12 for q1 2021.
anticipate that cinema sites could continue to be negatively affected through first half of fiscal 2021 or longer. | 0 |
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Jamie.
Before we begin, let me make the usual disclaimers.
We are pleased with our second quarter 2020 results and with completing the operational integration of Legacy on schedule in early June.
The team members from Legacy, now Prosperity, have been excellent and we could not have achieved such a smooth integration without their commitment and efforts.
We remain excited about the combination and look forward to continuing to build the best bank anywhere.
For the second quarter of 2020, we showed impressive returns on average tangible common equity of 19.98% annualized and on average assets of 1.61%.
Our earnings were $130.9 million in the second quarter of 2020 compared with $82 million for the same period in 2019, an increase of $48.6 million or 59.1%.
Our diluted earnings per share were $1.41 for the second quarter of 2020 compared with the $1.18 for the same period in 2019, an increase of 19.5%.
The second quarter 2020 earnings per share of $1.41 includes a $0.22 income tax benefit, a $0.06 charge for merger related expenses and a $0.03 charge for the writedown of fixed assets related to the merger and some CRA funds.
In summary, it was $0.22 in benefit to earnings and $0.09 in inductions mostly related to the merger.
Loans at June 30, 2020 were $21.025 billion, an increase of $10.4 billion or 98.6% compared with $10.587 billion at June 30, 2019.
Our linked quarter loans increased $1.898 billion or 9.9% from the $19.127 billion at 31, 2020, of which $1.392 billion were SBA Paycheck Protection Program, sometimes referred to as PPP loans.
Mortgage warehouse loans also increased $843 million in the second quarter 2020 compared to the first quarter.
Our core loans, excluding held for sale and the warehouse purchase program and the PPP loans, decreased $311 million.
However, a portion of this decrease resulted from loans that were intentionally removed that were identified in our due diligence of Legacy.
We saw strong loan growth in the first part of the second quarter but that slowed as business shut down or reduced operations in response to various government orders.
Our deposits at June 30, 2020 were $26.153 billion, an increase of $9.265 billion or 54.9% compared with $16.888 billion at June 30, 2019.
Our linked quarter deposits increased $2.326 billion or 9.8% from the $23.826 billion at March 31, 2020.
Historically, our deposits are lower in the second quarter of the year compared with the first quarter and then begin to increase in the third and fourth quarters for us.
But this year, second quarter deposits are higher.
A large portion is from the PPP loans as well as reduction in customer spending and customer saving [Phonetic] right now.
With regard to asset quality, it's always been one of the primary focuses of our bank and always will be.
I have always said you will like us in the good times but love us in the bad times, and this is playing out to be true again during this pandemic and oil price downturn.
Nonperforming assets totaled $77.9 million or 28 basis points of quarterly average interest earning assets at June 30, 2020.
We continue to provide relief to our loan customers through loan extensions and deferrals when possible.
For the second quarter of 2020, net charge-offs were $13 million.
Of these charge-offs, $12.4 million were related to PCD loans with specific reserves of $28.5 million that we acquired in the merger.
So far, $16.1 million in specific reserves were released to the general reserve in addition to the $10 million provision for loan losses for the second quarter.
M&A activity has subsided during this pandemic.
Although there are -- there are some conversations and probably a few deals working, we believe that the M&A activity will start to pick up as businesses reopen and economic activity increases.
Size does seem to matter now, especially with lower net interest margins, the need for increased technology and the potential for additional regulatory burden if there is a change in the administration.
An example is the increased volume at our customer call center, with many older customers wanting to set up online and mobile banking that have previously not been interested in doing so.
The Blue Chip consensus forecast estimates that fourth quarter 2020 GDP will end at a negative 5.6% compared with the fourth quarter of 2019.
However, they're forecasting a positive 4.8% GDP for the fourth quarter of 2021 compared with the fourth quarter of 2020.
They are also forecasting an unemployment rate of 9.4% for the fourth quarter of 2020 compared with unemployment rate of 6.9% for the fourth quarter of 2021.
Based on these estimates, 2021 looks bright.
We are positive about our Company's future.
While our operating environment and economy are changing frequently, we remain focused on addressing whatever comes our way and taking care of our customers and associates.
Prosperity continues to focus on building core relationships, maintaining sound asset quality and operating the bank in efficient manner while investing in ever-changing technology and product distribution channels.
We intend to continue to grow the Company both organically and through mergers and acquisitions.
We want to develop people to be the next generation of leaders, make every customer experience easy and enjoyable and operate in a safe and sound manner.
Let me turn over our discussion to Asylbek, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended June 30, 2020 was $259 million compared to $154.8 million for the same period in 2019, an increase of $104.1 million or 67.2%.
The increase was primarily due to the merger with LegacyTexas in November 2019 and loan discount accretion of $24.3 million in the second quarter 2020.
The net interest margin on a tax equivalent basis was 3.69% for the three months ended June 30, 2020 compared to 3.16% for the same period in 2019 and 3.81% for the quarter ended March 31, 2020.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended June 30, 2020 was 3.33% compared to 3.14% for the same period in 2019 and 3.36% for the quarter ended March 31, 2020.
Non-interest income was $25.7 million for the three months ended June 30, 2020 compared to $30 million for the same period in 2019.
The current quarter non-interest income was affected by $3.9 million in writedown of certain assets and general impacts of COVID-19 pandemic.
Non-interest expense for the three months ended June 30, 2020 was $134.4 million compared to $80.8 million for the same period in 2019.
The increase was primarily due to the merger with LegacyTexas and one-time merger related expenses of $7.5 million due to the core system conversion that occurred in June.
In addition to this merger-related expenses, the second quarter results reflected elevated expenses related to increased mortgage activities.
With the core system conversion and operational integration process behind us, we do not anticipate any significant merger related expenses going forward, and we expect to start realizing the remaining cost savings beginning in the third quarter of 2020.
We expect this additional savings to be about $7 million to $9 million per quarter.
This, combined with the savings realized in the first and second quarter, will be in line with our previously stated 25% cost savings in non-interest expense.
The efficiency ratio was 46.56% for the three months ended June 30, 2020 compared to 43.74% for the same period in 2019 and 42.9% for the three months ended March 31, 2020.
Excluding merger related expenses of $7.5 million, the efficiency ratio was 43.97% for the three months ended June 30, 2020.
The bond portfolio metrics at 6/30/2020 showed a weighted average life of 2.69 years and projected annual cash flows of approximately $2.3 billion.
Our nonperforming assets at quarter-end June 30, 2020 totaled $77,942,000 or 37 basis points of loans and other real estate.
The June 30, 2020 non-performing assets total was made up of $71,595,000 in loans, $187,000 in repossessed assets and $6,160,000 in other real estate.
Of the $77,942,000 in nonperforming assets, $12,173,000 or 16% are energy credits, $12,73,000 of which are service company credits and $100,000 are production company credits.
Since June 30, 2020, $15,786,000 has been removed from the nonperforming assets list through the sale of collateral.
This represents 20% of the nonperforming assets dollars.
Net charge-offs for the three months ended June 30, 2020 were $13,01,000.
$10 million was added to the allowance for credit losses during the quarter ended June 30, 2020.
The average monthly new loan production for the quarter ended June 30, 2020 was $871 million.
This includes a total of $1.430 billion in PPP loans booked during the quarter.
Loans outstanding at June 30, 2020 were $21.025 billion.
The June 30, 2020 loan total is made up of 39% fixed rate loans, 36% floating rate loans and 25% loans resetting at specific intervals.
The fixed rate percentage increased somewhat due to the inclusion of the PPP loans.
Jamie, can you please assist us with questions? | prosperity bancshares, inc q2 earnings per share $1.41.
q2 earnings per share $1.41.
loans increased $1.898 billion or 9.9% during q2 2020.
qtrly net interest income before provision for credit losses was $259.0 million compared with $154.8 million. | 1 |
These estimates are subject to some risks and uncertainties.
Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings.
Revenue was essentially flat against the second quarter last year, but operating earnings are up $125 million and net earnings are up $112 million.
Earnings per share are up $0.43.
To be a little more granular, revenue on the defense side of the business is up against last year's second quarter by $308 million or 4.2%.
The Aerospace is down $352 million, pretty much as planned.
Operating earnings on the defense side are up $98 million, or 14.3%, and operating earnings in Aerospace are up $36 million on a 390 basis point improvement in operating margin.
The operating margin for the entire company was 10.4%, 140 basis points better than the year-ago quarter.
From a slightly different perspective, we beat consensus by $0.07 per share on somewhat lower revenue than anticipated by the sell side.
However, operating margin is 20 basis more than anticipated, coupled with a somewhat lower share count.
This led to the earnings bit.
On a year-to-date basis, revenue is up $596 million or 3.3%, and operating earnings are up $129 million or 7.3%.
Overall, margins are up 40 basis points.
The defense numbers are particularly good with revenue up $752 million or 5.2%, and operating earnings up $143 million or 10.3%.
On the Aerospace side of the business, revenue on a year-to-date basis is down $156 million or 4.3%, but earnings are up $16 million or 4% on a 90 basis point improvement in operating margins.
The quarter was also very strong from a cash perspective.
Free cash flow of $943 million is 128% of net income.
Cash flow from operating activities was 151% of net income.
In summary, we enjoyed a very good growth in the defense businesses in the quarter and had a very solid quarter from an earnings perspective across the board.
The year-to-date results give us a solid start to the year and enable us to raise our forecast for the full year, which I will share with you at the end of these remarks.
Let me put the aerospace results in some recent historical context so as to put our performance into our perspective where it can be understood.
As you recall that in April of last year, we told you we were cutting production as the result of certain supply chain issues.
It subsequently became clear that there was a reduction in demand related to COVID-19 that resulted in additional cuts to production.
Those production cuts were implemented slowly over the ensuing months and reached their low point this quarter.
You may also recall that I told you last quarter that the second quarter would be the most challenging for Gulfstream because of these preplanned production cuts.
On the good news side of the story, we had anticipated renewed post-COVID demand in the second half of this year and planned increased production for the second half.
In short, you will see more deliveries, revenue and operating earnings in the second half as a result.
With that, let me turn to the aerospace results in the quarter.
Aerospace had revenue of $1.6 billion and operating earnings of $195 million, with a 12% operating margin.
Revenue was $352 million less than the year-ago quarter or 17.8% as a result of fewer planned aircraft deliveries.
On the other hand, operating earnings are up $36 million or 22.6% on a 390 basis point improvement in margins.
From a pure operating perspective, we did very well.
From an order perspective, the quarter border long is spectacular.
In dollar terms, Aerospace had a book-to-bill of 2:1.
Gulfstream alone had a book-to-bill of 2.1:1, even stronger if expressed in unit terms.
This is the strongest order quarter in number of units in quite some time.
It was all the more remarkable in that it did not include any fleet sales.
As previously discussed, sales activity truly accelerated in the middle of February and continued on through the remainder of the first quarter.
The pipeline that developed in that quarter rolled over into the second quarter as is obvious from these results.
We continue to experience a high level of interest activity and a growing pipeline.
From a new product perspective, the G500 and G600 continue to perform well.
Margins are improving on a consistent basis and quality is superb.
We have delivered 115 of these aircraft to customers as we speak.
The G700 has approximately 1,600 test hours on the five test aircraft.
We remain on track for entry into service in the fourth quarter of 2022, but much remains to be accomplished, particularly with respect to the certification of the new Rolls-Royce engine.
Looking forward, we have planned 32 deliveries in the third quarter and 39 in the fourth.
If all goes well, we may be able to bring in a few more forward from the first quarter of 2022 to meet current demand.
Turning to Combat Systems.
All of the comparisons in combat systems quarter over quarter sequentially and year-to-date are quite favorable.
Combat systems had revenue of $1.9 billion, up 8.3% over the year-ago quarter.
While ordinance and tactical systems did well, the primary source of growth was combat vehicles at both land systems and european land systems.
So all in all, very good growth.
It is also interesting to observe that combat systems revenue has grown in 17 of the last 19 quarters on a quarter over the year-ago quarter basis.
For the first half of the year, combat systems revenue of $3.7 billion, is $257 million or 7.4% over the first half of last year.
Operating earnings for the quarter at $266 million are up 11.3% on higher volume and a 40 basis point improvement in margin.
For the first half, combat systems earnings of $510 million are up $48 million or 10.4% over the last year's first half.
The quarter was also good for combat systems from an order perspective with a 1:1 book-to-bill, leaving a modest increase in total backlog.
Demand for our products, particularly our combat vehicles, remain strong with Europe leading the way.
Abrams main battle tank demand is also increasing and the Stryker remains the combat vehicle of choice for multiple U.S. Army missions and operations.
This was an impressive performance once again by Combat Systems.
Revenue of $2.54 billion is up $65 million over the year-ago quarter.
It is also up sequentially in year-to-date.
In the quarter, the growth was led by the DDG-51 and T-AO volume.
Submarine construction was stable with increases in Virginia Block V and Columbia, offset by a decline in Block IV and engineering.
For the first half, revenue is up $302 million or 6.4%.
This is very impressive continued growth.
In fact, revenue in this group has been up for the last 15 quarters on a quarter versus the year-ago quarter basis.
Operating earnings are $210 million in the quarter, up $10 million or 5% on operating margins of 8.3%.
You may recall that we experienced a strike at bath last year.
I am pleased to report that our relationship with the union is strong, and we are both committed to improving bath performance.
NASSCO is coming down the learning curve on the ESG and is nearing completion on the first of the new oilers.
Repair was also strong.
Electric both performance remains strong.
And while early in the Columbia first ship construction contract, the program remains on cost and schedule.
The segment has revenues of $3.16 billion in the quarter, up $98 million from the year-ago quarter or 3.2%.
The revenue increase supplied by information technology, mostly associated with the ramp-up of new programs, was almost 10%.
Mission systems experienced a modest decline in revenue driven by the sale of our space antenna business last year and a shortage of chips for certain products, which we are working to remedy in the second half.
Operating earnings at $308 million are up $61 million or 24.7% on a 9.7% operating margin.
EBITDA margin is an impressive 13.7%, including state and local taxes, which are a 50 basis point drag on that result.
Most of our competitors carry state and local taxes below the line.
Total backlog grew $95 million, so good order activity in the quarter with a book-to-bill of 1:1 and good order prospects on the horizon.
The book-to-bill at IT was a little better than 1:1, and somewhat less at Mission Systems.
This is particularly good performance in light of the continued delays by the customer in making contract awards.
In total, GDIT has nearly $34 billion in submittals awaiting customer decision with most representing new work.
In addition to these submittals, our first half order book does not reflect approximately $4.6 billion of awards made in GDIT that are now in protest, including two sizable contracts challenged by a competitor.
These delays are pushing work we anticipated delivering in the second half of 2021 to 2022.
While new award activity has generally been slower, new requests for proposals have remained robust.
GDIT's hefty submittals in the first half reflect significant customer demand for modernization and securing IT infrastructure in the wake of COVID.
Business has the opportunity to submit another nearly $20 billion in proposals through the end of the year.
This concludes my remarks with respect to a very strong quarter and first half.
I'll start with our cash performance in the quarter.
From an operating cash flow perspective, we generated over $1.1 billion on the strength of the Gulfstream order book and additional collections on our large international combat vehicle contract.
Including capital expenditures, our free cash flow, as Phebe noted, was $943 million, or a 128% net earnings conversion.
You may recall that for the past several years, our free cash flow has been heavily weighted to the back half of the year.
So the strong quarter derisks that profile somewhat and reinforces our outlook for the year of free cash flow conversion in the 95% to 100% range.
Looking at capital deployment.
I mentioned capital expenditures, which were $172 million in the quarter or 1.9% of sales.
That's down from last year, but our full-year expectation remains in the range of 2.5% of sales.
We also paid $336 million in dividends and spent approximately $600 million on the repurchase of 3.3 million shares.
That brings year-to-date repurchases to 7.9 million shares at an average price of just under $173 per share.
We have 279.5 million shares outstanding at the end of the quarter.
We repaid $2.5 billion of notes that matured in May, in part with proceeds from $1.5 billion in notes we issued in May.
We also issued $2 billion of commercial paper during the quarter to facilitate the repayment of those notes and for liquidity phasing purposes, but we expect to fully retire that CP before the end of the year.
After all this, we ended the second quarter with a cash balance of just under $3 billion and a net debt position of $11.4 billion, consistent with the end of last quarter and down more than $900 million from this time last year.
As a result, net interest expense in the quarter was $109 million, down from $132 million in the second quarter of 2020.
That brings the interest expense for the first half of the year to $232 million, down slightly from $239 million for the same period in 2020.
We repaid another $500 million of notes on July 15, as we continue to bring down our debt balance this year and beyond.
At this point, we expect our interest expense for the year to be approximately $425 million.
The tax rate in the quarter and the first half at 16.3% is consistent with the full-year expectation.
So no change to our outlook of 16% for the year.
Order activity and backlog were once again a strong story in the second quarter with a 1:1 book-to-bill for the company as a whole.
As Phebe mentioned, order activity in the aerospace group led the way with a twice book-to-bill, while combat and technologies each recorded a book-to-bill of 1:1 on solid year-over-year revenue growth.
We finished the quarter with a total backlog of $89.2 billion.
That's up over 8% over this time last year.
And total potential contract value, including options and IDIQ contracts, was $130.3 billion.
Finally, a quick note on the operating results in the technologies group.
You'll recall in the second quarter of last year, we recognized a loss of approximately $40 million on an international contract that resulted from scheduled delays caused by COVID-related travel restrictions.
We formally closed out this matter with the customer this quarter.
And despite the fact that our activity on the contract has been dormant for over a year, the accounting rules required us to reverse approximately $45 million of previously recognized revenue in the quarter.
Without this reversal, the technologies group would have seen organic growth of 6.4% in the quarter.
Now let me do my best to give you an updated forecast.
The figures I'm about to give you are all compared to our January forecast, which I will not repeat.
In our aerospace, we expect an additional $200 million of revenue with an operating margin of around 12.4%, which is 10 basis points below what we previously forecasted.
This will result in an additional $10 million of operating earnings.
There could be some upside here if we can squeeze out a few more planes in the year.
With respect to the defense businesses, combat systems should have another $100 million of revenue and add another 10 basis points of operating margin.
So total revenue of $7.4 billion and operating margin number around 14.6%.
Marine Systems has an additional $300 million and 10 basis points of improved margin.
So annual revenue of $10.6 billion with an operating margin around 8.4%.
Technology revenue will be down $200 million from our previous forecast but adds 30 basis points of operating margin.
So annual revenue of $13 billion with an operating margin of around 9.8%.
So on a companywide basis, we see annual revenue of about $39.2 billion and an overall operating margin around 10.6%.
This rolls up to earnings per share around $11.50, $0.45 to $0.50 better than our forecast going into the year. | compname reports q4 non-gaap earnings per share from continuing operations of $2.76.
q4 non-gaap earnings per share from continuing operations $2.76.
q4 same store sales rose 1 percent.
q4 sales $637 million versus refinitiv ibes estimate of $617.6 million. | 0 |
FNB's third quarter earnings per share was $0.34, representing an increase of 10% on a linked-quarter basis and bringing year-to-date earnings per share to $0.94.
Our performance across our core businesses led to record revenue this quarter of $321 million, up 18% on a linked-quarter annualized basis with strong underlying momentum visible on our loan growth, pipeline, fee income, and digital customer engagement.
Let's look at each one of these core building blocks starting with loan growth.
Our spot loan growth, excluding the impact of PPP forgiveness, is 8% annualized linked-quarter, driven by a strong pickup in lending activity in both the commercial and consumer portfolios.
Spot commercial loan growth totaled 7% annualized on a linked-quarter basis with positive growth in nearly every region across our footprint, notably the Pittsburgh, Cleveland, Harrisburg, and Raleigh region.
Consumer lending grew over 8% annualized linked-quarter, led by increases in residential mortgages and direct installment home equity.
As evidenced by the spot loan growth, our teams had a strong quarter, and overall loan production reached record levels as the economy continues to recover.
We saw healthy pipeline build and a slight increase in line utilization with the pipeline being up nearly 12% year-over-year.
In prior earnings calls, we indicated our expectation for improvement in loan demand and that is now materializing.
Commercial had record production in September and the consumer pipeline jumped 27% year-over-year.
Mortgage activity has slowed more recently because of the decline in refinance activity due to higher interest rates -- due to the higher interest rate environment.
In addition, revenues have decreased as margins have normalized.
Overall, we are optimistic that our total loan pipeline indicate a path for sustained growth.
As we have continued to execute our strategic plan, non-interest income reached a record $89 million with strong contributions from capital markets and wealth management, as well as solid SBA revenue.
Our emphasis on diversifying revenue streams has become even more important during the low-rate environment.
Through our efforts of enhancing our product suite and expanding our services, our non-interest income now comprises 28% of our total revenue.
Our clicks-to-bricks strategy, introduced several years ago, was designed to integrate our mobile, online, and in-branch channels for a seamless and convenient banking experience.
Our philosophy of continuing to invest in technology has resulted in many industry-leading offerings, including our e-store solution center, which features a retail shopping cart experience, our mobile app and our website with videos and substantial digital content.
After launching our new website at the beginning of last year, our website engagement has increased 13% year-to-date compared to the same period in 2020, which included increased usage due to COVID and PPP origination.
The platform we built with clicks-to-bricks has been extremely important, driving the increase in adoption and usage of digital channels.
We continue to make enhancements to provide our customers with the most flexible banking option as demonstrated by our online application functionality that enables customers to quickly and easily apply for multiple products, including consumer deposits, credit cards, and home equity and mortgage loans.
In May, we launched our digital applications for mortgages on our e-store.
And since then, 61% of all applications came through our digital channels, and those -- and of those applications, approximately 46% were submitted outside of normal business hours or on the weekend.
In addition, over half of our credit card applications were made digitally in the third quarter.
Online applications for small business loans and deposits, as well as auto loans will be available by year-end.
And next year, we plan to launch a single unified application for virtually all FNB loan and deposit products to make the shopping experience for multiple products even easier.
Our new interface will reduce customers' input by eliminating redundant application fields and expand our clients' capabilities to upload information in a secure portal to expedite approvals.
Broader use of e-signature and automated documentation and disclosures will also be added over time.
F.N.B. recently introduced a chatbot, which will apply artificial intelligence and automation to assist our customer service employees in supporting our customers.
The chatbot will identify policies and procedures and provide recommended scripting to address the Top 100 frequently asked questions.
We are excited about both the current and upcoming enhancements to our digital platform, which will continue to drive increased client engagement and client acquisition and improve our operating efficiency while differentiating F.N.B. in the marketplace.
Our credit portfolio ended the third quarter very well positioned, following continued positive results across all of our key credit metrics.
This solid performance was marked by further improvement in the level of delinquency and non-performing loans, reductions in rated credits, and low net losses for both the quarterly and year-to-date periods.
Additionally, improving trends across the broader economy and government stimulus have further contributed to these favorable results, including deferrals, which have reached an immaterial level of only 0.2% of total loans.
Let's now review some of the highlights for the third quarter.
The level of delinquency, excluding PPP balances, ended September at a very solid 71 basis points, a 9 bp improvement on a linked-quarter basis, reflecting a notable improvement in non-accruals within the commercial book.
The level of NPLs and OREO improved to end the quarter at 49 basis points, representing a 9 basis point reduction from the prior quarter's ex-PPP level.
The reduction in NPLs during the quarter totaled $18 million and when compared to the year-ago period when NPLs had reached their peak, declined by $68 million, representing a solid 38% year-over-year reduction.
Net charge-offs for the quarter were very low at $1.6 million or 3 basis points annualized, while year-to-date net charge-offs were solid at 7 basis points on an annualized basis.
We recognized a $1.8 million net benefit in the provision during the quarter following these improvements in our credit quality position.
This resulted in a GAAP reserve position that was down 1 basis point to stand at 1.41% with the ex-PPP reserve decreasing 6 bps to stand at 1.45%.
Our NPL coverage position further improved ending September at a very solid level of 317% following the noted reductions in NPLs during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totaled 1.56%.
In closing, we are very pleased with the position of our portfolio moving into the final quarter of the year and the continued progress we've made to further reduce non-performing and rated credit levels.
We remain vigilant and attentive to any emerging risks in both the broader economy and within the markets in which we and our customers operate.
With the continued supply chain and labor disruptions, elevated input costs, and the evolving nature of the virus, our approach to managing and growing our loan portfolio in this highly competitive environment remains balanced and consistent with our time-tested credit principles that have served us well throughout the various economic cycles.
This foundation of sound and consistent underwriting, timely and comprehensive management of risk, and selectively pursuing opportunities that fit our desired credit profile will support our future growth objectives as we move ahead.
Today, I will discuss our financial results for the third quarter and provide guidance for the fourth quarter.
Overall, this was a strong quarter, and we are very pleased with the results.
Our continued strategic focus on diversified fee income contribution drove non-interest income to a record $88.9 million, up $9.1 million or 11% linked-quarter, leading to record pre-provision net revenue of $138 million on an operating basis and a return on tangible common equity reaching nearly 17%.
Our tangible book value per share reached $8.42, an increase of $0.22 or 2.6% on a linked-quarter basis.
Let's walk through the financials in greater detail, starting with the highlights on Slide 4.
Third quarter earnings per share increased to $0.34, up $0.03 over the prior quarter and $0.09 from the year ago quarter.
On a linked-quarter basis, total revenue reached a record of $321 million, an increase of $13.6 million or 4.4% and drove net income available to common stockholders to a record $109.5 million, an increase of $10 million or 10.2%.
When excluding PPP, which is more reflective of the underlying loan growth, period-end total loans increased $463 million or 7.8% annualized on a linked-quarter basis with commercial loans and leases increasing $289 million or 7.4% annualized and consumer loans increasing $173 million or 8.5% annualized, building on the strong growth generated in the second quarter of this year.
As Vince said, this loan growth was across the footprint with production levels 17% higher than last quarter and 45% higher than third quarter of 2020.
Let's continue with the balance sheet on Slide 7.
Reported average loans and leases totaled $24.7 billion with average commercial loans and leases decreasing $942 million, which was entirely due to lower average PPP balances as we saw an acceleration of forgiveness and ended the quarter at $694 million.
On the deposit side, average deposits totaled $30.8 billion, an increase of $0.3 billion or 1.1% primarily in non-interest-bearing deposit accounts.
We continue to see a shift in customers' preferences for more liquid accounts in the low interest rate environment as well as maintaining larger deposit account balances than before the pandemic.
In addition, we have also seen an acceleration of deposit accounts opened digitally.
Turning to Slide 8, net interest income totaled $232.4 million, an increase of $4.5 million or 2% from the prior quarter.
Moving to PPP contribution and purchase accounting accretion, net interest income increased $2.8 million or 1.4%, reflecting an increase in average loans, more favorable funding mix and lower deposit costs.
We are expecting a slight tailwind for net interest income, excluding PPP contribution as a significant portion of our loan growth occurred during the end of the quarter.
Reported net interest margin increased 2 basis points to 2.72%, reflecting higher PPP contribution of 23 basis points and a 5 basis point benefit from acquired loan discount accretion, which was offset by higher average cash balances that reduced the net interest margin 26 basis points.
Excess cash balances grew to $3.7 billion at quarter end, a 45% increase from June 30.
When excluding these higher excess cash balances, acquired loan discount accretion and PPP impact, net interest margin declined 2 basis points.
Now let's look at non-interest income and expense on Slides 9 and 10.
Record non-interest income totaled $88.9 million, increasing $9.1 million or 11.4% from the prior quarter with broad contributions from each of our fee-based businesses.
Capital markets income increased $5.5 million, reflecting very strong swap activity with solid contributions from commercial lending activity as well as contributions from loan syndication, debt capital markets and international banking.
Service charges increased $2 million, reflecting seasonally higher customer activity volumes.
SBA volumes and average transaction sizes continue to be strong with $2 million in premium income included in other non-interest income.
Also included in other non-interest income was a $2.2 million recovery on a previously written off other assets.
Reported non-interest expense increased $1.7 million or 0.9% to $184.2 million this quarter.
Excluding non-operating items, non-interest expense increased $3.4 million or 1.9%.
On an operating basis, the increase was driven by salaries and employee benefits increasing $2.9 million or 2.8% due to production and performance-related commissions and incentives, consistent with record levels of total revenue, which was driven by diversified strong contributions from our fee-based businesses.
Overall, we produced a strong quarter and believe we are well positioned for the fourth quarter.
Now, let's turn to fourth quarter guidance on Page 12.
We expect PPP forgiveness to be $300 million to $500 million.
With the PPP loan balances decreasing, we are estimating a range of $10 million to $15 million with a PPP contribution to net interest income compared to the third quarter's contribution of $27 million.
Excluding PPP contribution, we expect net interest income to be up low single-digits relative to the third quarter.
Continuing to benefit from our diversified revenue base, we expect non-interest income to be in the high $70 million to $80 million for the fourth quarter.
Non-interest expense is expected to be around $180 million on an operating basis, which is subject to normal production-related incentives and commissions as we close out the year.
We expect the effective tax rate to be between 19% and 19.5%.
Lastly, I would like to quickly review our full year 2021 guide given last quarter.
We believe we will meet our loan growth guidance of mid single-digits.
We expect full year GAAP revenue to be up year-over-year, which will impact the production-related incentives and commissions, bringing compensation related expenses slightly higher.
Full year provision is expected to continue its strong performance with incremental provision dependent on the level of loan growth.
Overall, we believe we will finish 2021 with solid earnings.
We're pleased to announce that Howard Bank integration is currently underway, and overall, everything is moving very smoothly.
We are impressed with Howard's employees and strong customer base, and look forward to working with them.
We are still expecting to close the transaction in early 2022.
F.N.B. was once again recognized for our best-in-class digital strategy, clicks-to-bricks.
We recently received a prestigious national award for our mobile banking experience.
Our continued productive investment in our top mobile offering will soon have a new look and feel with chat support, a credit center, mobile statements and F.N.B.'s proprietary mobile e-store enabling product, service and financial literacy to be available within the mobile app.
Other features include Snap-to-Pay, which enables customers to add a payee by taking a picture of their bill and F.N.B. express deposit, where for a fee, select customers would be offered immediate funds availability for mobile deposited items.
This quarter's performance demonstrates the dedication and drive of our employees.
It is because of each person's commitment to F.N.B. and our clients that we have been able to achieve record quarterly revenue. | q3 revenue $321 million versus refinitiv ibes estimate of $306.9 million.
q3 earnings per share $0.34. | 1 |
Joining us is Roger Jenkins, president and chief executive officer; along with David Looney, executive vice president and chief financial officer; Eric Hambly, executive vice president, operations; and Tom Mireles, senior vice president, technical services.
Throughout today's call, production numbers, reserves, and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of Mexico.
As such, no assurances can be given that these events will occur or that the projections will be attained.
A variety of factors exist that may actually cause results to differ.
For further discussion of risk factors, see Murphy's 2020 annual report on Form 10-K on file with the SEC.
On Slide 2, as we kick off our quarterly call and investor meetings, we would like to remind our investors of our story.
Our ongoing execution in our three producing areas continues to show outstanding results, while progressing our offshore long-term projects and expansion of the Tupper Montney.
Our competitive advantage of executing in offshore, again, is illustrated by the outstanding progress on our Khaleesi/Mormont, Samurai, and King's Quay projects.
We also maintained strong cash flow that easily covers our planned spending for 2021 and supports shareholders through our long-standing dividend.
Further, we were able to increase our cash position this quarter by nearly 190 million, which allows us to accelerate our delevering plans.
Our ongoing meaningful level board and management ownership highlight our personal interest in the company's long-term success.
Our three priorities are simply to delever, execute, and explore and I'm pleased with the progress we've made on all fronts in the second quarter and this year.
After our initial delevering event, we repaid our revolver in full in Quarter 1.
We stated our goal of reducing long-term debt by $200 million by year-end 2021.
We recently announced the redemption of 150 million of 6.875% senior notes due in 2024.
And now today, we're able to increase increased our delevering goal to 300 million assuming a $65 oil price for the remainder of 2021.
Additional cash flow has been accomplished, not only through stronger oil prices, but also ongoing operational excellence as we've achieved less operated downtime offshore while experiencing the benefits of our optimization efforts and upgrades completed over the previous 18 months.
Along with continuing to bring on our onshore wells online, below budget, and ahead of schedule.
As a result of this work, production from every single asset was above the midpoint of guidance this quarter, with all onshore operations exceeding the high end of the guidance range.
Additionally, we produced 100,000 barrels of oil per day in the second quarter, topping our guide by 5%.
Offshore, our Gulf of Mexico projects remains on budget and on schedule.
We also remain focused on advancing our exploration program.
We participated in the drilling in Brunei in the second quarter with the Jagus SubThrust-1X exploration well along with the spudding with non-operated Silverback well in the Gulf of Mexico.
In the fourth quarter, we participated in the drilling of the cut-throat exploration well in Brazil.
On our sustainability report on Slide 4, our report has been published on our website and includes expanded disclosures to share our sustainability efforts and further align us with multiple international standards, such as the UN sustainable development goals, and five reporting principles outlined in sustainability reporting guidance for our industry.
We've now established a goal of zero routine flaring by 2030 and obtained third-party assurance of our 2020 scope one and scope two greenhouse gas emissions.
Additionally, we have revised and strengthened our climate change position instituted a human rights policy advanced our diversity equity inclusion efforts.
Statistical highlights include receiving a 47% reduction in scope one and scope two greenhouse gas emissions since 2016 and a 10% decrease in greenhouse gas emissions from 2020 -- from 2019 to 2020, excuse me.
Building upon our current top quartile, low carbon emission intensity for oil-weighted peers we are continuing the internal work to reduce our environmental footprint and advance the energy transition while protecting and supporting our people and the communities in which we work.
On Slide 5, our second-quarter production volumes of 171,000 barrels of oil equivalent per day were 4% above our guidance midpoint for the quarter.
Accrued capex for the quarter was $198 million, revenue of near 700 million, which is the highest in a year was achieved through strong realized pricing of $65.53 per barrel for oil.
I'll start with Slide 6.
In the second quarter, we reported a net loss of $63 million or $0.41 per diluted share.
After adjusting for certain after-tax items, such as 103 million non-cash mark-to-market loss on crude oil derivatives and a $49 million non-cash mark-to-market loss on contingent consideration, we reported adjusted net income of $91 million or $0.59 per diluted share.
Cash from operations for the quarter totaled $449 million, including the noncontrolling interest.
After accounting for net property additions of $203 million, we achieved positive adjusted cash flow of $246 million.
On the hedging front, Murphy continues to protect its future cash flow in the Tupper Montney with additional fixed price forward sales contracts for a portion of production through 2024.
Our 2021 capex plan is heavily weighted toward the first half of the year with 198 million total accrued capex in the second quarter.
While slightly above our previous guide, this was due to timing adjustments of non-operated activity and has no impact on our annual capex.
Overall, our ongoing disciplined spending has led us to tighten our capex guidance for the year, now ranging from 685 million to $715 million, with $700 million maintained as the midpoint.
As we established on our last earnings call, capex will step down for the remainder of the year.
With the shift in Eagle Ford Shale spending, our fourth quarter capex is forecast lower than previously.
Approximately 63% has already been spent in the Eagle Ford Shale as of June 30th, and 66% has been spent in the Gulf of Mexico, while 76% of onshore Canada capex has been spent by that date.
We continue to proactively manage our supply chain exposure, particularly with our long-lead items.
Since 60% of our 2021 capital plan is complete, and key contracts are in place for the remaining plan, we have minimal near-term supply chain risk to our capital spending.
Our third-quarter production guidance range of 162 to 170,000 a barrels of oil equivalent per day includes 4,100 barrels of oil equivalent per day of assumed Gulf of Mexico storm downtime.
Additionally, we are adjusting our full-year production guidance range to 157.5 thousand barrels of oil equivalent per day to 165.5 thousand barrels of oil equivalent per day, which includes fourth-quarter impacts of 1,300 barrels of oil equivalent per day for assumed Gulf of Mexico storm downtime and 7,900 barrels of oil equivalent per day for net planned offshore downtime.
On Slide 9, in the second quarter, we brought online three operated and 29 gross non-operated wells in the Eagle Ford Shale, 10 wells are brought online in the Tupper Montney, that wraps up our activity in offshore Canada for the year.
Our U.S. onshore drilling program is nearly complete with just four operated Eagle Ford wells planned to come online in the fourth quarter.
Our Eagle Ford Shale wells produced 42,000 barrels equivalent per day in the second quarter in process of 75% oil and 88% liquids.
For the remainder of the year, we plan to drill and complete 4 wells in the fourth quarter, I just mentioned, in our Catarina acreage, all within our planned annual capex of $170 million.
The team continues to execute and generate efficiencies as evidenced of our 25% improvement in our rate of penetration completion cost per lateral foot since 2019.
Overall, we've achieved a 40% reduction in completion costs in four years.
Through strict focus on nonproductive time.
And making operational improvements, our average per well drilling and completion costs has improved to 4.7 million from 6.3 million in 2018.
As a result, we are now achieving well payouts of approximately nine months on our 2021 program at oil prices averaging nearly $62 per barrel in the first half of this year.
On Slide 11, as Austin Chalk, one of our four Eagle Ford wells we plan to drill and bring online in the fourth quarter is targeted for the Austin Chalk formation.
Overall, our recent Karnes Austin Chalk wells have nicely outperformed our average type curve.
Additionally, other public operators near our Catarina acreage in the western portion of our Eagle Ford Shale acreage have reported strong Austin Chalk results from their recent wells.
We're excited to drill this well and highlight potential derisk another 100-plus Austin Chalk locations in our portfolio in that area.
On Slide 12, the Tupper Montney, we produced 248 million cubic feet per day in the second quarter.
10 wells are brought online, which completes all well activity for the year.
Costs continue to decrease here as well.
we've seen a 24% reduction in drilling and completion costs since 2017 while achieving a total well cost of just 4.4 million in 2021, compared to 5.5 million in 2019.
The -- In particular, our completion cost per lateral foot have improved 25% since 2019 through lower nonproductive time, optimized wireline operations, enhanced water handling, and natural gas-powered frac pumps.
Further, our average pumping average per day has increased more than 50% since 2017 from almost 12 hours to 18 hours per day, the ability to lower our cost per well by nearly $1 million will add significant value to our Tupper Montney project and represents the tremendous work of our drilling and completions team in that area.
As to our Gulf of Mexico project done extremely well, -- On Slide 14, Murphy continues to progress as scheduled with major Gulf of Mexico projects, Samurai No.
3 well was drilled in the quarter, and we're now drilling the Khaleesi 3 well.
Our next well is Samurai 4, which is planned for later in the third quarter before we begin completions work on all seven wells that make up the Khaleesi/Mormont, Samurai development.
The team has been able to maintain the schedule and capital plan for this project, and we still anticipate flowing first oil in the King's Quay in the first act next year.
Completions work on the final producing well of our non-operated St. Malo waterflood project is set to wrap up within the week and thereby completing rig activity on this project for the remainder of the year.
We're pleased that a project this size has remained on schedule and highlight and completing the rig work for the remainder of '21 provides further certainty on our capital spending.
As to King's Quay, the second quarter saw completion of the construction of the King's Quay floating production system, the FPS is now sailed away from Korea and is headed to the Texas Coast, where final work will be accomplished at the shore-based private placement in the Gulf in early 2022.
This team has done an incredible job on this project not only remaining on schedule, but also keeping everyone safe and healthy through the pandemic.
We're excited to see this come to fruition.
This is yet another example of our industry-leading offshore execution ability.
In Brunei, on Slide 17, in the quarter, we participated in the drilling of discovery well in Block CA1 in Brunei with the Jagus SubThrust-1X well for a total cost of Murphy of just $2.8 million at approximately an 8% working interest.
Post this well, we reclassified our working interest in Block CA-1 of Brunei has not held for sale any longer.
Partners are assessing development appraisal plans.
We're evaluating seismic data, further prospectivity.
This exploration in the Gulf of Mexico in the second quarter on Page 18, and drilling was commenced at the Chevron-operated sale back prospect in the Gulf, which we anticipate finishing this month.
Our participation provides access to 12 blocks with potential for attractive play opening trend and is adjacent to the large position Murphy holds with our partners.
On Slide 19, in Brazil, cited about our non-operated exploration position in Sergipe-Alagoas Basin and the additional optionality and resource potential that provides our company.
Murphy along with the operator, ExxonMobil, and partners planned to spud the cut through one well in the fourth quarter of 2021 and approximate net cost of Murphy of just $15 million.
On Slide 21 on to our capital program.
I'm pleased with our excellent production results this quarter and our oil production exceeded by 5% has remained consistent in our ever-improving operations and operated offshore and in the Eagle Ford Jail.
We remain on track with our full-year production at our midpoint of 161.5 thousand barrels equivalent per day with 55% oil weighting.
We remain very disciplined on our capital spending with no intention to change our plans for the remainder of the year.
As such, we affirm the 700 million midpoint of capex for 2021 and have announced today that we're tightening the range around this midpoint.
On Slide 22, as we remain focused on our strategy of delevering, executing, and exploring, we note that our long-term plan remains unchanged.
Our continued execution and capital discipline laid in maintaining our capital spend of 600 million from '21 through 2024 with a production CAGR of approximately 6% through that period.
Of course, we're trending well in our current oil weighting and are above the plan for 2021 at 55%.
Assuming an average long-term WTI price of $60 per barrel, Murphy is able to -- will be able to cut its debt in half to less than 1.4 billion by the end of '24 while maintaining a quarterly dividend payment to shareholders.
We note that this plan accelerates using an average price of $70 per oil in '23, enabling us to reach the debt reduction by just mid-2023.
Beyond delevering, we remain focused on our exploration program and portfolio of over 1 billion barrels of oil equivalent and net risked resource potential.
Long term, once our major Gulf projects are complete, we'll have significant optionality when making capital allocation decisions, and we'll look to what's best for Murphy and our shareholders and stakeholders at that time.
While we have many options, we'll seek to balance increased asset development with funding exploration success and potential A&D and execute additional debt repurchases and return more cash to shareholders.
Throughout the remainder of '21 and longer term, we are steadfast and focused on our priorities of delevering, executing, and exploring.
We decided to accelerate our long-term debt reduction goal for 2021 to 300 million from 200 million, assuming an oil price of $65 for the rest of the year, and look forward to achieving our goal of 1.4 billion in long-term debt reduction by '24 with a long-term average price of $60 per barrel.
We're able to accomplish this in part by disciplined spending, but also continued execution of our major Gulf of Mexico projects ahead of first oil next year as well as keeping everyone safe and healthy while protecting the environment in which we're operating.
Lastly, we're excited with the recent exploration success in Brunei.
I look forward to drilling wells with operating partners in the Gulf and Brazil this year while planning for next year's exploration campaign.
Murphy could not have achieved this successful second quarter without the effort of all of our employees who continue operating with excellence in every single department. | compname reports q1 loss per share $1.87.
q1 loss per share $1.87.
q1 production averaged 155 thousand barrels of oil equivalent per day (mboepd) with 57 percent oil and 63 percent liquids.
onshore business produced approximately 80 mboepd in the first quarter.
maintains its 2021 capital expenditures (capex) guidance of $675 to $725 million.
qtrly adjusted income from continuing operations per average diluted share $0.06. | 0 |
Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31st, 2019.
sec.gov or on NHI's website at www.
We are pleased to report our fourth quarter and full year results for 2019, which were at the top-end of our guidance range despite the many headwinds that we faced last year.
We started 2019 in a much more defensive posture than is usual for NHI and we experienced good momentum throughout the year.
We are in much better shape as we enter 2020.
We are not out of the woods by any means as the senior housing industry continues to be challenged by new deliveries and labor issues, which we do not expect to improve for at least the next several quarters, but we are generally encouraged by slowing inventory growth and very strong net absorption, which in 2019 showed the highest level of demand in the 13 years since NIC has been collecting this data.
Furthermore, our skilled nursing portfolio continues to show very strong coverage and we expect that the new PDPM reimbursement system will moderately improve on that coverage.
We have remained optimistic despite some of the headwinds and announced $329 million in acquisitions in 2019 primarily with existing partners.
We also added three new partners with whom we are excited to grow with for many years to come.
In 2020, we have already announced $150 million, including $135 million for Timber Ridge, which is a Class A CCRC just outside of Seattle and we are thrilled to partner with LCS on this deal.
Kevin will share more details later.
With the Timber Ridge acquisition, we are dipping our toes back into RIDEA with a 25% interest in OpCo, but unlike other RIDEA structures more common with healthcare REITs, we've done so with an embedded triple net lease that mitigates volatility of the underlying operation to NHI's shareholders.
We are always open to creative financing solutions with premier operators like LCS and investors should inspect that our focus will continue to be on the triple net strategy.
We recently announced a 5% increase in our dividend, which marks the 11th straight year we have increased the quarterly dividend by 5% or more while maintaining a coverage ratio below 80% of normalized FFO for the last seven years.
This makes us a dividend achiever, if you keep track of such things.
We are not satisfied with the limited per share growth that we experienced in 2019 and our G&A reflects that in the form of reduced executive compensation this year.
This demonstrates accountability to shareholders.
We worked hard to anticipate areas that need attention and proactively addressed issues in a transparent manner.
As we talked about on our third quarter call, we expect that we will return to mid single-digit growth this year.
John will discuss the guidance in more detail, but I will add that we have good visibility on our outlook and that our desire is always to under-promise and over-deliver.
I'm pleased to report a solid quarter and year-end to 2019 as well as 2020 guidance more representative of historic NHI growth.
Beginning with our three FFO performance metrics on a diluted common share basis for the fourth quarter ending December 31st, 2019, NAREIT FFO increased 6.9% to $1.39, normalized FFO increased 4.4% to $1.41, and adjusted FFO increased 2.4% to $1.30.
On a full year basis, NAREIT FFO per diluted common share increased 2.4% to $5.49, normalized FFO increased 0.7% to $5.50, and adjusted FFO increased 1.2% to $5.10, which as Eric previously mentioned, was at the top-end of our guidance range.
I want to now talk about our cash NOI.
Cash NOI is a metric we use to measure our performance.
We define cash NOI as GAAP revenue excluding straight-line rent, excluding escrow funds received from tenants, and excluding lease incentive and commitment fee amortizations.
For the year ending December 31st, 2019, cash NOI increased 7% to $290.5 million compared to $271.5 million in the prior year.
Our increase in 2019 cash NOI was reflective of our organic NOI growth from lease escalators, our partial year contributions from newly announced 2019 investments, our continued fulfillment in 2019 of the prior year's announced investments offset by impacts due to the Holiday master lease restructuring, and finding new homes for the nine transition properties.
A reconciliation of cash NOI can be found on Page 17 of our Q4 2019 SEC filed supplemental.
G&A expense for the 2019 fourth quarter increased 28% over the prior year fourth quarter and for the entire year increased 6.8% over 2018 to $13.4 million.
Included in the fourth quarter and full year 2019 G&A expense was approximately $716,000 in severance.
Excluding the severance expense, G&A increased 2.7% in the fourth quarter over the prior year's fourth quarter and 1.1% for the full year compared to 2018.
Turning to the balance sheet, we ended the year with $1.44 billion in total debt, of which a little over 90% was unsecured.
At December 31st, we had $250 million capacity on our $550 million revolver.
During December, NHI entered into privately negotiated agreements with certain holders of our 3.25% convertible senior notes under which we issued 626,397 shares of NHI common stock plus cash consideration and payment of fees totaling $22.1 million to redeem $60 million in aggregate principal amount of our outstanding convertible notes.
As a result of the redemption at year-end, NHI's aggregate balance of convertible notes is now $60 million, which will mature in April of 2021.
Our debt capital metrics for the quarter ending December 31st were net debt to annualized adjusted EBITDA at 4.7 times, weighted average debt maturity at four years, and our fixed charge coverage ratio at 5.7 times.
For the quarter ended December 31st, our weighted average cost of debt was 3.54%.
We've mentioned in prior calls that we expect 2020 to be a transformative year for NHI's balance sheet and the interest rate is currently favorable.
Our announced public credit ratings allow us to consider the public debt markets.
Our current shelf registration is expiring and we will be filing a new shelf registration in the coming weeks.
Stay tuned of more to come in the forthcoming quarters as we look to term off our revolver balance and make room for future growth.
We expect NFFO to be in the range of $5.67 to $5.71 per diluted share or an increase of 3.5% at the midpoint.
We also expect AFFO to be in the range of $5.31 to $5.35 or an increase of 4.5% at the midpoint.
Our guidance continues to reflect management's intent to under-promise and over-deliver.
Our guidance issued today includes effects from the recently announced Brookdale purchase option, expected contributions from the recently announced Timber Ridge joint venture, continued fulfillment of our commitments as detailed in our 10-K, and line of sight on unannounced investments under LOIs totaling approximately $50 million.
Our guidance also reflects our views on our transition properties.
While we don't expect the cash NOI in the nine transition properties to return to 2018 levels this year, we do expect them to get to between 40% and 45% of the way back to 2018 levels.
We do believe though after straight-line rent, the GAAP revenues for the transition properties will get to between 60% and 65% of the way back to the 2018 levels.
Our guidance this year includes assumptions for terming off our revolver debt and further assumes that we will continue to make additional investments on a leverage neutral basis.
In addition to our per share guidance, we wanted to also give guidance on several items that many of you use to evaluate our FAD performance.
Moving forward, we wanted to also provide you with pro forma routine capital expenditure and non-refundable entrance fee cash flows attributable to our 25% share in the Timber Ridge OpCo.
We increased our quarterly dividend 5% or $0.0525 [Phonetic] to $1.1025 per common share.
The first quarter dividend is payable May 8th to shareholders of record March 31st, 2020.
Looking at the overall portfolio, at the end of the third quarter, the EBITDARM coverage ratio was 1.66 times for the total portfolio compared to 1.65 times in the year earlier period and 1.69 times in the prior quarter.
Senior housing coverage declined year-over-year as expected to 1.14 times compared to 1.23 times last year in 1.15 times in the prior quarter, and our skilled portfolio at 2.73 times improved from 2.55 times last year, but declined from 2.8 times in the June quarter.
The sequential decline is attributable to NHC as the non-NHC SNF coverage improved to 1.92 times from 1.87 times in the June quarter and we are still very comfortable with the NHC coverage, which was 3.69 times in the third quarter.
Our ample SNF coverage is a testament to the hard work of our best-in-class operators and while the senior housing industry continues to be challenged by supply and labor issues, we have not seen a meaningful shift in operating trends and feel our operating partners are doing a good job of competing in their respective markets.
According to recent NIC data, properties with an average age of 10 years to 17 years have the highest occupancy followed by properties with an average age of 25 plus years.
Interestingly, the lowest occupancy was reported for properties with an average age of 2 years to 10 years.
This tells us that performance is operator-driven, consistent with our philosophy and that the newest buildings will not always garner the most market share.
Turning to our operators by revenue, Bickford Senior Living represents 18% of our cash revenue and had an EBITDARM coverage ratio of 1.07 times for the trailing 12 months ended September 30th.
On a same-store basis.
The Bickford EBITDARM coverage was 1.12 times, including a development property, which will roll into the coverage calculation in the fourth quarter, the Bickford total and same-store coverage was 1.09 times and 1.14 times respectively.
Due to the lagging nature of EBITDARM coverage and in an effort to provide more transparency, we have continued to disclose Bickford's occupancy.
Bickford's occupancy started to turn positive in the second quarter which continued through the third quarter.
We are pleased to report that Bickford's fourth quarter occupancy remained steady on a sequential basis and showed significant improvement year-over-year.
Bickford's total and same-store leased portfolio occupancy improved by 160 basis points and 230 basis points respectively in the fourth quarter of 2019 compared to the same quarter in 2018.
Importantly, Bickford has maintained price discipline while showing this improved occupancy.
Lastly, NHI exercised its purchase option on the Bickford Shelby property for $15.1 million at an initial yield of 8% during the first quarter of 2020.
This transaction is similar to the Bickford Gurnee deal and that it replaces a $14 million construction loan we had in place previously.
We have similar agreements on two other Bickford properties, which we believe will help stabilize and improve our coverage with this operator.
Developing new assets with Bickford will help us continue to evaluate additional asset sales while maintaining our relationship with Bickford and upgrading the portfolio.
Moving to Senior Living Communities.
Our relationship with SLC represents 16% of our annualized cash revenue.
Including net entry fee income, their EBITDARM coverage ratio was 1.1 times on a trailing 12-month basis.
This compares to 1.28 times in the year earlier period and 1.1 times for the June quarter.
As discussed on prior calls, we are watching entry fee sales closely and leading sales indicators have started to turn positive where SLC has purchased additional unit inventory.
The benefit of entry fee sales will take some time to roll through the coverage calculation as the quarters with those inventory repurchases roll out of the calculation.
Our next largest partnership is with NHC, which accounts for 14% of our annualized cash revenue.
As previously mentioned NHC had a corporate fixed charge coverage of 3.69 times in the September quarter.
Lastly, Holiday Retirement, which represents 12% of our cash revenue, had an EBITDARM coverage ratio of 1.21 times, which is a slight improvement on both a year-over-year and sequential basis.
Recall that we restructured the master lease with Holiday at the beginning of 2019, which required some difficult decisions at the time, but the goal was always to put Holiday in a better position operationally and financially while acting in the best interest of our shareholders.
While the story continues to play out, we are encouraged by the outcome just over a year later.
Moving on to new investments.
In the fourth quarter, we continued to expand our relationship with 41 Management with the acquisition of a 48-unit assisted living and memory care community in the St. Paul, Minnesota area for $9.34 million at an initial cash yield of 7.23%.
We also extended a second mortgage loan of $3.87 million at a rate of 13% on an assisted living community in Bellevue, Wisconsin.
This is a one-year loan with extension options and NHI has a purchase option on the community upon stabilization.
We also exercised our purchase option and formed a joint venture with LCS to own and operate the 401-unit Timber Ridge CCRC for $135 million effective January 31st.
As Eric mentioned earlier, this deal includes a RIDEA structure whereby NHI holds an 80% interest in the PropCo and a 25% interest in the OpCo.
PropCo is leasing the community to OpCo under a seven-year triple net lease at an initial yield of 6.75%.
NHI is also providing financing of $81 million to PropCo or approximately 60% of the purchase price.
This is a Class A property in a high barrier to entry and affluent market outside of Seattle with one of the premier CCRC operators in the country.
Regarding the acquisition environment and pipelines, we announced $329 million in acquisitions during 2019 and we are off to a good start in 2020 with announced deals already totaling $150 million.
We look forward to our new building opening in Milwaukee with Ignite Medical Resorts.
Our $25 million investment has a yield of 9.5% and we expect rent to commence when it opens in the second quarter.
Valuations are still very competitive, but through a relationship driven approach, we continue to see additional opportunity as we survey the market and are committed to adding high quality operators and communities to the portfolio yields comparable to what we have done in the last few years.
With that, I'll hand the call back over to Eric.
The challenges in this industry cannot simply be lumped into general categories like AL versus IL or primary versus secondary.
NHI is committed to succeeding in all of the markets and products in which we invest.
We are constantly reviewing our portfolio to identify opportunities that we can proactively address.
We do this through a number of methods and our preference is to always do it in unison with our operators and through our financial structure, which leads to stability in our cash flow.
As I mentioned earlier, we have good visibility in our outlook this year and we look forward to updating you on our progress throughout the year. | compname reports q4 adjusted ffo per share of $1.30.
q4 adjusted ffo per share $1.30.
quarterly ffo per share $1.39.
compname says normalized ffo for 2020 to be in range of $5.67 to $5.71 per share.
compname says normalized affo for 2020 to be in range of $5.31 to $5.35 per share. | 1 |
This information is available on our Investor Relations website, investors.
We direct you to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.
During the call, we will also discuss non-GAAP financial measures as defined by SEC Regulation G, including funds from operations or FFO, core FFO, same-center net operating income, adjusted EBITDA and net debt.
As such, it is important to note that management's comments include time-sensitive information that may only be accurate as of today's date, November 2, 2021.
At this time, all participants are in listen-only mode.
We request that everyone ask only one question and one follow-up to allow as many of you as possible to ask questions.
If time permits, we are happy for you to requeue for additional questions.
On the call today will be Steven Tanger, our Executive Chair; Stephen Yalof, Chief Executive Officer; and Jim Williams, Executive Vice President and Chief Financial Officer.
We had a great quarter as a result of improvements in occupancy, rent spreads and sales.
These all contributed to earnings, which exceeded our expectations, and an increase in our guidance for the remainder of the year.
Our proactive capital market success has also positioned us well with low leverage, ample liquidity and exciting potential growth opportunities.
I'm proud of the tireless efforts of the entire Tanger team who are successfully delivering our strategic objectives.
We delivered strong performance in the third quarter and the continued momentum we are demonstrating across our portfolio supports our decision to increase our guidance for the year.
The successful execution of our strategic plan is evident across all of our key metrics, including occupancy, rent spreads, tenant sales and our focus on driving non-rental revenues, all of which continue to contribute to core FFO growth.
Our portfolio occupancy has returned to pre-pandemic levels, despite having recaptured over 1 million square feet due to bankruptcies and brandwide restructurings since the beginning of 2020.
This includes 55,000 square feet recaptured in the third quarter as anticipated.
As of September 30, occupancy was 94.3%, up 140 basis points year-over-year and up 130 basis points since the end of the second quarter.
With regard to rent spreads, we continue to see positive momentum for leases that commenced in the 12 months ended September 30.
Blended average rates improved by 240 basis points on a cash basis compared to the 12 months ended June 30.
Spreads have improved each quarter this year and we believe that the continued improvement we are seeing in traffic and sales will help sustain this trend.
We also benefited from significant percentage rental growth this quarter, which was more than 2.5 times the comparable 2019 period.
During the height of the pandemic, we renegotiated select leases with an aim to trade value for value, in some cases, trading base rent for a larger variable rent component.
In many cases, reducing break points and increasing variable rent pay rates are now producing total rents that exceed the prior contractual fixed rents.
Our rent spreads don't capture percentage rent contributions as spreads measure the change in base rent and common area charges only, but the strong variable rent component has contributed to our core FFO growth.
Additionally, as we continue to negotiate renewals on these leases, we are focused on converting some of the variable upside into base rents, which provide longer term certainty.
In light of the improving trends, we are being strategic in our renewal and permanent leasing activity.
Renewals executed or in process represented 68% of the space scheduled to expire during the year compared to 72% at this time last year.
Traffic for the quarter was approximately 99% of the same period in 2019.
We saw a slight downturn in August, in part, due to concerns over the Delta variant and the timing of Labor Day, but September traffic returned to pre-pandemic levels.
Tenant sales accelerated in the quarter, reaching an all-time high of $448 per square foot for the consolidated portfolio for the 12 months ended September 30, representing an increase of more than 13% over the comparable 2019 period.
The key objective underlying our leasing strategy is to maximize NOI.
While shorter-term leasing will continue to be a strategy, our goal is to convert this space to permanent deals over time as conditions improve, retaining the current tenant with higher rent or repopulating the space.
We also continue to focus on growing our non-apparel and footwear tenant base and have added multiple new brands and categories to our portfolio this quarter.
Key categories include furniture and home goods and wellness and beauty.
We have also focused on growing our food offerings, adding numerous sit-down, quick serve and grab-and-go concepts across our portfolio and we are growing the presence of entertainment stores, kiosks and amenities aimed to driving shopper visits, frequency, dwell time and ultimately larger spend.
These new uses are presenting both on-center and in our outparcel and peripheral real estate.
We are seeing traction with non-rental revenues.
This is an area with growth opportunity as it is still in the early stages as a focus for Tanger.
Marketing partnerships in the form of sponsored onsite events, activations and advertising provide an opportunity for retailers to interact and communicate with the tens of millions of customers that shop at our centers annually.
And our Labor Day Block Party activations, for example, was sponsored by international brands such as Unilever, Tesla and Heineken, and we are planning similar events in the fourth quarter around holiday themes and tree lightings.
Events like these not only improve traffic and dwell time, but also generate revenue.
This revenue is captured in the other revenues line, which for the third quarter has doubled the contribution from 2020 and increased 38% over 2019.
This has proven to be a profitable initiative with plenty of additional opportunity and we plan to grow this program across our portfolio.
Our digital channels, including our website app and social channels, complement our on-center experience and help to attract new customers, particularly in young demographics.
Activations and shopper amenities such as Virtual Shopper and our web-hosted flash sales continue to engage and draw a younger consumer, while providing an omnichannel experience for our core shopper base and important Tanger Club members.
Our Tanger Fashion Director is leading these programs and will continue to do so for us through the holiday season.
As we look ahead to holiday shopping, we are encouraged.
In partnership with our retailers, we are starting early.
Holidays began at Tanger on November 1 and we are underway running campaigns, programs and events to encourage early shopping.
Many retailers across the country are facing potential logistics and staffing issues but are proactively navigating the situation.
Although the impact of labor and supply chain is unknown, we are optimistic with regard to our ability to deliver an exciting and fulfilling holiday experience to our customers and guests.
In summary, we continue to execute on our strategic plan, focus on our core business, and create value by unlocking new revenue opportunities across our portfolio.
We are enthusiastic with our positive leasing momentum and are encouraged by the new brands and categories we are adding to our centers.
We are innovating and reaching our shoppers where they want to be, offering additional ways to engage and interact with new products and to shop.
We continue to see traffic, sales, leasing and business development results improve.
We're on a clear path to sustained same-center NOI growth and, along with our new long-term growth initiatives and operational efficiencies, we believe we have a compelling opportunity to create value over time.
We delivered strong third quarter results showing continued positive momentum.
Third quarter core FFO available to common shareholders was $0.47 per share compared to $0.44 per share in the third quarter of 2020.
Core FFO for the third quarter of 2021 excludes a charge of $34 million or $0.31 per share for the early extinguishment of debt related to the redemption of our 2023 and 2024 bonds.
Same-center NOI for the consolidated portfolio increased 11.5% for the quarter to $73.8 million, driven by better than expected rebound in variable rents and other revenues.
We remain on track with rent collections and, through October 29, had collected approximately 98% of 2020 deferred rents due by the end of the third quarter.
The strategy we employed during the pandemic of deferring rent has proven to be effective.
With regard to our ATM program, we did not sell any additional equity during the third quarter.
Year-to-date, we have sold 10 million shares generating proceeds of approximately $187 million and $60 million remains available under our current authorization.
As previously announced, in July, we amended our unsecured lines of credit and extended the maturity date to July 2026, including extension options.
The lines have a borrowing capacity of $520 million with an accordion feature to increase borrowing capacity to $1.2 billion.
Additionally, in August, we completed a public offering of $400 million of senior notes at a rate of 2.75%, the lowest coupon in Tanger history.
We used the proceeds from the sale to redeem the $100 million that was outstanding on our 3.875% notes due in 2023 and the $250 million that was outstanding on our 3.75% notes due in 2024.
We also incurred a $31.9 million make-whole premium in September related to these redemptions.
As of quarter end, we had no significant debt maturities until April 2024.
Our leverage position has continued to improve in conjunction with our capital markets activity and earnings growth.
As of September 30, our net debt to adjusted EBITDA improved to 5.3 times for the trailing 12 months compared to 7.2 times for the comparable 12-month period of the prior year.
We have always prioritized maintaining a strong financial position and a disciplined and prudent approach to capital allocation.
Our Board will continue to evaluate dividend distributions alongside earnings growth and taxable income distribution requirements.
Our priority uses of capital are investing in our portfolio to grow in a way and evaluating selective external growth opportunities.
Turning to guidance for the remainder of the year.
We are increasing our core FFO to a range of $1.67 to $1.71 per share from the prior range of $1.52 and $1.59, an increase of 9% at the midpoint.
This guidance reflects continued sequential improvement in our business, particularly higher variable rents achieved in the third quarter.
Our guidance also includes up to 50,000 [Phonetic] square feet related to the potential additional bankruptcies and brandwide restructurings that could occur for the remainder of the year.
For additional details on our key assumptions, please see our release issued last night.
Operator, can we take our first question? | sees 2021 estimated diluted core ffo per share $1.52 - $1.59.
q2 core ffo per share $0.43. | 0 |
Today's call will cover ITT's financial results for the three-month period ending October 2, which were announced yesterday evening.
These statements are not a guarantee of future performance or events and are based on management's current expectations.
Actual results may vary materially due to, among other items, the factors described in our 2020 annual report on Form 10-K and other recent SEC filings.
These adjusted results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
I am very pleased with the results ITT delivered in the third quarter.
Once again, the resilience of our businesses and our teams has allowed ITT to execute for our customers in a tough macroeconomic environment.
As a result of the revenue growth, continued margin expansion and the effective deployment of the balance sheet, ITT delivered adjusted earnings per share of $0.99, growing 21% over the prior year.
During the quarter, it was paramount that we stay focused on execution while cultivating the significant growth opportunities ahead of us, and this is exactly what we did.
In the third quarter, I continued to work our shop floors around the world to ensure we are taking full advantage of our opportunities.
I'm encouraged by what I saw firsthand as we are not even close to being done improving our operational and business excellence.
I saw the engineering expertise and prowess on display at the Friction plant and innovation center in Barge, Italy.
The productivity and automation opportunities at our KONI plant in Oud-Beijerland, The Netherlands and the energized high-performing goods pumps team I reconnected with in Dammam, Saudi Arabia.
I was also fortunate to visit our industrial process team in Tizayuca, Mexico, where we have a good low-cost manufacturing setup poised for future growth.
And lastly, our Friction plant in Silao, Mexico is continuing to add new production lines to support the wins in EVs and share gains on conventional vehicle platforms.
There is a lot to be excited about at ITT.
Let's talk about some of the key highlights from ITT's third quarter.
We drove broad-based sales growth across all three segments and implemented strategic commercial actions to minimize the impact of rising inflation.
We drove incremental productivity in the quarter, roughly 280 basis points through a combination of shop floor and sourcing actions, and we continue to apply strict controls over our fixed costs as growth resumes.
We thought to overcome a year-over-year $0.23 or 370 basis point raw material headwind.
Our ITTers delivered 60 basis points of adjusted segment operating margin expansion, an exceptional result, considering the supply chain dynamics we see.
We generated organic orders growth of 27% with strong demand in Friction aftermarket, rail, connectors and industrial controls.
We also continued to grow nicely in IP short-cycle and projects.
Finally, we put our capital to work, repurchasing an additional $50 million of ITT shares to bring our year-to-date repurchases above $100 million, exceeding our repurchase commitment for the full year.
These accomplishments and the dedication of our ITTers drove adjusted earnings-per-share growth of over 20% compared to prior year and 2% above 2019 pre-pandemic levels.
Looking at the businesses.
Despite the supply chain disruption, the restricted auto production volumes, Friction OE continued to outperform, while also driving strong aftermarket growth.
We continue to win on both conventional OE vehicles and on new electric vehicle platforms, which will power future outperformance as they transition to hybrid and ultimately to full electric accelerate.
This quarter, we won content on six new electric vehicle platforms in China, the world's largest automotive market.
This year, we have been awarded content on 25 new EV platforms and our win rate is significantly above our current global OE share of over 25%.
Electrification will be MT's next springboard for long-term growth given our strategic focus on EV platforms.
In Connect & Control Technologies, we drove 17% organic sales growth with strong demand in North America distribution, especially in the industrial market.
This, coupled with progress on CCT's operations, generated 17% adjusted segment margin for the quarter, putting the business closer to pre-pandemic levels.
Lastly, we generated 8% organic revenue growth in industrial process, driven by short-cycle demand across parts, valves and service.
This is remarkable, given the supply chain difficulties we are experiencing.
We see positive signs in our weekly order rate.
And as you will hear shortly, continue to see sequential improvement and market share gains in the long-cycle project business, which is an encouraging sign for 2022 and beyond.
One of the most telling metrics for ITT this quarter was the 27% organic orders growth.
Our order levels again surpassed 2019, even with many of our key end markets still early in their recovery, like commercial aerospace.
In Industrial Process, we generated double-digit growth versus 2020 in short-cycle across baseline pumps, part and service.
Q3 was also the third consecutive quarter of sequential orders growth in projects with 36% organic order growth.
As a result, IP's backlog was up $28 million in the quarter.
In Connect & Control, orders grew over 40% organically, including an encouraging 70% orders growth in aerospace and the strong performance in North America distribution.
Finally, in Motion Technologies, we generated strong demand in the Friction aftermarket and in KONI/Axtone, which more than offset a slight decline in friction OE due to the chip shortage impact on our OEM customers.
Even with these challenges, MT grew over 20% organically versus 2020 and 4% above 2019.
And for the year, we now expect MT to deliver over $1.3 billion in revenue, comfortably above 2019.
As we head into the fourth quarter, we are not anticipating any improvement in the global supply chain or with raw material pricing.
With our teams executing relentlessly against these challenges, we are narrowing and raising our full year adjusted earnings per share outlook for 2021 at the midpoint to reflect the strong performance to date and our ability to execute.
We now expect adjusted earnings per share in the range of $4.01 to $4.06 at the high end, which equates to 25% to 27% growth versus prior year.
This is a $0.06 improvement at the midpoint after a $0.37 increase through the first half of the year.
This puts ITT on pace to comfortably surpass 2019 adjusted EPS.
In September, ITT released the second supplement to our 2019 sustainability report, demonstrating the company's progress on our environmental, social and governance practices.
We are continuing to integrate ESG in our business strategy and the day-to-day operations of over 10,000 ITTers.
Some highlights from the report to note: we drove a 25% reduction in greenhouse gas emissions, and a 23% reduction in waste sand to landfills, with 25% fewer workplace safety incidents.
We are expanding investments in guarantee of origin certificates throughout our European locations to increase ITT's share of electricity from renewable sources.
We are investing in more sustainable product technologies, especially in our pump business, building on the success we have achieved in MT's copper-free brake pads.
As we conduct our operating plan reviews for 2022, ESG continues to be a key element of the leadership team's mandate and there is much more for us to do.
Thus far, we have deployed capital in an amount nearly three times our year-to-date free cash flow across all our capital deployment priorities.
Our capex for the year is approximately 3% of revenue through the third quarter.
We've invested in capacity in our Friction plant to support the share gains achieved with new and existing customers as it relates to the accelerated transition to electric vehicles.
We also continue to execute value analysis, value engineering to reinvigorate our product offerings in Industrial Process and Connect & Control.
From the inception of this initiative in 2018, we have commercialized more than 100 different pump models, representing 23% of our total product portfolio.
In addition, we completed redesign for more than 30 additional pumps ahead of their commercial release.
We have only begun to scratch the surface with more than 70% of the product offerings still to be addressed.
As an example of this effort, following the success of our BB2 pumps, our year-to-date order growth for our recently redesigned magnetic drive pump is 40%.
The VA/VE announcements resulted in increased performance, better reliability and shorter lead times.
Regarding our other capital deployment priorities, we increased our dividend rate by 30% after 15% the year before.
This represents an annual dividend yield of approximately 1%.
Our share repurchases this quarter will drive a 1% reduction in our weighted average share count for the full year.
We will continue to drive repurchase activity in the future and our existing $500 million authorization.
And lastly, as we discussed last quarter, we divested our legacy asbestos liability to a portfolio company of Warburg Pincus.
This has reduced ITT's risk profile and allows us additional capital flexibility.
To accelerate our M&A activity, we're investing in our capabilities.
Bartek leads strategy development and will drive all merger and acquisition activities, including ITT's newly launched corporate venture vehicle.
On this front, we made one initial venture investment in Q3 for Connectors-related assets.
And we have a growing pipeline of leading technologies to enhance our existing product portfolio.
We have stepped up our M&A pipeline and cultivation activities and are looking forward to bringing great companies into ITT in the near future.
Emmanuel, over to you.
As you heard, Motion Technologies again delivered a solid performance, driven by strength in the Friction aftermarket.
In our OE business, Friction's market outperformance was over 1,000 basis points this quarter, significantly above our historical average despite large declines in global auto production levels.
For all of ITT, we estimate that the supply chain disruptions deducted approximately 350 basis points from our sales growth this quarter.
However, we expect to recover a majority of the pushed-out sales in the next few quarters.
We also saw double-digit organic sales growth in IP short-cycle and continued strong demand for industrial connectors.
And similar to what we saw in Q2, demand in commercial aerospace is increasing as exhibited by the 70% growth in aerospace orders.
On segment margin, CCT grew margin by 300 basis points and IP by 150 basis points, while MT declined 110 basis points, mainly due to raw material inflation.
We overcame a 470 basis point inflation headwind to drive 60 basis points of adjusted segment margin expansion.
On adjusted EPS, despite the challenges Luca highlighted in his introduction, we drove a $0.42 operational improvement year-over-year through a combination of higher sales volumes, strategic pricing actions and productivity across the enterprise.
We continue to realize benefits from prior restructuring, including our 2020 cost action plan, and we're carefully managing the unwinding of temporary cost actions taken in 2020 to ensure these costs align with the pace of ITT's recovery.
We achieved an adjusted trailing 12-month free cash flow margin of more than 11% this quarter, due to higher segment operating income.
On a year-to-date basis, excluding the asbestos payment in Q2, adjusted free cash flow declined by -- driven by strategic investments in working capital.
As I mentioned earlier, our performance this quarter was largely operationally driven.
Our year-over-year growth was significantly impacted by $0.23 headwind related to raw material inflation and a $0.09 headwind from prior year environmental settlements and temporary cost actions.
Partially offsetting these items was a roughly $0.04 benefit from foreign currency.
We also realized a slightly lower effective tax rate versus the prior year, which drove over a $0.02 benefit.
This was due to effective tax planning strategies related to our patent portfolio abroad.
We now expect our full year effective tax rate to be approximately 20.75%.
Motion Technologies Q3 organic revenue growth of 20% was primarily driven by strength in the aftermarket as the Friction OE business declined slightly given the supply chain headwinds affecting OEMs. This and the raw material inflation also impacted operating margin as we had signaled last year -- last quarter.
The Friction team is working diligently with our customers to drive equitable price recovery action, given the significant inflation we are seeing today.
We were able to pass price increases on to our customers this quarter and manage the impact of contractual price concessions.
However, there is much more to be done to compensate for the inflation we are experiencing.
Our Motion Technologies team will continue to methodically execute incremental pricing actions in Q4 and 2022.
We also experienced significant production inefficiencies resulting from large variations in customer orders patterns.
However, as with last quarter, our Friction OE business executed very well with over 99% on-time performance across all Friction plants.
In challenging economic conditions, Friction continues to be widely recognized as the quality -- as the highest quality and most reliable supplier in the market.
And in KONI, we continue to improve our quality performance and remain deeply focused on serving our customers amid supply chain disruptions.
Finally, we also continue to evaluate strategic footprint actions and announced one additional plant closure in Europe this quarter, which will drive further cost competitiveness within our rail business.
For Industrial Process, revenue was up 8% organically.
This was driven primarily by short-cycle demand across parts, valves and service.
Serving our customers this quarter require tremendous focus, coordination and effort by the IP team to overcome supply chain disruptions.
Our all-hands-on-deck approach made this happen.
As we signaled last quarter, we see the project funnel continuing to grow and IP was able to capture a significant share as evidenced by the 36% organic order growth in project this quarter.
We see this constructive momentum continuing and expect to deliver similar year-over-year growth in Q4.
IP margin expanded 150 basis points to 15.6% with an incremental margin of 33%, this was driven by higher sales volume, favorable mix, given the higher proportion of short-cycle sales, productivity and price, partially offset by labor and material inflation as well as higher freight charges given shipping delays.
Similar to MT, we're making progress on footprint optimization and have executed one plant closure during the quarter with another plant in Brazil in Q4.
In Connect & Control Technologies, we continued to drive a recovery from both the sales and margin perspective.
With incremental margin of 35%, CCT generated segment margin above 17%.
This is a 300 basis point improvement over prior year.
The margin expansion was the result of continued volume leverage and strong productivity, including restructuring savings, despite inflationary headwinds.
This margin profile is approaching pre-pandemic levels, but with approximately $20 million less in revenue.
While there is much work to be done to further solidify this performance, we are very encouraged by the work the team has done thus far and it gives us confidence in the future prospects at CCT.
As you can see, our teams have done a good job capturing the demand, leading to solid order growth in Q2 and Q3.
A few highlights to note.
It is important to note that our ability to win a majority of the EV competitions that we bid on is key to creating the long-term growth platform that Luca talked about.
Second, in Industrial Process, the strength we anticipated in short cycle is materializing.
But even more encouraging is the order growth and continuing recovery in long cycle pump projects.
Both the number and the size of orders in the funnel is increasing, and we have seen a steady sequential order increase throughout 2021.
This is the result of our relentless focus on customer centricity and operational excellence, which is increasingly recognized by our OE customers.
Third, CCT orders were up 40% organically in -- on the strength of our connector portfolio, particularly in North America.
The commercial connector performance, especially with our distribution partners is encouraging, and we're working to replicate the strong momentum across all our customers.
We also continue to see a gradual recovery in commercial aerospace, which will further bolster the sales growth in CCT over the next several years.
CCT backlog is up 17% organically or $40 million since year-end with a book-to-bill of 1.06.
This is a notable improvement for CCT since this time last quarter.
Through two quarters we had raised our organic sales outlook by 600 basis points and adjusted earnings per share by $0.37 versus the midpoint of our original guidance.
Given our strong performance, today, we are again raising the midpoint of our adjusted earnings per share range by an additional $0.06 to reflect the stronger-than-anticipated results and lower tax rate.
We're not anticipating any improvement in the market headwinds in the near term.
Nevertheless, in 2021, we expect to comfortably exceed pre-pandemic adjusted earnings per share levels.
IP will grow revenue in the low single-digit range, while CCT will drive mid-teen percent revenue growth.
Facing a tough comparison after a strong Q4 last year and the continued impact from constrained OEM demand, MT revenue will decline by mid-single digits in Q4.
However, we expect to largely outperform the global auto market.
In total, this will drive approximately flat to slightly up organic revenue growth in Q4.
From a segment margin standpoint, we expect all businesses to expand sequentially with CCT growing triple digits and IP building on its strong Q3 performance.
Year-over-year we expect segment margin to grow approximately 50 to 75 basis points.
Because of an exceptionally strong Q4 last year, Q4 adjusted earnings per share will grow in the low single-digit range year-over-year, and this will drive full year adjusted earnings per share above 2019.
With that, let me pass it back to Luca.
Let me wrap it up.
First, ITT has performed extremely well in a challenging climate.
We fought through adversity, and we're winning in the market.
Second, we have a resilient set of businesses that have demonstrated over and over again the ability to effectively manage multiple external factors while investing in long-term growth.
We delivered strong growth in revenue and margin, while not all of our markets have fully recovered yet.
Third, while we are continuing to invest for long-term growth and sustainability, our funnel of opportunities is increasing, and the growth in orders throughout 2021 will pave the way for continued outperformance.
Lastly, we have deployed over 2.8 times our year-to-date adjusted free cash flow through our asbestos divestiture, dividends and share repurchases.
And we are increasing our focus on M&A, we are in a favorable position to execute acquisitions given our balance sheet strength, and we are growing our pipeline and expanding our target cultivation activity.
As I said earlier, there is a lot to be excited about at ITT. | itt q3 loss per share $0.55 from continuing operations.
q3 revenue fell 17 percent to $591.2 million .
q3 adjusted earnings per share $0.82 from continuing operations.
q3 loss per share $0.55 from continuing operations.
sequentially, organic revenue increased 12 percent from q2 of 2020.
compname reports q3 adjusted earnings per share $0.82 from continuing operations.
q3 revenue fell 11 percent to $272 million. | 0 |
Greg and Jason will review our results along with commentary and Jack and Mahesh will join for Q&A.
These materials include GAAP to non-GAAP reconciliations for your reference.
These statements are based on current expectations and assumptions that are subject to a variety of risks and uncertainties.
Information about factors that could cause such differences can be found in today's earnings news release, in the comments made during this conference call, in the risk factors section of our 2020 Annual Report on Form 10-K and in our other reports and filings with the SEC.
I'll start off by sharing a few thoughts about the overall business before Jason takes us through the results and our outlook.
First, Q2 was an outstanding quarter.
We grew revenue 22%, earnings per share of 49% and operating cash flow 86% versus the prior year.
Additionally, we expanded operating margins by 220 basis points and ended the quarter with $11.2 billion of backlog, up 7% versus last year and a record for Q2.
Second, we saw strong demand in both segments of our business during the quarter.
In Products and Systems Integration, revenue was up 24% and operating margins expanded 270 basis points driven by growth in our LMR and video security technologies.
And in Software and Services, revenue was up 19%, and operating margins expanded by 210 basis points on growth in LMR services, video security and command center software.
This strong broad-based performance highlights the strength of our business and value of our mission-critical integrated ecosystem.
And finally, based on the strong backlog and momentum that we're seeing across our business, we're raising again our full year guidance for both sales and earnings per share.
Our Q2 results included revenue of $2 billion, up 22%, including $47 million from acquisitions and $66 million from favorable FX.
The GAAP operating earnings were $370 million, and operating margins were 18.8% of sales compared to 13.5% in the year ago quarter.
Non-GAAP operating earnings of $482 million, up $123 million or 34% from the year ago quarter and non-GAAP operating margins of 24.4% of sales, up from 22.2% driven by higher sales and improved operating leverage in both segments, inclusive also of higher costs related to employee incentive compensation this year.
GAAP earnings per share of $1.69 compared to $0.78 in the year ago quarter.
This increase was primarily due to increased sales volume, improved operating leverage, a lower tax rate related to the release of valuation allowance and lower reorganization charges in the current quarter.
Non-GAAP earnings per share of $2.07 compared to $1.39 last year, primarily due to higher sales and improved operating leverage in both segments.
opex in Q2 was $477 million, up $51 million versus last year, primarily due to higher compensation related incentives and higher expenses related to acquisitions.
Turning to cash flow.
Q2 operating cash flow was $388 million compared with $209 million in the prior year, and free cash flow was $326 million compared with $155 million in the prior year.
These increases in cash flows were primarily due to higher sales and working capital improvements, partially offset by higher cash taxes.
Capital allocation for Q2 included $121 million in cash dividends, $102 million in share repurchases at an average price of $206.85 per share and $62 million of CapEx.
Additionally, during the quarter, we issued $850 million of new long-term debt and redeemed $324 million of outstanding senior notes due in 2023.
Subsequent to quarter end, we acquired Openpath, a leader in cloud-based access control solutions for $297 million, and we invested $50 million in equity securities of Evolve, whose technology powers our concealed weapons detection solution.
Moving to our segment results.
Q2 Products and Systems Integration sales were $1.2 billion, up 24%, driven by strong growth in LMR and video security.
Revenue from acquisitions in the quarter was $38 million.
Operating earnings were $194 million or 16.2% of sales, up from 13.5% in the prior year on higher sales and improved operating leverage, inclusive of higher costs related to incentive compensation.
Some notable Q2 wins and achievements in this segment include a $37 million P25 order for the Kentucky State Police, a $36 million P25 upgrade for a state in the US, a $30 million P25 order from MARTA in Atlanta, a $29 million P25 devices order for a large US state and local customer, and a $5 million video security order, our largest single fixed video order from a US federal customer to date.
Moving to the Software and Services segment.
Q2 revenue was $773 million, up 19% from last year, driven by growth in LMR services, video security and command center software.
Revenue from acquisitions in the quarter was $9 million.
Operating earnings were $288 million or 37.2% of sales, up 210 basis points from last year, driven by higher sales, higher gross margins, improved operating leverage and also inclusive of higher compensation related incentives this year.
Some notable Q2 wins in this segment include, an $18 million French MOI body-worn camera frame agreement, a $15 million license plate recognition software extension with US based customer, a $10 million P25 multiyear services extension for Ohio's statewide network, and a $10 million P25 maintenance renewal with the US federal customer.
Additionally, we launched Command Central Suite, Public Safety's, first cloud-native 911 case-call to case closure solution.
Looking at our regional results, North America Q2 revenue was $1.3 billion, up 20% on growth in LMR, video security and command center software.
International Q2 revenue was $659 million, up 25%, also driven by LMR, video security and command center software.
We saw strong growth in EMEA during the quarter, while in Asia Pac growth was minimal as the region continues to navigate impacts from COVID-19.
Ending backlog was a Q2 record of $11.2 billion, up $741 million compared to last year, driven by $660 million of growth in North America and $81 million of growth internationally.
Sequentially, backlog was down $57 million, driven by revenue recognition on Airwave and ESN, partially offset with growth in LMR products.
Software and Services backlog was up $257 million compared to last year, primarily driven by North America multiyear service contracts.
And sequentially, backlog was down $130 million, driven again primarily by the revenue recognition for Airwave and ESN.
Products backlog was up $484 million compared to last year and $73 million sequentially, driven primarily by LMR growth in both regions.
Turning to our outlook.
We expect Q3 sales to be approximately up 10% with non-GAAP earnings per share between $2.09 and $2.14 per share.
This assumes FX at current rates, a weighted average diluted share count of approximately 174 million shares and an effective tax rate of 23% to 24% a year.
And for the full year, we now expect sales to be up between 9.5% and 10%, an increase from our prior guide of 8% to 9%, and we now expect full year non-GAAP earnings per share between $8.88 and $8.98 per share, up from our prior guidance of $8.70 to $8.80 per share.
This increased outlook incorporates the ongoing supply chain constraints, primarily in LMR and assumes FX at current rates, a weighted average share count of approximately 173 million shares and an effective tax rate of approximately 22%.
I thought I'd end with a few thoughts as we conclude the call.
First, our results for the quarter were excellent.
We achieved Q2 record sales, operating earnings and EPS, expanded operating margins, grew our video security technologies by 66% and achieved strong growth in LMR and command center software technologies as well.
Additionally, we finished the quarter with record Q2 ending backlog and a robust pipeline that we expect to drive growth for the remainder of the year, inclusive of the continued supply chain challenges that we're navigating primarily in LMR. Second, in video security, demand remains strong.
We've continued investing in this area even during the early days of the pandemic, and these investments have positioned us well to capture the increased demand we're now seeing from our customers.
Additionally, we just announced our acquisition of Openpath, a leader in cloud based access control solutions.
Openpath is disrupting the access control industry and extends our value proposition in the $15 billion video security market.
As a result, we're also renaming the technology within our revenue desegregation from video security and analytics to now video security and access control to reflect these investments and the future of video and access control convergence.
And finally, as I look to the second half of the year, I'm encouraged.
I'm encouraged by our execution across all of the businesses.
In LMR, customers are looking to invest in their networks, including several statewide upgrades and we're gaining traction with our APX NEXT device designed for the highest tier of public safety requirements.
In video security and command center software, we're leveraging our large installed base and go-to-market footprint to drive continued strong growth.
And with respect to ESG, we've recently released our 2020 corporate responsibility report, which highlights our strategy and performance.
Our work in this critically important area has been recognized by Forbes who named us as one of the best employers for diversity and Barron's who named us as one of the most sustainable companies.
I'm proud of what our teams are doing and look forward to further progress as we continue to deliver mission-critical solutions that create value for employees, customers, communities and our shareholders.
Before we begin taking questions, I'd like to remind callers to limit themselves to one question and one follow-up to accommodate as many participants as possible.
Operator, would you please remind our callers on the line how to ask a question? | qtrly revenue was $388 million, increasing 3 percent from a year ago on a reported basis. | 0 |
Participating on the call today are Aaron Ravenscroft, president, and chief executive officer; and Dave Antoniuk, executive vice president, and chief financial officer.
However, actual results differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings.
And with that, I will now turn over the call to you, Aaron.
Clearly, in retrospect, the economic dislocations created by our return to normal were far greater than anyone anticipated.
That being said, 2021 was a year of transition for Manitowoc on multiple fronts.
While we bounced back operationally from the COVID shutdowns, we also made significant changes in our strategic orientation.
As we laid out a year ago, we continued to build out our tower crane business and the [Inaudible] regions, launching two locally designed cranes.
We accelerated our all-terrain new product development, which will bear fruit at the upcoming BAUMA trade show this October.
We invested $15 million in our tower crane rental fleet in Europe, which helped us increase our market share in Germany and win some strategic orders with key accounts.
And finally, we completed two acquisitions in North America, which lays the groundwork for us to grow our aftermarket presence in the local mobile cranes market.
And currently, we continue to make progress on our ESG journey and more traditional safety terms.
The team doubled our hazard observations that we call SLAMS, and our recordable injury rate, excluding acquisitions, was 1.39 for the year.
While our RIR was up slightly year over year, it is still well below the industry benchmark, and I am very pleased with our performance in the face of the previous year.
On the sustainability front, we implemented [Inaudible], a tracking system to help us account for our environmental footprint, and we are utilizing the Manitowoc Way to drive continuous improvement.
For example, we assembled a global team to collaborate on paint booth emission reductions and have already begun to realize benefits.
As for diversity, we've been leaning and hard on this initiative to help offset our labor shortages.
Namely in Shady Grove, we implemented our first ESL program to help attract Spanish-speaking members of our community, and we have begun to offer relocation incentives to nearby cities such as Philadelphia to attract employees to our internal welding and machining schools.
With respect to our balance sheet, we continue to position the company for long-term growth.
After investing $40 million in capex and $186 million on two acquisitions, we closed the year with $75 million of cash on hand and $250 million of liquidity.
Considering the difficulties of managing working capital in the current environment, I'm comfortable with where we ended 2021.
For sure, the economic dislocations created by the return to normal were far greater than we anticipated a year ago, and I am extremely appreciative of all hard work by our team to minimize inflation as best as we could, implement price increases, and manage parts shortages while executing our long term strategy.
Specifically, I would like to recognize Jim Glenwright and Sebastian Maleigh, who recently won the CEO award for the Manitowoc Way.
In the midst of all of the economic chaos of 2021, Manitowoc encountered a cyberattack in June.
Jim led our effort to restore our IT system all at the same time continue to implement a new ERP system for MGX Equipment Services.
Meanwhile, across the pond, Sebastian earned his award for his contributions to the continuous improvement of our manufacturing processes and our tower factories.
He led projects to implement an automated tube cutting machine and move on while kicking off another significant machining project in our [Inaudible] factory.
I'm very proud of the commitment and passion of our employees at Manitowoc, and these two leaders truly represent the spirit of The Manitowoc Way.
Finally, I am pleased to announce that our changes on the factory won our annual Manitowoc Way Lessons Learned competition for 2021.
The Welding Value Stream and services support teams developed a homemade robot for welding mass rod bars.
Through ingenuity, the team built a robotic [Inaudible] for less than $10,000 to buy the same machine when it costs 10 times as much, and it would not have been specifically designed for the job at hand.
Turning to the financials, I would like to add a little color to our recent performance.
Generally, the story on demand remains consistent with the last couple of quarters.
Every region and every product category is doing well, except for the China market.
Orders for the quarter totaled $615 million and our backlog ended the year just over $1 billion, our highest level in over 10 years.
This was driven by continued solid activity in our end markets, rebounding customer sentiment, and improved dealer stocking levels.
Looking at the P&L, I have to admit I was very surprised by how we ended the year.
Inflation, part shortages, and logistical problems have been a serious issue for us for over six months, and unfortunately, they are creating a really volatile situation when it comes to predicting short-term results.
On the back of third soft third quarter shipments during October and November, periods were $75 million lower than our internal forecasts.
And as we entered December, vessels continued to be postponed while at the same time Omicron was spreading around the world.
Much to our surprise, we were fortunate in the last couple of weeks of the year and received several key parts shipments, which enabled us to complete several cranes.
In fact, we cut back over $25 million of shipments during December, which was nothing short of the heroic effort by our operations team.
This, combined with tighter cost management and payroll mix, helped us deliver a healthy EBITDA of $34 million in the fourth quarter.
Dave will officially step down as the CFO on May 2nd, at which time Brian Regan will assume the CFO role.
Dave will, however, remain with Manitowoc Way advisory role until January 2, 2023.
Dave has played an integral role in Manitowoc's evolution since 2016.
He led us through the difficult times after the Foodservice business spin-off.
He renegotiated our debt in 2019.
And finally, he shepherded our recent acquisitions.
Dave, it's been my pleasure working alongside of you for the last six years.
We wish you the absolute best in the next phase of your life.
the team wanted you to end on a high note.
Please provide color on the fourth-quarter financial results.
It's been an honor and a privilege to work with you over the past six years.
The many thought-provoking questions and comments surely challenged my thinking for the betterment of Manitowoc.
Now moving to our results for the quarter, which ended the year on a considerable high note.
Please move to Slide 4.
Our fourth quarter orders totaled $650 million of the book-to-bill of 1.24 and an increase of 21%, compared to $509 million of orders last year.
The increase in orders was primarily due to higher global demand.
Orders were unfavorably impacted by approximately $13 million from changes in foreign currency exchange rates.
Our 2021 ending backlog of $1 billion was up 86% over the prior year and is at its highest level in over 10 years.
The increase in backlog was across all segments and primarily due to higher global demand and lower than expected shipments in the fourth quarter due to supply chain challenges and logistic constraints.
Backlog was unfavorably impacted by approximately $40 million from changes in foreign currency exchange rates.
Net sales in the fourth quarter of $498 million increased $68 million, or 16% from a year ago.
The incremental net sales from acquisitions in the quarter were $24 million, slightly below the $30 million we communicated in the prior quarter.
Net sales were unfavorably impacted by approximately $9 million from changes in foreign currency exchange rates.
SG&A costs are up $24 million.
Due to confidential negotiations with the EPA, we are unable to provide any further updates at this time.
Our acquisitions increased SG&A costs by $8 million in the quarter and the remainder of the increases were primarily inflation-related.
Our adjusted EBITDA for the fourth quarter was $34 million flat year over year.
The acquisitions accounted for approximately $3 million during the quarter, which was in line with our expectations.
As I discussed last quarter, the Q4 adjusted EBITDA from the acquisitions was impacted by the elimination of intercompany profit and ending inventory.
We expect the impact of the elimination of intercompany profits to be nominal going forward and target approximately $30 million on an annual basis from the acquisitions.
As a percentage of sales, the adjusted EBITDA margin decreased to 6.9%, a reduction of 100 basis points over the prior year.
The decrease in margin was primarily due to the price cost dynamic in the quarter.
Income tax expenses in the quarter were $1.2 million, this was primarily driven by the jurisdictional mix of earnings, partially offset by a one-time tax benefit.
Our GAAP diluted loss per share in the quarter was $0.10 a decline of $0.15 over the prior year.
On an adjusted basis, diluted earnings per share increased $0.8 from the prior year to $0.27 per diluted share, primarily driven by lower income tax expense in the quarter.
Now I will recap the full-year financial results.
Orders total roughly $2.2 billion, up to $655 billion dollars, or 43% from the prior year.
Foreign currency exchange rates impacted 2021 orders favorably by approximately $32 million.
Net sales for the year totaled approximately $1.7 billion.
A 19% increase from 2020 and were positively impacted by $31 million due to favorable changes in foreign currency exchange rates.
The year-over-year increase was primarily due to higher global demand.
As 2020 was significantly impacted by the COVID-19 pandemic.
Our adjusted EBITDA improved by $33 million, or 40% from the prior year.
Moreover, our adjusted EBITDA margins improved by 90 basis points to 6.7%.
Our full-year 2021 adjusted net income was $31 million compared to a net loss of $12 million in 2020.
We generated $76 million of cash flows from operating activities in the year, an increase of $111 million year over year.
We spent $40 million in capital expenditures, which resulted in $36 million of free cash flows and an improvement of $97 million year over year and ahead of our expectations.
We ended the year with a cash balance of $75 million, a decline of approximately $64 million year over year.
As a reminder, we paid $186 million for the acquisitions using available cash, along with borrowing $100 million from our ABL credit facility.
Our total liquidity on December 31, 2021, remained strong at $254 million.
As most of you know, our current notes are callable on or after April 1, 2022, at a price of 104.5%.
As I mentioned at our Investor Day on December 13, we continue to opportunistically look at our debt as the debt markets for new sources of capital or to reduce our total cost of capital.
Our 2022 guidance assumes that our current capital structure will remain in place for the full year.
As we look ahead to 2022, we expect continuing global supply chain and logistic challenges, moderation in inflationary pressure, and an unstable labor market throughout the first half of the year.
In the second half of the year, we anticipate an improved price cost dynamic and a stabilizing supply chain, logistics, and labor market.
Based on this outlook, our 2022 guidance is as follows.
Net sales are approximately $2 billion to $2.2 billion.
With regard to SG&A, it is important to note that our adjusted SG&A expenses for the year are expected to increase approximately 21% of which approximately $32 million is from acquisitions.
Our adjusted EBITDA guidance is approximately $130 million to $160 million.
Depreciation and amortization of approximately $65 million.
Interest expense is approximately $28 million to $30 million.
Provision for income tax expense approximately $13 million to $17 million.
Adjusted diluted earnings per share approximately $0.65 to $1.35.
And capital expenditures of approximately $85 million.
With our recent acquisitions and growing rental fleets, I think it's worth taking a moment to discuss how these initiatives will impact our capital expenditure investments.
As we have discussed before, oftentimes a crane is rented for two years and then sold after the acquisition value has decreased.
As such, there is always a certain level of churn in a rental fleet.
As we sell use machines, we will replenish the rental fleet with the proceeds.
We expect this to be approximately $35 million in 2022.
In addition, we are still growing our rental fleets strategically to support RPOs and market share growth and target markets such as the German Tower Crane Market.
This capex investment will approximate $25 million in 2022.
The remaining $25 million of capex will be for a normal factory capex.
Please keep in mind that the management of our rental fleet and the related capex is far more dynamic than the traditional manufacturing capex.
It is heavily dependent upon opportunistic sales transactions.
In certain instances, capex could be generated by an unexpected sale of a crane that is on rent, which will likely need to need to be replaced.
In other instances, capex can be generated by an RPO opportunity, which can be multi crane deals.
Let's move to Slide 6.
As we begin in 2022, our strategy remains unchanged and underpinned by our four strategic initiatives.
We will continue to look for attractive acquisitions to help accelerate these initiatives, and we will opportunistically evaluate our capital and debt structure to help ensure that we have the necessary flexibility as the US economy faces increasing interest rates.
Adding a little more clarity and focus to our strategy, I am pleased to announce our vision for aftermarket, which we call Cranes Plus 50.
Our goal is to increase our aftermarket or non-new machine sales by 50% over the next five years.
Historically, our business model has been highly product focus.
Our objective is to grow beyond machines and products and to sell more aftermarket parts, field service, lifting solutions, RPOs, rentals for fleet management, used sales, remanufactured cranes, and digital solutions that provide greater customer connectivity.
As a jumping-off point, we ended 2021 with $449 million in non-new machine sales, which will be outlined in our 10-K filing.
In closing, Manitowoc continues to strive to get closer to our customers and to grow our less cyclical and higher-margin revenue streams.
We continue to reposition the company for long-term growth while we weather the near-term economic storm.
We are confident that our investment in our four growth initiatives will allow us to deliver on our Cranes Plus 50 strategies and increase our non-new machine sales by 50% over the next five years, which we believe will fuel greater long-term returns for our shareholders. | compname reports q4 loss per share of $0.10.
q4 adjusted earnings per share $0.27.
q4 loss per share $0.10.
sees 2022 net sales about $2.0 billion to $2.2 billion.
sees 2022 adjusted diluted earnings per share about $0.65 to $1.35. | 1 |
This is Al Nahmad, Chairman and CEO and with me is A.J. Nahmad, President; Paul Johnston, Executive Vice President and Barry Logan, Executive Vice President.
Before I report, let me first wish that you and your families are healthy and safe.
Now onto our report.
Watsco just completed an outstanding third quarter.
EPS grew 25% to a record $2.76.
Records were set for sales, gross profit, operating profit, operating margins and net income.
These results were driven by strong growth in our U.S. residential HVAC equipment business, which grew 19% during the quarter and from operating efficiencies achieved throughout our network, as evidenced by the nominal change in SG&A.
Homeowners clearly are investing in their homes as HVAC replacement sales have remained strong from early summer through today.
We also believe that greater adoption of our Watsco technologies has contributed to our results and led to gains in market share.
Our best indication of this impact are two simple metrics.
first, customers that use Watsco technologies are growing at a much faster rate than non-users.
Second, we are experiencing minimal attrition among active users on a year-over-year basis.
Now keeping this in mind, we continue to invest in our platforms and to drive for greater adoption by more customers.
Here are some examples of our progress.
Weekly users of our mobile apps have grown 31% since last year with over 100,000 downloads.
E-commerce transactions have grown by 19% this year to nearly 1 million online orders, which is about $1.5 billion in annual rate at the moment.
Our annual -- our annualized e-commerce sales run rate is 32%, versus 29% at the end of last year and in certain markets the use of e-commerce is over 50%.
Our dockside pickup services have expanded to more locations and now include non-contact payment functionality.
This technology has only been available for a few months and already over 12,000 orders were fulfilled during the quarter by more than 2,000 unique users.
Two of our newer innovative platforms have gained momentum.
We call them OnCall Air and the second one CreditForComfort.
These platforms provide digital connectivity for contractors and homeowners when making proposals, and buying and financing replacement systems.
Contractors using our -- what we call OnCall Air platform provided digital proposals to over 39,000 households during the quarter, and generated $114 million in sales, nearly double that of last year.
Our CreditForComfort platform process doubled in number of digital financing applications resulting in an 87% increase in third-party funded loans.
Investments in inventory management software have also benefited us this year, with inventory turns improving 25 basis points over last year and of course contributing to cash flow and operating efficiency.
All of this is exciting, but we believe, Watsco's technology are only scratching the surface of their full potential.
As always, feel free to schedule a zoom call with us and we can further explain our technology and progress.
We also strengthened Watsco's balance sheet this quarter.
We generated record operating cash flow of $373 million, which is far away a record for the year, so far, and we have no debt at this time.
Importantly, we have the capacity to make almost any size investment to grow in our business.
And I always like to comment that we're in a $40 billion industry of which we are only $5 billion, so we have lots of room for growth.
And then finally, one more very important thought, our results are a testament to the efforts of our teams across the Watsco network.
We deeply appreciate their commitment. | watsco q3 earnings per share $2.76.
watsco earnings per share jumps 25% setting new records for sales, operating profit, net income and operating margins during third quarter.
q3 earnings per share $2.76. | 1 |
John and David will provide high-level commentary regarding the quarter.
We appreciate you joining our call today.
We're very pleased with our fourth quarter and full-year results.
We achieved a great deal despite a challenging interest rate and operating environment.
Despite continued economic uncertainty, we remain focused on what we can control, and our efforts are paying off.
We grew consumer checking accounts by 3% and small business accounts by 5%.
Notably, our 2021 net retail account growth exceeds the previous three years combined and represents an annual growth rate that is three times higher than pre-pandemic levels.
We increased new corporate banking group loan production by approximately 30% and generated record capital markets revenue.
Through our enhanced risk management framework, we delivered our lowest annual net charge-off ratio since 2006.
We made investments in key talent and revenue-facing associates to support strategic growth initiatives.
We continue to grow and diversify revenue through our acquisitions of EnerBank, Sabal Capital Partners, and Clearsight Advisors.
We successfully executed our LIBOR transition program to ensure our clients are ready to move to alternative reference rates.
We continue to focus on making banking easier through investments in target markets, technology, and digital capabilities.
We surpassed our two-year $12 million commitment to advance programs and initiatives that promote racial equity and economic empowerment for communities of color.
Before closing, we're extremely proud of our achievements in 2021 but none of these would have been possible without the hard work and dedication of our nearly 20,000 associates.
The past year posed unique challenges as we continue to transition to our new normal, both on a personal and professional level.
Despite continued uncertainty, our associates remain steadfast.
They continue to bring their best to work every day, providing best-in-class customer service, successfully executing our strategic plan, and maintaining strong risk management practices, all of which contributed to our success.
In 2022 and beyond, we'll continue to focus on growing our business by making investments in areas that allow us to make banking easier for our customers, all while continuing to provide our associates with the tools they need to be successful.
We will make incremental adjustments to our business by leaning into our strengths and investing in areas where we believe we can consistently win over time.
These changes represent a natural extension of our commitment to making banking easier for our customers and complement the enhanced alerts, time order posting process, as well as our Bank On certified checking product we launched last year.
It's important to note that the financial impact of these enhancements have been fully incorporated in our total revenue expectation for 2022.
Again, we're pleased with our results and have great momentum as we head into 2022.
Now Dave will provide you with some select highlights regarding the quarter.
Let's start with the balance sheet.
Including the impact of acquired loans from the EnerBank transaction, adjusted average and ending loans grew 6% and 7%, respectively, during the quarter.
Although business loans continue to be impacted by excess liquidity, pipelines have surpassed pre-pandemic levels.
And encouragingly, we experienced a 240-basis-point increase in line utilization rates during the fourth quarter.
In addition, production remained strong with line of credit commitments increasing $4.7 billion year over year.
Consumer loans reflected the addition of $3 billion of acquired EnerBank loans, as well as another strong quarter of mortgage production accompanied by modest growth in credit card.
Looking forward, we expect full-year 2022 reported average loan balances to grow 4% to 5% compared to 2021.
Let's turn to deposits.
Although the pace of deposit growth has slowed, balances continued to increase this quarter to new record levels.
The increase includes the impact of EnerBank deposits acquired during the fourth quarter, as well as continued growth in new accounts and account balances.
We are continuing to analyze our deposit base and pandemic-related deposit inflow characteristics in order to predict future deposit behavior.
Based on this analysis, we currently believe approximately 35% or $12 billion to $14 billion of deposit increases can be used to support longer-term asset growth through the rate cycle.
Additional portions of the deposit increases could persist on the balance sheet but are likely to be more rate sensitive, especially later in the Fed cycle.
While we expect a portion of the surge deposits to be rate sensitive, you will recall that the granular nature and generally rate insensitive construct of our overall deposit base represents significant upside for us when rates do begin to increase.
Let's shift to net interest income and margin.
Net interest income increased 6% versus the prior quarter, driven primarily from our EnerBank acquisition, favorable PPP income, and organic balance sheet growth.
Net interest income from PPP loans increased $8 million from the prior quarter but will be less of a contributor going forward.
Approximately 89% of estimated PPP fees have been recognized.
Cash averaged $26 billion during the quarter.
And when combined with PPP reduced fourth quarter's reported margin by 51 basis points, our adjusted margin was 3.34%, modestly higher versus the third quarter.
Excluding the impact of a large third-quarter loan interest recovery, core net interest income was mostly stable as loan growth offset impacts from the low interest rate environment.
Similar to prior quarters, net interest income was reduced by lower reinvestment yields on fixed-rate loans and securities.
These impacts are expected to be more neutral to positive going forward.
The hedging program contributed meaningfully to net interest income in the fourth quarter.
The cumulative value created from our hedging program is approximately $1.5 billion.
Roughly 90% of that amount has either been recognized or is locked into future earnings from hedge terminations.
Excluding, PPP Net interest income is expected to grow modestly in the first quarter, aided by strong fourth-quarter ending loan growth, as well as continued loan growth in the first quarter, partially offset by day count.
Regions balance sheet is positioned to benefit meaningfully from higher interest rates.
Over the first 100 basis points of rate tightening, each 25-basis-point increase in the federal funds rate is projected to add between $60 million and $80 million over a full 12-month period.
This includes recent hedging changes and is supported by a large proportion of stable deposit funding and a significant amount of earning assets held in cash when compared to the industry.
Importantly, we continue to shorten the maturity profile of our hedges in the fourth quarter.
Hedging changes to date support increasing net interest income exposure to rising rates, positioning us well for higher rates in 2022 and beyond.
In summary, net interest income is poised for growth in 2022 through balance sheet growth and a higher yield curve in an expanding economy.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 5% from the prior quarter, primarily due to elevated other noninterest income in the third quarter but did not repeat in the fourth quarter.
Organic growth and the integration of Sabal Capital Partners and Clearsight Advisors will drive growth in capital markets revenue in 2022.
Going forward, we expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA.
Mortgage income remained relatively stable during the quarter.
And while we don't anticipate replicating this year's performance in 2022, mortgage is expected to remain a key contributor to fee revenue, particularly as the purchase market and our footprint remains very strong.
Wealth management income increased 5%, driven by stronger sales and market value impacts, and is expected to grow incrementally in 2022.
Seasonality drove an increase in service charges compared to the prior quarter.
Looking ahead, as announced yesterday, we are making changes to our NSF and overdraft practices, which along with previously implemented changes will further reduce these fees.
NSF and overdraft fees make up approximately 50% of our service charge line item.
These changes will be implemented throughout 2022.
But once fully rolled out, together with our previous changes implemented last year, we expect the annual impact to result in 20% to 30% lower service charges revenue versus 2019.
Based on our expectations around the implementation timeline, we estimate $50 million to $70 million will be reflected in 2022 results.
NSF and overdraft revenue has declined substantially over the last decade.
And once fully implemented, we expect the annual contribution from these fees will be approximately 50% lower than 2011 levels.
Since 2011, NSF and overdraft revenue has decreased approximately $175 million and debit interchange legislation reduced card and ATM fees another $180 million.
We have successfully offset these declines through expanded and diversified fee-based services.
And as a result, total noninterest income increased approximately $400 million over this same time period.
Through our ongoing investment in capabilities and services, we will continue to grow and diversify revenue to overcome the impact of these new policy changes.
We expect 2022 adjusted total revenue to be up 3.5% to 4.5% compared to the prior year, driven primarily by growth in net interest income.
This growth includes the impact of lower PPP-related revenue and the anticipated impact of NSF and overdraft changes.
Let's move on to noninterest expense.
Adjusted noninterest expenses increased 5% in the quarter.
Salaries and benefits increased 4%, primarily due to higher incentive compensation.
Base salaries also increased as we added approximately 660 new associates, primarily as a result of acquisitions that closed this quarter.
The increased headcount also reflects key hires to support strategic initiatives within other revenue-producing businesses.
We have experienced some inflationary pressures already and expect certain of those to persist in 2022.
If you exclude variable-based and incentive compensation associated with better-than-expected fee income and credit performance, as well as expenses related to our fourth quarter acquisitions, our 2021 adjusted core expenses remained relatively stable compared to the prior year.
We will continue to prudently manage expenses while investing in technology, products, and people to grow our business.
As a result, our core expense base will grow.
We expect 2022 adjusted noninterest expenses to be up 3% to 4% compared to 2021.
Importantly, this includes the full-year impact of recent acquisitions, as well as anticipated inflationary impacts.
Despite these impacts, we remain committed to generating positive adjusted operating leverage in 2022.
Overall credit performance remained strong.
Annualized net charge-offs increased 6 basis points from the third quarter's record low to 20 basis points driven in part by the addition of EnerBank in the fourth quarter.
Full-year net charge-offs totaled 24 basis points, the lowest level on record since 2006.
Nonperforming loans continued to improve during the quarter and are now below pre-pandemic levels at just 51 basis points of total loans.
Our allowance for credit losses remained relatively stable at 1.79% of total loans, while the allowance as a percentage of nonperforming loans increased 66 percentage points to 349%.
We expect credit losses to slowly begin to normalize in the back half of 2022 and currently expect full-year net charge-offs to be in the 25 to 35 basis point range.
With respect to capital, our common equity Tier 1 ratio decreased approximately 130 basis points to an estimated 9.5% this quarter.
During the fourth quarter, we closed on three acquisitions, which combined absorbed approximately $1.3 billion of capital.
Additionally, we repurchased $300 million of common stock during the quarter.
We expect to maintain our common equity Tier 1 ratio near the midpoint of our 9.25% to 9.75% operating range.
So, wrapping up on the next slide are our 2022 expectations, which we've already addressed.
In closing, the momentum we experienced in the fourth quarter positions us well for growth in 2022 as the economic recovery continues.
Pretax pre-provision income remains strong.
Expenses are well controlled.
Credit risk is relatively benign.
Capital and liquidity are solid, and we're optimistic about the pace of the economic recovery in our markets. | q4 net profit 64 million usd.
qtrly gross written premium growth of 13%. | 0 |
I'm joined today by Scott Buckhout, CIRCOR's president and CEO; and Abhi Khandelwal, the company's chief financial officer.
These expectations are subject to known and unknown risks, uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.
You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website.
CIRCOR delivered another solid quarter, and we're entering the back half of the year with high confidence that we'll achieve our 2021 guidance.
Our Q2 performance was highlighted by 27% organic orders growth in our Industrial business as both short- and long-cycle demand remained strong.
We saw continued recovery across virtually all Industrial regions and end markets with orders exceeding pre-COVID levels.
Book-to-bill in Industrial was 1.2, consistent with the first quarter.
Despite some headwinds from inflation and COVID-related supplier issues, we delivered revenue and earnings in line with guidance.
Our free cash flow conversion was 115%, a sign that our efforts to improve working capital are taking hold.
Based on our strong orders performance in the first half, our $436 million backlog and all the work we've done to streamline our operations, we're well-positioned for a very strong second half.
And finally, we made significant progress on our strategic priorities.
I'll talk more about this later.
I'm excited about the momentum the team is building, especially around growth and margin expansion.
Let's start with the financial highlights on Slide 2.
Organic orders of $210 million in the quarter were up 4% versus prior year.
We saw a strong year-over-year increase of 27% in Industrial driven by improvements in virtually all of our end markets.
As expected, orders were down 31% in Aerospace & Defense due to the timing of large defense orders.
Our backlog remained strong at $436 million, up 4% sequentially.
Our backlog in Industrial is $248 million, up 26% since the end of last year.
Organic revenue was $190 million, down 2% versus prior year and up 5% sequentially.
Revenue came in as expected given the timing of orders and lead times across our portfolio.
Sequentially, Industrial was up 7% as revenue starts to ramp from strong orders in Q1 and Q2.
A&D was in line with prior quarter driven by timing of defense deliveries and a slowly improving commercial market.
Adjusted operating income was $14.6 million, representing a margin of 7.7%, up 80 basis points from previous quarter and down 80 basis points from prior year.
Finally, we delivered $0.35 of adjusted earnings per share and generated free cash flow of $8 million as the team continues to drive working capital improvements across the company.
Moving to Slide 3.
Industrial organic orders were up 27% versus last year and 1% sequentially.
Regionally, order growth was led by North America and Asia, and we saw improved project orders as customers start to increase capex spending.
Our book-to-bill ratio for the quarter and for the first half was 1.2, which will support double-digit second-half revenue growth and represents a revenue inflection point post-COVID.
As expected, Industrial organic revenue was down 1% versus last year and up 7% sequentially.
By region, we saw year-over-year strength in both EMEA and China, partially offset by lower revenue in North America.
Outside of these isolated issues, revenue was in line or better than expectations across our end markets.
Adjusted operating margin was 8%, down 200 basis points versus last year, which reflects the downstream volume and aftermarket mix challenges in the quarter.
Operating leverage, simplification and continued strategic pricing will drive strong second-half margin expansion.
Turning to Slide 4.
Aerospace & Defense orders of $54 million were down 31% versus last year and 26% sequentially.
Orders were lower versus prior year due to a large multiyear defense order for the Virginia class submarine.
Versus prior quarter, the lower orders were driven by the timing of large orders for the Joint Strike Fighter and CVN-80 and 81 aircraft carriers.
Lumpy defense orders were partially offset by a modest sequential and year-over-year improvement in commercial aerospace.
As expected, revenue in the quarter was $61 million, down 5% year over year and up 1% from prior quarter.
Looking to the back half, we're expecting double-digit organic revenue growth as we ramp deliveries on key defense programs.
Finally, operating margin was 19.9% in the quarter, down 120 basis points year over year.
The margin decline was driven by lower aftermarket revenue.
Sequentially, margins expanded 210 basis points due to pricing actions and material productivity.
We remain confident in our ability to expand margins through the remainder of the year with higher defense and aftermarket volume.
Turning to Slide 5.
Free cash flow in the quarter was $8 million, a significant improvement versus prior year.
Working capital was a source of cash primarily driven by improved AR collections through the quarter and the timing of customer down payments.
We paid down $40 million of debt in Q2 with free cash flow and the proceeds from the sale of a noncore industrial product line.
We ended the quarter with $451 million of net debt, and we are on track to improve our leverage by greater than one turn this year.
In the third quarter, we expect revenue to be up 8% to 10% organically.
For Industrial, deliveries will be heavily weighted to Q3 and Q4 as we ship the backlog that we built in the first half.
In A&D, the growth in the back half is driven by the ramp in defense program deliveries and a modest recovery in commercial aerospace.
Scott will cover this in more detail in the upcoming slides.
We're expecting adjusted earnings per share of $0.55 to $0.60 in the third quarter, a 53% to 67% increase versus prior year.
3Q free cash flow conversion is expected to be between 120% and 140%.
Inflation will be a headwind in the third quarter and second half, but we expect material productivity to offset any cost increases.
For the year, we are reaffirming the guidance that we provided during the first-quarter earnings call.
Organic revenue growth is expected to be in the range of 2% to 4%, with adjusted earnings per share of $2.10 to $2.30.
Free cash flow conversion remains at 85% to 95%.
We have high confidence in our second-half margin outlook, and we expect to exit the year with 4Q operating margin of 13% to 15% for the company.
As we head into the back half of the year, we are closely monitoring the impact of COVID-19 variants in our global end markets and operations.
Now I'll hand it back to Scott to discuss our market outlook.
Let's start with our Industrial outlook on Slide 7.
As Abhi mentioned, in the second quarter, we saw continued recovery across virtually all Industrial end markets with orders exceeding pre-COVID levels.
In Q3, we expect double-digit order growth versus prior year with a seasonal sequential decline.
For Q3 Industrial revenue, we expect solid improvement year over year with growth between 7% and 11%.
Improvement across our short-cycle end markets is expected to lead revenue growth as shorter lead time products in our backlog ship in Q3.
Aftermarket remained strong with a double-digit increase expected in the third quarter.
Our longer-cycle end markets are expected to be up 5% to 9%.
In downstream, we're expecting revenue more or less in line with last year.
We're encouraged by the orders and quoting activity we saw through July, and we've addressed the supplier issues that impacted us in Q2.
In Commercial Marine, orders and revenue are increasing as shipbuilding activity picks up from historically low levels.
Finally, pricing is expected to net roughly 1%, consistent with prior quarters.
Moving to Aerospace & Defense.
Orders in the second quarter were down sequentially and versus prior year driven by the timing of large defense program orders.
Q3 orders are expected to be in line with prior year, and we're expecting a significant increase in Q4.
Revenue in the third quarter is expected to be up 12% to 15% versus prior year.
Growth in defense revenue was primarily driven by strong volume on smaller OEM programs such as the Boeing P-8 Poseidon and various missile switch programs.
Revenue from our top OEM programs is expected to be up low to mid-single digits with growth across nearly all of our major platforms.
Year to date, aftermarket revenue has been trending below our expectations driven by delayed government spending.
Looking forward, we expect sequential growth in spares and MRO activity in both Q3 and Q4.
Commercial aerospace is expected to be up between 15% and 20% in the third quarter.
Revenue from commercial air framers will be up roughly 50%, mostly driven by increased A320 volume and favorable comparisons to last year.
Aftermarket is expected to be up roughly 30%, in line with increased aircraft utilization.
In both cases, narrow-body volume continues to lead the recovery.
Finally, pricing is expected to be a net benefit of 3% for defense and 5% for commercial due to price increases secured earlier in the year, a higher level of spot orders and an increase in commercial aftermarket volume.
Our full-year pricing outlook remains in line with last year.
As we did last quarter, I'd like to provide an update on our previously shared strategic priorities.
These priorities continue to guide what our team works on every day.
We're investing in growth.
We launched 21 new products through the first half of the year and remain on track to deliver 45 new products in 2021.
On the Aerospace & Defense side, we launched a new brushless DC motor and brake assembly, which actuates the vertical stabilizers and aileron flight control surfaces on a high-altitude, long-endurance surveillance drone operated by the U.S. Air Force.
On the Industrial side, we introduced a new control valve that was entirely designed, sourced and manufactured in India, the first of its kind for CIRCOR.
This flue gas desulfurization valve is not only compliant with the new clean air regulations for Indian power plants, but also positions CIRCOR as the sole local partner providing a total solution.
Next, our regional expansion strategy is gaining traction.
Our Industrial team recently won a large multiproduct pump order with Daewoo Shipbuilding in Korea.
By providing a complete solution, we were able to secure a position on a long-term submarine program and strengthen our relationship with the Korean Navy.
On margin expansion, we're building on our CIRCOR operating system and simplification program by kicking off 80/20 at three of our largest Industrial businesses.
We're still early in the process, but we're excited about the structured approach to accelerate margin expansion at CIRCOR.
Finally, as Abhi covered earlier, we made progress in reducing our total debt.
We'll continue to use free cash flow to pay down debt for the remainder of 2021.
Before we move to Q&A, I want to highlight a recent customer perception study for our Industrial business.
It was an independent global survey with participation from roughly 70 of our largest customers.
The results confirm that our strategic priorities are aligned with our customers.
Our Net Promoter Score of 67 is exceptional and is a testament to our product quality and technical customer support.
Given the mission-critical nature of our products and the high cost of failure, our customers have a strong preference to buy OEM spare parts, and price is one of the least important buying criteria.
This study illustrates the power of our differentiated product portfolio and confirms that our strengths are aligned with our customers' top priorities. | circor delivers strong second quarter results and reaffirms 2021 guidance.
q2 adjusted earnings per share $0.35.
q2 revenue $190 million versus refinitiv ibes estimate of $189.2 million.
sees q3 adjusted earnings per share $0.55 to $0.60.
reaffirms fy adjusted earnings per share view $2.10 to $2.30.
sees q3 revenue up 10 to 12 percent.
for full year of 2021, circor reiterated its guidance of organic revenue growth of 2 to 4%. | 1 |
dollargeneral.com under news and events.
We also will reference certain non-GAAP financial measures.
dollargeneral.com under news and events.
Our fourth quarter performance was impacted by sustained and rising inflation, ongoing global supply chain pressure and a surge in Omicron cases, which impacted staffing levels at our distribution centers, contributing to elevated out-of-stocks.
Despite these challenging conditions, our teams continued to focus on controlling what we can control and being there for our customers.
Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond.
And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook, we're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan.
In fact, I'm pleased to report our staffing levels are back to 2019 pre-COVID levels in both our stores and distribution centers, and we are seeing a meaningful improvement in our in-stock positions.
Additionally, although we experienced higher-than-expected product and supply chain cost in Q4, we are very confident in our price position as our price indexes, relative to competitors and other classes of trade, remain in line with our targeted and historical ranges.
And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important to our customers, and they will continue to have a significant presence in our assortment.
In fact, approximately 20% of our overall assortment is $1 or less.
And moving forward, we expect to continue to foster and grow this program where appropriate.
population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, even in a challenging economic environment.
Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating Dollar General from the rest of the retail landscape.
Turning now to our fourth quarter performance.
Net sales increased 2.8% to $8.7 billion, following a 17.6% increase in Q4 of 2020.
Comp sales declined 1.4% compared to the prior year period, which translates into a robust 11.3% increase on a two-year stack basis.
From a monthly cadence perspective, Comp sales were lowest in January, with December being our strongest month of performance.
Our fourth quarter sales results include a decline in customer traffic, which was largely offset by growth in average basket size.
Notably, our average basket size at year-end was approximately $16 and consisted of nearly six items.
This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and a degree of inflation.
In addition, we are pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years in an effort to provide customers with an even wider variety of options.
And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two-year basis.
We are also pleased with the retention rates of new customers acquired in 2020, which continues to exceed our initial expectations.
For the full year, net sales increased 1.4% to $34.2 billion, which was on the high end of our full year guidance and on top of a robust 21.6% increase in fiscal 2020.
Comp sales for the year decreased 2.8%, which translates into a very healthy 13.5% increase on a two-year stack basis.
In total, we completed more than 2,900 real estate projects during the year, including the opening of our 18,000th Dollar General store and 50 stand-alone pOpshelf locations as we continue to build and strengthen the foundation for future growth.
From a position of strength, we also made targeted investments in key areas, including the acceleration of our pOpshelf concept, as well as our most recent initiatives focused on health and international expansion as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.
Overall, we are proud of our fourth quarter and full year results, which further validate our belief that our strategic actions and targeted investments positions us well for continued success while supporting long-term shareholder value creation.
We operate in one of the most attractive sectors in retail.
And while our mission and culture remain unchanged as the foundation for our success, with our robust portfolio of short and long-term initiatives, I believe Dollar General is a much different company and is in a much stronger competitive position than it was just a few short years ago.
As a result, I've never felt better about the underlying business model, and we are excited about the enormous growth opportunities we see ahead.
Now, that Todd has taken you through a few highlights of the quarter and the full year, let me take you through some of its important financial details.
Unless we specifically note otherwise, all comparisons are year over year, all references to earnings per share refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.
As Todd already discussed sales, I will start with gross profit.
As a reminder, gross profit in Q4 2020 and fiscal year 2020 were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28%, respectively, in our combined non-consumables categories.
For Q4 2021, gross profit as a percentage of sales was 31.2%, a decrease of 131 basis points.
The decrease compared to Q4 2020 was primarily attributable to a higher LIFO provision, increased transportation and distribution costs and a greater proportion of sales coming from our consumables category.
Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million.
These factors were partially offset by a reduction in markdowns as a percentage of sales in higher inventory markups.
SG&A as a percentage of sales was 22% in the quarter, a decrease of 16 basis points.
This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane-related expenses and a reduction in incentive compensation.
These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor, occupancy costs, and depreciation and amortization.
Moving down the income statement.
Operating profit for the fourth quarter decreased 8.7% to $797 million.
As a percentage of sales, operating profit was 9.2%, a decrease of 116 basis points.
Our effective tax rate for the quarter was 21.2% and compares to 22.7% in the fourth quarter last year.
Finally, earnings per share for the fourth quarter decreased 1.9% to $2.57, which reflects a compound annual growth rate of 10.6% over a two-year period.
Turning now to our balance sheet and cash flow, which remained strong and provided us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders.
Merchandise inventories were $5.6 billion at the end of the year, an increase of 7% overall and 1.4% on a per store basis.
Importantly, as Todd noted, we have begun to see a meaningful improvement in our in-stock levels since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to serve our customers with the products they want and need.
In 2021, we generated significant cash flow from operations totaling $2.9 billion.
Total capital expenditures for the year were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.
During the quarter, we repurchased 2.2 million shares of our common stock for $490 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million.
At the end of the year, the remaining share repurchase authorization was $2.1 billion.
Our capital allocation priorities continue to serve us well and remain unchanged.
Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.
We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.
Moving to our financial outlook for fiscal 2022.
First, I want to remind everyone that our fiscal year 2022 includes a 53rd week which will occur during the last period of the fourth quarter.
We also continue to operate in a time of uncertainty regarding, among other things, the impacts on the business arising from the current geopolitical conflict and the recovery from the global COVID pandemic, including recovery of the U.S. economy, changes in consumer behavior, labor markets and government stimulus and assistance programs.
Despite these uncertainties, including cost inflation, ongoing pressure in the supply chain and rising fuel costs, we are pleased to provide annual guidance that reflects our confidence in the business.
With that in mind, we expect the following for 2022.
Net sales growth of approximately 10%, including an estimated benefit of approximately two percentage points from the 53rd week, same-store sales growth of approximately 2.5%, and earnings per share growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 53rd week.
Our earnings per share guidance assumes an effective tax rate range of 22.5% to 23%.
We also expect capital spending to be in the range of $1.4 billion to $1.5 billion, which includes the impact of increases in the cost of certain building materials, as well as continued investment in our strategic initiatives and core business to support and drive future growth.
With regards to shareholder returns, our board of directors recently approved a quarterly dividend payment of $0.55 per share, which represents an increase of 31%.
We also plan to repurchase a total of approximately $2.75 billion of our common stock this year, reflecting our continued strong liquidity position, the benefit from the 53rd week and our confidence in the long-term growth opportunity for our business.
Let me now provide some additional context as it relates to our outlook.
In terms of quarterly cadence, we anticipate both comp sales and earnings per share growth to be much stronger in the second half of the year than the first half.
As a reminder, we are lapping a significant stimulus benefit from Q1 2021, including gross margin expansion of 208 basis points.
We also anticipate ongoing cost inflation, including elevated supply chain and fuel costs.
While we do not typically provide quarterly guidance, given the unusual lap in the significant inflationary environment in Q1, we are providing more specific detail on our expectations for the first quarter.
To that end, we expect a comp sales decline of 1% to 2% in Q1 with an earnings per share in the range of approximately $2.25 to $2.35.
Turning now to gross margin for 2022.
We expect to continue realizing benefits from our initiatives, including DG Fresh and NCI.
In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet, could drive additional benefits over the year despite continued cost pressures in the near term.
Partially offsetting some of these benefits are rising fuel costs, as well as an expected return to recent historical rates of markdowns and shrink, all of which are expected to be headwinds in 2022.
With regards to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts.
However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2022 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.
We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track.
And we believe these savings in 2022 will offset a portion of an expected increase in wage inflation.
In summary, we are proud of our fourth quarter and full year results in 2021, which are a testament to the perseverance and execution by the team.
Looking ahead, we are excited about our plans for 2022, including our outlook for sales and earnings per share growth, as well as our planned significant returns to shareholders via an increased dividend payout and increased share repurchases.
As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in our business and employees for the long term.
We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.
Let me take the next few minutes to update you on our operating priorities and strategic initiatives, including our plans for 2022.
Our first operating priority is driving profitable sales growth.
We have a growing portfolio of initiatives which are contributing to our strong results, as well as strengthening the foundation for future growth.
Let me take you through some of the recent highlights, as well as some of our next steps.
Starting with our non-consumables initiative, or NCI, which was available in more than 11,700 stores at the end of 2021.
We continued to be very pleased with the strong sales and margin performance we are seeing across the NCI store base.
Notably, NCI stores outperformed non-NCI stores in both average ticket and customer traffic, driving an incremental 2.5% total comp sales increase on average in NCI stores, along with a meaningful improvement in gross margin rate.
We expect to realize ongoing sales and margin benefits from NCI in 2022, and we are on track to complete the rollout across nearly the entire chain by the end of the year.
Moving to our newest store concept, pOpshelf, which further builds on our success and learnings with NCI.
As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value, with the vast majority of our items priced at $5 or less.
During the quarter, we opened 25 new pOpshelf locations, bringing the total number of stores to 55 and exceeding our initial goal of 50 stores.
Additionally, we opened 11 new store within a store concepts during Q4, bringing the total number of Dollar General Market stores with a smaller-footprint pOpshelf store included to a total of 25 at the end of the year.
And we continue to be pleased with the results.
In 2022, we plan to nearly triple the pOpshelf store count and open up to an additional 25 store-within-a-store concepts, which would bring us to a total of more than 150 stand-alone pOpshelf locations and a total of approximately 50 store-within-a-store concepts.
We continue to anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the average gross margin rate for these stores to exceed 40%.
In addition to the early success of pOpshelf, we have been able to take some of our learnings and apply them in our Dollar General store base, particularly in further enhancing our nonconsumables offering.
Overall, we are very pleased with the results from this unique and differentiated concept, and we are excited about our goal of approximately 1,000 pOpshelf locations by year-end 2025.
Turning now to DG Fresh, which is a strategic, multi-phased shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas.
As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to more than 18,000 stores from 12 facilities.
The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing.
Notably, DG Fresh was a meaningful positive contributor to our gross margin rate in 2021, and we expect to see continued benefits in 2022.
Another important goal of DG Fresh is to increase sales in our frozen and refrigerated categories.
We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department.
In fact, our perishables department had a high single-digit comp increase in Q4 and contributed more comp sales dollars than any other department for both Q4 and the full year.
Importantly, the sales penetration of these categories has increased to approximately 9% as compared to approximately 8% prior to the rollout of DG Fresh.
In 2022, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale and deliver an even wider product selection.
And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time.
To that end, at the end of Q4, we offered produce in more than 2,100 stores, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022.
Finally, DG Fresh has also extended the reach of our cooler expansion program.
During 2021, we added more than 65,000 cooler doors across our store base.
In 2022, we again expect to install more than 65,000 additional doors as we continue to build on our multiyear track record of growth in cooler doors and associated sales.
Turning now to an update on our expanded health offering, which consists of up to 30% more feet of selling space and up to 400 additional items as compared to our standard offering.
This offering was available in nearly 1,200 stores at the end of 2021, with plans to expand to a total of more than 4,000 stores by the end of 2022.
As we move toward becoming more of a health destination, particularly in rural America, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services over time.
In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink reduction.
Our second priority is capturing growth opportunities.
Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business.
In 2021, we completed a total of 2,902 real estate projects, including 1,050 new stores, 1,752 remodels and 100 relocations.
For 2022, we remain on track to execute nearly 3,000 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations.
As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger, 8,500 square foot store format, allowing for an expanded assortment and room to accommodate future growth as we respond to our customers' desire for an even wider product selection.
Importantly, we continue to be very pleased with the sales productivity of all of our larger-format stores as average sales per square foot are about 15% above an average traditional store.
In addition to our planned Dollar General and pOpshelf growth in 2022, and included in our expected new store total, we are very excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2022.
Overall, our real estate pipeline remains robust with more brick-and-mortar stores than any retailer in the country.
And we are excited about our ability to capture significant growth opportunities in the years ahead.
Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers.
Our efforts remain centered around building engagement across our digital properties, including our mobile app.
We ended 2021 with over million monthly active users on the app and expect this number to grow as we look to further enhance our digital offerings.
As with everything we do, the customer is at the center of our digital initiative.
Our partnership with DoorDash is the latest example of these efforts as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less.
This offering was available in more than 10,700 stores at the end of Q4, and we are very pleased with the early results, including our ability to generate profitable transactions, as well as better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base.
In addition, our DG Media Network is becoming increasingly more relevant in connecting our brand partners with our customers.
To that end, we significantly grew the reach of this network in 2021, increasing from 6 million unique active profiles to more than 75 million, enabling our vendors to now reach over 90% of our DG customers through the DG Media Network.
After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond as we expand the program and enhance the value proposition for both our customers and brand partners while increasing the overall net financial benefit for the business.
Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
And we are pleased with the growing engagement we are seeing across our digital properties.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
We have a clear and defined process to control spending which continues to govern our disciplined approach to spending decisions.
This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset.
Notably, the Save to Serve program contributed more than $800 million in cumulative cost savings from its inception in 2015 through the end of 2021.
Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.
The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores.
The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates.
Self-checkout was available in more than 6,100 stores at the end of 2021.
We continue to be pleased with our results, including strong and growing customer adoption rates and high scores on speed and ease of checkout.
In 2022, we plan to expand this offering to a total of up to 11,000 stores by the end of the year as we look to further extend our position as an innovative leader in small box discount retail.
Looking ahead, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders in 2022.
When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail associates and leaders.
I also want to highlight our growing private fleet, which consisted of more than 700 tractors and accounted for approximately 20% of our outbound transportation fleet at the end of 2021.
We are focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors, we expect will account for approximately 40% of our outbound transportation fleet by the end of the year.
Importantly, we save an average of 20% of associated costs every time we replace a third-party tractor with one from our private fleet.
Moving forward, we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational control in our supply chain while further optimizing our cost structure.
Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As a growing retailer, we created thousands of new jobs in 2021, providing career growth opportunities for existing associates and the start of a career for many others.
In 2022, we now expect to create more than 10,000 net new jobs as a result of our continued growth.
Our internal promotion pipeline remains robust, as evidenced by our internal placement of more than 75% of our store associates at or above the lead sales associate position.
We also continue to innovate on development for our teams to provide ongoing opportunities for career advancement, and in turn, meaningful wage growth.
These investments include offering an enhanced college tuition benefit for our associates and their families, as well as continuing to facilitate driver training programs for associates who would like to become drivers in our private fleet.
In addition to our focus on development, we continue to focus on further enhancing the associate experience and our strong workplace culture.
Collectively, these investments continue to yield positive results across our organization, including healthy applicant flow and strong critical staffing levels.
We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.
Overall, we made significant progress against our operating priorities and strategic initiatives in 2021.
These efforts have further strengthened our foundation and position heading into 2022 as we continue to drive long-term sustainable growth.
In closing, I'm proud of the team's strong and resilient performance in 2021.
As we enter 2022, we are laser-focused on executing and delivering our robust plans, which we believe will further enhance our unique combination of value and convenience for our customers while delivering strong returns for our shareholders. | compname reports q3 earnings per share of $2.08.
q3 earnings per share $2.08.
sees fy sales up about 1 to 1.5 percent.
q3 sales rose 3.9 percent to $8.5 billion. | 0 |
While we are making those statements in good faith, we do not have any guarantee about the results we will achieve.
Descriptions of the risk factors are included in the documents we filed with the SEC.
Also, we will be discussing some non-GAAP financial measures, references to adjusted items including organic net sales referred to measures that exclude items management believes impact the comparability for the period referenced.
Today, Dave and I will discuss our strong second-quarter results as well as our perspective on how Conagra is positioned to continue to succeed in both the current environment and beyond.
So, let's get started.
I'm very pleased with our strong results for the second quarter.
Our business continue to perform well both in the absolute and relative to peers.
Our success to date in fiscal 2021 is not only a testament to our team's ability to adapt to the current environment but a reflection of the work we've done to transform our business over the past five-plus years.
Our ongoing execution of the Conagra Way playbook perpetually reshaping our portfolio and capabilities for better growth and better margins has enabled us to rise to the occasion during the COVID-19 pandemic.
And that has positioned the business to excel in the future.
During the second quarter, we continue to build on our momentum and our Q2 results exceeded our expectations across the board.
We had strong, broad-based sales growth, our margin expansion is ahead of schedule, and I'm proud to announce that we've reached our deleveraging targets earlier than originally planned.
In keeping with our Conagra Way playbook, we continue to optimize the business for long-term value creation during the quarter.
We made targeted investments in both production capacity and marketing support to drive the physical and mental availability of our products.
We also remained committed to sculpting our portfolio through smart divestments with the agreement shortly after the second quarter closed to sell Peter Pan Peanut Butter.
Peter Pan is a very good business, but it's not an investment priority for Conagra given our other portfolio priorities.
Finally, we are reaffirming our fiscal 2022 guidance for all metrics.
And none of this would be possible without our exceptional team, particularly our frontline workers.
So, before we dive into the details of the quarter, I want to recognize everyone responsible for the continued extraordinary work of our supply chain.
I'm extremely proud of the thousands of hardworking Conagra team members whose dedication has enabled our industry-leading performance.
We remain focused on keeping employees safe while meeting the needs of our communities, customers, and consumers.
With that, let's get into the business update.
As the table on Slide 7 shows, our second-quarter results exceeded our expectations across the board.
We delivered organic net sales growth of 8.1%, adjusted operating margin of 19.6%, and adjusted earnings per share of $0.81.
These results enabled us to reach our fiscal '21 net leverage ratio target of 3.6 times ahead of schedule.
During the second quarter, we continued to drive significant growth across our retail business.
Total Conagra retail sales grew 10.4% year over year with strong growth across each of our snacks, frozen, and staples portfolios.
Our results were driven by continued success in expanding our presence with consumers and gaining share.
Total Conagra household penetration grew 14 basis points versus a year, ago and our category share increased 26 basis points.
Critical to our ability to sustain our growing relevancy with consumers is the physical availability of our products, whether through brick and mortar or online.
And Slide 9 demonstrates how our ongoing investments in e-commerce have continued to yield results.
In the chart on the left, you can see the step-change in e-commerce growth for total edibles that has occurred since the onset of the pandemic.
But what's really impressive about this chart is the sustainability of our e-commerce performance.
We've retained a massive portion of the e-commerce sales we gained at the onset of the pandemic, and our results have outpaced total edible e-commerce growth each quarter.
As a result of our sustained success, e-commerce continued its recent trend of steadily increasing as a percentage of our total retail sales as you can see on the right.
While e-commerce growth both on an absolute basis and as a percent of overall sales is not a new dynamic for Conagra, this growth has accelerated during COVID-19.
In addition to our continued progress in e-commerce, our new innovation generated strong performance during the second quarter.
When we began this journey over five years ago, we've recognized that we had a lot of latent potential in the portfolio, it just had to be modernized.
So, we set out to aggressively do just that.
And you'll recall that we established a goal of having 15% of our annual retail sales come from products launched within the preceding three years.
As you can see on Slide 10, our innovation performance has continued to exceed our 15% goal.
What's equally important is the consistency of our innovation performance.
Investments we've made over the last five years in our innovation capabilities enabled us to continue launching new products since the pandemic began.
Customers trust our innovation track record and rely on our new products to drive consumer trial and overall category growth.
Slide 11 drills down on the strength of our recent innovation performance compared to last year's first half launches.
The products we introduced in the first half of this year have achieved 37% more sales per UPC, and 28% more distribution points per UPC during the comparable time period.
Product performance highlights include Marie Calendars boast the No.
1 branded new item in frozen indulgent single-serve meals.
Duncan Hines has delivered the top 3 highest velocity new items in the single-serve baking, and our modernized Hungry Man brand is outpacing category growth by more than two times.
After a strong first half of fiscal '21, we will introduce even more new products that will build distribution in the second half.
Expect to hear more about our upcoming product launches at CAGNY next month.
Importantly, our terrific frozen vegetables business returned to strong growth in the quarter as we brought on our additional capacity investments online.
Slide 13 digs a bit deeper into our largest frozen brand, Birdseye.
Birdseye is a cornerstone of the important frozen vegetable segment with a No.
1 position in the category, more than twice the category share of the closest branded competitor.
Recall that Birdseye previously faced some supply constraints as we worked to bring new capacity online.
And last quarter, I noted that shipments for the brand were a bit ahead of consumption as retailers started rebuilding their inventories.
As you can see in the charts on Slide 13, Birdseye returned to form in Q2 as expected.
In addition to strong retail sales growth of 7.2% in quarter, Birdseye gained an impressive 261 basis points of share from Q1 to Q2.
Continuing to Slide 14, you can see how Birdseye has attracted and retained more new buyers than our competition since the pandemic began.
Frozen vegetables category remains highly relevant to consumers and we believe the steps we've taken over the past several quarters to modernize the Birdseye brand and expand capacity have positioned us well to build on our category leadership.
Turning now to another area of strength, our leading portfolio of frozen single-serve meals had another terrific quarter.
As you can see on Slide 15, Conagra has outperformed peers, driven category growth, and attracted new buyers since the start of the pandemic.
As the chart on this slide shows, we have three of the top brands in this category from both the trial and repeat perspective.
Our snacks business also continued to see strong growth in the quarter.
As you can see on Slide 16, we delivered double-digit retail sales growth on a year-over-year and two-year basis in snacking led by impressive results across the popcorn, sweet treats, and meat snacks.
We're not just growing, we're winning versus the competition.
Slide 17 shows how we grew share year over year in popcorn, meat snacks, hot cocoa, and ready-to-eat pudding and gelatin in the quarter.
Our staples portfolio also delivered solid results in Q2.
Historically, this portfolio has served as a -- primarily as a source of cash for us but it hasn't been looked at as a growth engine.
But Slide 18 shows how staples remained highly relevant to consumers in the quarter as people continue to rediscover cooking and the utility, relevance, and value of products in our portfolio.
Our basket of the total staples category grew retail sales by 12.7% in the second quarter.
People are returning to their kitchens during the pandemic and new, younger consumers are discovering the joy of cooking.
Many of the brands on this slide including PAM, RoTel, and Hunt's are cooking utilities and ingredients.
As we've discussed before, the current environment has resulted in consumers trying or reengaging with our products and coming back again and again.
And that takes us to what we see going forward and how our business is uniquely set up to win.
Our execution of the Conagra Way playbook over the last five-plus years enabled us to deliver strong performance prior to the onset of COVID.
And we firmly believe that our reshaped portfolio, modernized products, and enhanced capabilities have been foundational to our ability to excel during these highly dynamic times.
We all know that the COVID pandemic has driven an increase in at-home eating overall.
But for Conagra, it has also meant an acceleration of the consumer trial, adoption, and repeat purchase rates of our products.
Our results have been strong on both in absolute and relative basis.
These dynamics have driven meaningful levels of incremental cash flow for our business.
They've also enhance the ROI of our previous disciplined investments in portfolio, capabilities, and the physical and mental availability of our products.
Importantly, the Conagra Way is perpetual.
While we've adapted to the current environment and deliver superior results, we also continue to look to the future and make smart investments to further strengthen our business.
Our investments include continuing to modernize our products and packaging, increasing production capacity when category dynamics warrant, supporting on-shelf availability, and increased e-commerce share, and raising consumer awareness.
To be clear, these investments are not a reaction to the near-term environment but to see as rooted in our longer-term outlook for the business and our disciplined execution of the Conagra way.
We believe that Conagra is in a strong position to continue to win now and for years to come.
We expect that our investments, coupled with consumer adoption and the proven stickiness of our products will result in Conagra continuing to deliver long-term profitable growth.
In summary, we continue to see solid execution across our portfolio aligned with the Conagra way playbook in Q2 which enabled us to deliver results that exceeded our expectations.
Our business remains strong in the absolute and relative to competition.
And we expect Conagra to be in an even better position post-COVID as a result of our ongoing disciplined approach to investment and innovation.
Today, I'll walk through the details of our second-quarter fiscal '21 performance and our Q3 outlook before we move to the Q&A portion of the call.
I'll start by calling out a few performance highlights from the quarter which were captured on Slide 22.
As Sean mentioned, outstanding execution by our teams across the company enabled us to exceed expectations for net sales, margin, profitability, and deleveraging during the second quarter while we continued to invest in the business.
Reported and organic net sales for the quarter were up 6.2% and 8.1%, respectively, versus the same period a year ago.
We continued our strong margin performance from Q1 as Q2 adjusted gross margin increased 139 basis points to 29.9%.
Adjusted operating margins increased 250 basis points to 19.6%.
Adjusted EBITDA increased 16.7% to $712 million in the quarter.
And our adjusted diluted earnings per share grew 28.6% to $0.81 for the second quarter.
Slide 23 breaks out the drivers of our 6.2% second-quarter net sales growth.
As you can see, the 8.1% increase in organic net sales was primarily driven by a 6.6% increase in volume related to the growth of at-home food consumption.
The favorable impact of price mix which was evenly driven by favorable sales mix and less trade merchandising also contributed to our growth.
The strong organic net sales growth was partially offset by the impacts of foreign exchange and a 1.7% net decrease associated with divestitures.
The Peter Pan peanut butter business is still part of Conagra Brands and thus included in our organic results.
We expect the sale of Peter Pan to be completed in Q3 at which point it will be removed from organic net sales growth.
I will discuss the estimated impact of this divestiture shortly.
Slide 24 summarizes our net sales by segment for the second quarter.
On both the reported and organic basis, we saw continued significant growth in each of our three retail segments: grocery and snacks, refrigerated and frozen, and international.
The net sales increase was primarily driven by the increase of at-home food consumption as a result of COVID-19, which benefited our retail segments but negatively impacted our food service segment.
The grocery and snack segment experienced strong organic net sales growth of 15.3% in the quarter.
The segments we're getting net sales growth outpaced its growth in consumption as retailers continued to rebuild inventories.
Our refrigerated and frozen segment delivered organic net sales growth of 7.8%.
This growth is a testament to our continued modernization and innovation efforts and illustrates the increasingly important role refrigerated and frozen products play in meeting the evolving needs of today's consumers.
Turning to the international segment.
Quarterly organic net sales increased 9.1%.
This segment experienced particularly strong growth in both Canada and Mexico.
This quarter, our food service segment reported a 21.4% organic net sales decline, primarily driven by a volume decrease of 25.3% due to less restaurant traffic as a result of COVID-19.
Slide 25 outlines the adjusted operating margin bridge for the quarter versus the prior-year period.
As you can see, in the second quarter, our adjusted operating margin increased 250 basis points to 19.6%.
Strong supply chain realized productivity, favorable price mix, cost synergies associated with Pinnacle Foods acquisition, and fixed cost leverage combined to drive 440 basis points in adjusted operating margin improvement more than offsetting the impact of cost of goods sold inflation and COVID-related costs in the quarter.
Collectively, these drivers resulted in a 139 basis point increase in our adjusted gross margin versus the same period a year ago.
A&P increased 4.7% on a dollar basis primarily due to increases in e-commerce marketing A&P was flat on a percentage-of-sales basis this quarter versus Q2 a year ago.
Finally, our adjusted SG&A rate was favorable by 110 basis points primarily as a result of fixed cost leverage on higher net sales, the Pinnacle cost synergies, and temporarily reduced spending as employees work from home and significantly reduce their travel.
I want to give you some additional perspective on our margin expansion.
As I just mentioned, operating margin expanded 250 basis points for the quarter well ahead of our expectations.
Of this 250 basis point expansion in operating margin this quarter, approximately 60 basis points reflects our ongoing progress toward achieving our fiscal '22 margin target of 18% to 19%.
We also saw an approximate 180 basis point margin benefit from price mix in the quarter primarily driven by mix, and to a lesser extent, favorable pricing in lower-trade merchandising.
We expect to retain some of this benefit going forward, but exactly how much remains uncertain at this point.
Additional 10 basis points of net margin expansion came from favorable fixed cost leverage across the entire P&L and COVID-related SG&A benefits, mostly offset by COVID-related cost of goods sold.
We do not expect this net benefit to repeat next year.
Slide 26 summarizes our adjusted operating profit and margin by segment for the second quarter.
Our three retail segments, all operating profits increased by double-digit percentages versus the same period a year ago.
Each retail segment benefited from higher organic net sales and strong supply chain-realized productivity.
In the foodservice segment, however, operating profit decreased due to the COVID-related impacts of lower organic net sales and higher input costs that more than offset the impacts of favorable supply chain-realized productivity and cost synergies.
Overall, we're pleased with the continuation of the strong Q1 margin results into the second quarter which are anchored by core productivity and benefits from the Pinnacle acquisition we expected to see.
Turning to Slide 27.
We've outlined the drivers of our second-quarter adjusted diluted earnings per share growth versus the same period a year ago.
EPS increased 28.6% to $0.81.
The growth in the quarter was primarily driven by the increase in adjusted operating profit associated with the net sales increase and margin expansion, and also benefited from a decrease in net interest expense as we've continued to reduce debt as prioritized.
Slide 28 highlights our significant progress on the overall synergy capture since the close of the Pinnacle Foods acquisition during the second quarter of fiscal '19.
We captured an incremental $27 million in savings during the most recent quarter bringing total cumulative synergies to $246 million.
As a reminder, the majority of total synergy to date have been in SG&A.
Cost-of-goods-sold synergies have started to be a bigger portion of our synergy cash for the last two quarters and we expect them to make up a majority of our synergies going forward.
We remain pleased with the team's progress in capturing synergies and remain on track to achieve our fiscal '22 synergy targets.
Slide 29 shows the strong progress we've made to date to achieve our deleveraging targets.
Since the close of the Pinnacle acquisition in the second quarter of fiscal '19 through the end of the second quarter fiscal '21, we have reduced total gross debt by $2.3 billion resulting in net debt of $9.2 billion.
We are pleased to report that at the end of the second quarter, we achieved our net leverage ratio target of 3.6 times, down from five times at the closing of the Pinnacle acquisition and 3.7 times at the end of the first quarter of fiscal '21.
Strong, consistent improvements in debt reduction, coupled with robust earnings enabled us to achieve this net leverage ratio target ahead of schedule.
Looking ahead, we will continue to be focused on executing a balanced capital allocation policy.
We remain committed to solid investment-grade credit ratings as we continue to be opportunistic using our balance sheet to drive shareholder value such as our increased investment in capex and the recent 29% dividend increase.
Slide 30 summarizes our outlook.
While we're confident in the quarters ahead and that Conagra will continue to excel beyond the COVID-19 environment, the sustained impact of COVID-19 remains dynamic and continues to make near-term forecasting with specificity a challenge.
We expect a continuation of elevated retail demand and reduced foodservice demand compared to historic pre-COVID-19 demand levels.
We are currently seeing both of these trends continue in the third quarter to date.
For the third quarter, we expect organic net sales growth to be in the range of plus 6% to 8%.
We expect Q3 operating margin to be in the range of 16% to 16.5%, implying a year-over-year increase of 30 to 80 basis points.
This estimate includes an expected acceleration of our AMC investment in e-commerce marketing that we started in Q2, reducing the estimated year-over-year Q3 operating margin expansion.
As a reminder, Q3 operating margins are historically lower than Q2 operating margins given the leverage impact on the seasonality of sales.
Given these sales and margin factors along with expected improvement in below-the-line items, we expect to deliver third-quarter adjusted earnings per share in the range of $0.56 to $0.60.
Our third-quarter guidance also continues to assume that the end-to-end supply chain operates effectively during this period of heightened demand.
We are selling the business for approximately $102 million and the expected annualized impact of the divestiture is a reduction of approximately $110 million of net sales and $0.03 of adjusted EPS.
Lastly, we are reaffirming all metrics of our fiscal '22 guidance which also excludes the impact of the pending sale of Peter Pan.
We look forward to presenting again next month at CAGNY where we will provide another update on our progress in executing the Conagra Way.
We hope you'll join us. | q2 adjusted earnings per share $0.81.
sees q3 adjusted earnings per share $0.56 to $0.60.
reaffirming its fiscal 2022 guidance, which does not yet include impact of pending sale of peter pan peanut butter business.
sees q3 adjusted earnings per share is expected in range of $0.56 to $0.60.
organic net sales growth is expected in range of +6% to +8% in q3.
ultimate impact of covid-19 pandemic on company's full year fiscal 2021 consolidated results remains uncertain. | 1 |
We are so pleased you could join us today as we report our fiscal '22 results and take this opportunity to update our longer-term strategy and our multiyear financial outlook.
Today, we will discuss how our business has evolved and how we are planning to drive value over the next few years.
We're not planning to cover all our initiatives or all our business units.
We've tried to be as succinct as possible to focus on the topics and initiatives that we believe are most important for you to understand about our business, our plans and where we believe we're headed, both for fiscal '23 and for the longer term.
First, let's discuss our fiscal '22 results.
Fiscal '22 was another record year.
In addition to record revenue and earnings, our leaders continue to drive new ways of operating and our employees continue to do amazing things in the face of unprecedented challenge and change to support our customers' technology needs in knowledgeable, fast and convenient ways.
As we discussed when we entered the year, we anchored on three concepts we believe to be permanent and structural implications of the pandemic that were and are shaping our strategic priorities and investments.
One, customer shopping behavior will be permanently changed in a way that is even more digital and puts customers entirely in control to shop how they want.
Our strategy is to embrace that reality and to lead, not follow.
Two, our workforce will need to evolve in a way that meets the needs of customers while still providing more flexible opportunities for our employees.
And three, technology is a need and is playing an even more crucial role in people's lives.
And as a result, our purpose to enrich lives through technology has never been more important.
With these concepts in mind, we piloted numerous store formats to test and learn in the past year.
We advanced our flexible workforce initiative and invested in our employees' wellbeing.
We introduced new technology tools designed to support both our customers and also our employees.
And we also launched a bold new membership program called Best Buy Totaltech, designed to significantly elevate our customer experience and drive incremental sales.
We will be talking more about all these topics today.
All of this was against a constantly evolving backdrop.
During the year, we navigated supply chain and transportation challenges, uncertainty as virus peaks rolled across the country and then most recently, the disruption from the Omicron wave.
Our teams did an amazing job against that backdrop, expertly managing supply chain challenges since the beginning of the pandemic to bring in products our customers needed.
During the year, we continued serving our customers digitally at much higher rates.
Our online revenue was 34% of our domestic revenue, and while it declined versus last year, it was up 115% or $8.8 billion compared to two years ago.
At the same time, we also reached our fastest package delivery speeds ever.
We are an industry leader in fast and convenient product fulfillment for our customers.
In fact, the percent of online orders we delivered in one day was twice as high as pre-pandemic levels despite the significant increase in volume during that same time frame.
These record results are driven by the investment decisions we have made in the last several years in supply chain, store operations, our people and technology, many of which we discussed at our investor updates both in 2017 and 2019.
More importantly, these results are driven by our amazing associates across the company.
Over the past 24 months, they have flexibly dealt with rapidly changing store operations as we responded to impacts of the pandemic.
They created safe environments for our customers, and they worked tirelessly to provide excellent service.
In fact, despite all the changes we went through in the last year, we delivered NPS improvements both online and in our stores.
I am truly grateful for and continue to be impressed by our associates' dedication, resourcefulness and flat-out determination.
From a financial perspective, we delivered record revenue and earnings per share.
Our comparable sales growth was 10.4% on top of a very strong 9.7% last year, growing $8 billion over the past two years.
Our non-GAAP earnings per share was just over $10, up 27% compared to last year.
And compared to two years ago, we expanded our non-GAAP operating income rate by 110 basis points.
Our non-GAAP return on investment improved 840 basis points compared to two years ago, and we drove more than $6.5 billion of free cash flow in the last two years.
In fiscal '22, we returned $4.2 billion of that to shareholders in the form of dividends and share repurchases.
We also continued to deepen our commitment to the community and the environment.
Many of you may have had the opportunity to view the video that was playing before the event started.
We continue to believe that our ESG efforts are directly tied to long-term value creation.
And I am proud of all our initiatives, but we only have time for me to cover a few examples today.
We committed to spend at least $1.2 billion with BIPOC and diverse businesses by 2025.
We also committed to opening 100 Teen Tech Centers by fiscal '25.
During fiscal '22, we opened nine to end the year with a total of 44.
These provide teens in disinvested communities access to the training, tools and mentorship needed to succeed in post-secondary opportunities and careers.
In addition, we're building a diverse talent pipeline for jobs of the future.
In terms of the environment, in fiscal '22, we were a founding member of the Race to Zero initiative, committing to accelerate climate action within the retail industry.
We are also driving sustainability through the unique consumer electronic circular economy.
We help keep devices in use longer and out of landfills by leveraging our customer trade-in program, Geek Squad repair services, responsible recycling and Best Buy outlets.
These are initiatives our customers and vendors value and capabilities no one else has at our scale and breadth, and we are honored to be recognized for our work.
Notably, we have placed in the top five on Barron's Most Sustainable Companies list for the past five years in a row.
This ranking recognizes our strong performance across all aspects of ESG.
In addition, we are on the CDP Climate A List for the fifth year, which recognizes leadership in making a positive impact on the environment.
Now, let's move on to our Q4 results.
I am extremely proud of what we accomplished during the fourth quarter.
Our team showed remarkable execution and dedication to serving our customers throughout the important gift-giving season.
This was evidenced by the fact that we drove improvement in year-over-year customer NPS metrics across almost all areas, particularly for in-store, online and chat experiences.
In fact, we saw our best ever customer satisfaction scores for our in-store pickup experience.
Online sales were almost 40% of domestic revenue compared to 43% last year and 25% in Q4 of fiscal '20.
We reached our fastest holiday delivery times ever, shipping products to customer homes more than 25% faster than last year and two years ago.
We are deliberately investing in our future and furthering our competitive differentiation.
This, as we expected, is temporarily impacting our profitability.
The biggest areas of investment in Q4 were our new membership program, technology and Best Buy Health, all core to our future growth potential.
In the face of unexpected change, I remain inspired by the way our teams across the enterprise remain flexible to ensure our customers were able to find the perfect gift.
We remain well positioned as we head into fiscal '23 as the unique technology provider for the home.
I'll turn the meeting over to Matt to cover more details on our Q4 results and fiscal '23 outlook.
Our Q4 revenue was $16.4 billion.
Our domestic comparable sales declined 2.1%, and our enterprise comp sales declined 2.3%.
Revenue grew 8% versus two years ago.
It was only slightly below the low end of our revenue guidance for the quarter due to a few factors.
The first factor was inventory availability.
We expected to have pockets of inventory constraints as we entered the quarter and called out a few areas, including appliances, gaming and mobile phones.
As the quarter progressed, inventory was more constrained than we anticipated within a few categories and brands.
These constraints included some high-demand holiday items, and the categories most impacted were mobile phones and computing.
The second factor impacting our results was Omicron.
The Omicron wave and the resulting high levels of employee call-outs led to a temporary reduction in our store hours in January and to start fiscal '23.
In mid-February, our staffing levels started to improve, and we increased store operating hours for the majority of our stores.
Excluding these two factors, our revenue would have been comfortably in the guidance range we provided for the quarter.
From a category standpoint, on a weighted basis, the top areas with positive comparable sales growth included appliances, virtual reality, home theater and headphones.
We saw comparable sales declines in gaming, mobile phones, tablets and services.
Turning now to gross profit.
Our non-GAAP gross profit rate decreased 50 basis points to 20.2%.
This was about 20 basis points lower than we expected primarily due to increased promotionality.
When comparing to last year, the largest driver was our services category, primarily driven by Totaltech.
Our product margins were largely flat to last year as the benefit from category sales mix was offset by increased promotions.
Higher profit sharing revenue from our credit card arrangement was a benefit to gross profit rate compared to last year.
Lastly, our International gross profit rate improved 210 basis points to last year, which provided a weighted benefit of approximately 20 basis points to our enterprise results.
Our enterprise non-GAAP SG&A dollars grew 5% versus last year, less than our guide of 8% growth primarily due to lower-than-anticipated incentive compensation.
Within our domestic segment, our SG&A dollars increased $139 million.
The largest drivers were: one, advertising, which included campaigns for both holiday and to drive awareness for our new membership offering.
Three, increased store and call center labor that helped drive the record customer satisfaction scores Corie shared.
And four, Best Buy Health, which includes the impact associated with our acquisition.
Before I discuss the fiscal '23 financial outlook, let me spend some time on our new Totaltech membership program.
Totaltech is a near-term investment to drive long-term value.
The thesis is that over time, we will capture incremental product sales from our members that will lead to higher operating income, but as we discussed in prior earnings calls, it does come with near-term profitability impacts.
First, at $199, the stand-alone membership is profitable.
It just isn't as profitable as legacy service memberships due to the breadth of benefits and the cost to fulfill them.
Second, there's a loss of revenue and profit from existing revenue streams that are now included as benefits in the program.
For example, previously stand-alone services like extended warranties and products installations are now included within our Totaltech membership.
We still offer these services on a stand-alone basis or to nonmembers, but you can imagine there's an aspect of cannibalization as members are no longer paying incrementally for these items.
So what does all this mean?
We expect that the gross profit rate of our services category will reset to a new level going forward that is lower than it was prior to launching Totaltech.
The way to drive more operating income despite these lower services gross profit rate is to add far more members than we thought was possible under our previous membership offerings.
The key to increased profit will be through increased volume through a combination of more recurring membership revenue and incremental product purchases of our members.
The number of memberships grew very nicely in Q4, and our plans for fiscal '23 assume continued growth.
But it will take some time to reach the scale necessary to offset the lower gross profit rate I just described.
Therefore, Totaltech remains a pressure in fiscal '23 but we expect it to be a meaningful driver of both higher sales and operating income dollars in fiscal '25 targets.
Now, let's talk about our overall fiscal '23 outlook.
Our guide is anchored around a comparable sales decline in the range of 1% to 4% and a 5.4% non-GAAP operating income rate.
Our non-GAAP diluted earnings per share outlook is $8.85 to $9.15.
Before we discuss the broader assumptions driving our guide, I want to touch on our expected tax rate.
Our non-GAAP effective tax rate is planned at a more normalized level of 24.5% in fiscal '23 compared to 19% rate in fiscal '22.
As you may recall, our Q2 results this past year included a $0.47 diluted earnings per share benefit from the resolution of certain discrete matters.
Now, I would like to share a few important assumptions underpinning our guidance.
First, we anticipate the traditional CE industry to decline in the low to mid-single digits next year as we lap the high levels of growth in stimulus actions from this past year.
In addition, we anticipate the number of store closures to be in the range of 20 to 30, which is consistent with the trend over the past five years.
As I mentioned, our fiscal '23 guidance assumes non-GAAP operating income rate of approximately 5.4% compared to 6% in fiscal '22.
To be clear, the biggest driver of the lower operating income rate in fiscal '23 is our investment in Totaltech.
As I just described, this near-term pressure will drive long-term value for our shareholders.
There are, of course, other factors that we expect to impact our results that for the most part offset each other in fiscal '23.
We do expect higher levels of promotional activity to pressure our gross profit rate, which is partially offset by the favorable impact of expected growth and our monetization of our advertising business or Best Buy ads.
We expect our full year SG&A expense to be lower than fiscal '22 levels.
The largest year-over-year variance is lower incentive compensation expense as we reset our plans after paying out at higher levels in fiscal '22 due to the overachieving of our performance targets.
We expect a lower incentive comp to be partially offset by a few areas.
The first area is higher technology cost primarily due to annualizing spend in fiscal '22.
The second area is higher depreciation and store remodel expense, as Damien will discuss later.
And lastly, we expect to see higher SG&A dollars in support of our Best Buy Ads business.
Finally, as you may have noticed, we are not providing quarterly guidance, but I would like to provide some insight on the assumed phasing for fiscal '23.
Due to the strong first half comps last year, we expect our full year comparable sales decline to be weighted more heavily in the first half of the year.
In addition, we expect to see significantly more year-over-year operating income rate pressure in the first half of the year compared to the back half.
To summarize, the two largest variables for fiscal '23 financial results are the short-term industry declines as we lap high growth in government stimulus and the investment in our new membership program that will drive long-term value.
As we look to fiscal '25, we expect the CE industry will return to the high levels we saw in fiscal '22 and that Totaltech will drive meaningful growth.
I will now turn the meeting back over to Corie to begin our strategic update.
As I noted closing out my Q4 summary, we remain well positioned as we head into fiscal '23.
I'd like to expand on this a bit as we highlight our strategic positioning.
First, technology is a necessity, and we are the unique tech solutions provider for the home.
Second, we have built an ecosystem of customer-centric assets, delivering experiences no one else can.
And third, we believe our differentiated abilities and ongoing investments in our business will drive compelling financial returns over time.
We believe we have the right strategy to deliver growth and value for all stakeholders, and we are excited to go into more detail about our plans.
But first, let's do some level setting.
Our purpose is unchanged, and more relevant today, this minute than ever, our purpose to enrich lives through technology is enduring.
And we have honed our five-year vision.
We personalize and humanize technology solutions for every stage of life.
Technology is no longer a nice to have, it is a necessity, and it is expanding into all parts of our lives and homes.
Working has forever changed.
Streaming content has exponentially grown.
The metaverse is coming to life.
We can power our homes with connected solar panels.
And we can monitor our health, including connecting with the physician, from our living room.
Every aspect of our lives has changed with technology, and we uniquely know how to make it human in our customers' homes, right for their lives.
For example, we will send a consultant to your home for free to optimize the tech you have or add the tech you want.
We can repair your phone's screen and you can try VR headsets while you wait.
You can meet with a fitness consultant in our virtual store, who will match your fitness goals with our fitness products, or you can use our Lively device to connect with a caring center agent who can help you schedule a lift.
From a financial perspective, we delivered remarkable results over the past two years, and we are far ahead of where we expected to be when we set our long-term financial targets back in 2019.
As I mentioned earlier, in the past two years, we have delivered more than $8 billion of revenue growth and improved our operating income rate by 110 basis points to 6%.
We are in a strong position to drive the business forward and deliver growth.
We do not for one minute believe we hit our peak revenue and margin this past year.
As Matt outlined, we do expect fiscal '23 to look different as the industry cycles the last two years of unusually strong demand and we leverage our position of strength to continue to invest in our future.
But in fiscal '25, we expect to deliver revenue growth and expand our operating income rate beyond what we reported in fiscal '22.
As we have always said, in order to deliver these financial results, it is paramount that we stay focused on our goal to remain a best place to work, and we continue to deepen relationships with our customers.
As you can see, our new fiscal '25 targets are materially higher than what we thought just back in 2019.
We now expect to generate approximately $1 billion more in operating income than our original targets.
Given our margin rate, this is considerable growth in operating income dollars.
So what's changed since 2019?
Well, the CE industry is larger than we expected.
Our online mix has nearly doubled.
We have found ways to make our operating model more flexible and efficient while also investing in wages and benefits.
We are accelerating our category expansion, and we have launched an entirely new membership program.
On the flip side, the financial contribution from Best Buy Health is clearer but also a bit longer term than we had originally modeled.
This is based on primarily two things.
First, demand in the active aging business and product constraints were impacted by the pandemic.
Additionally, based on our internal learnings and insights from consumer behavior changes over the past two years, we tuned our strategy to focus on the growing virtual care opportunity, which Deborah will discuss in more detail later.
As we think about our strategy going forward, it is important to look at how dramatically our business has evolved over the past several years.
Here, we use fiscal '15 to give a longer-term view to what a different business we have become.
Most of these changes were already in motion before the pandemic and then accelerated significantly in the past two years.
Let me expand on a few points here.
I already mentioned our fiscal '22 online business was 34% of our Domestic sales.
That is more than $16 billion in sales compared to just $3.5 billion in fiscal '15.
When you look at how we use our stores for fulfillment, the increase in the sheer number of products customers are picking up in our stores is impressive.
This is even more meaningful when you consider the fact that our delivery speed is industry leading, and we cut delivery speed essentially in half over the past several years.
Clearly, customers value our stores and the convenience and choice they provide.
As Damien is going to discuss, we are increasingly interacting with customers via digital channels like chats and video and in their homes.
And finally, membership is incredibly important, both now and into our future.
And our My Best Buy program now has more than 100 million total members.
So with all of that as background, I'd like to tap back to our first key takeaway.
Technology is a necessity, and we are the unique tech solutions provider for the home.
So let's start with some industry context.
The traditional CE industry is large and growing.
There's no perfect external source that tracks our business, so here, we're showing a historical view based on selected government PCE category data.
Our outlook is based on multiple industry forecasts and internal data.
As you can see on this chart, the industry was growing for several years and then accelerated during the last two years.
As Matt mentioned, we expect it to step back this year as the industry absorbs the very high growth of the past two years.
By fiscal '25, we believe it can be back to fiscal '22 levels, which is materially higher than it was pre pandemic.
In addition, we're expanding our addressable market by entering new categories in areas like health and electric bikes that are being disrupted by technology in a good way, as well as areas where we can really complete solutions for customers like indoor and outdoor living.
Jason will provide a bit more detail on these in a few minutes.
As a reminder, this is also a stable industry.
Contrary to some sentiment, technology is no more volatile or cyclical than other large durable goods categories over time, and the last two years have significantly underscored the importance of technology in day-to-day life.
What historically was seen as a want has become a need.
40% of Americans use digital technology or the Internet in new or different ways compared with before the pandemic, and the use of telemedicine is triple what it was in just Q1 of 2020.
The majority of people who started or increased activities like online fitness, telemedicine, videoconferencing and connecting socially with others virtually say they plan to continue this increased usage even after the pandemic.
Terms like home nesting and virtual care have been invented to describe what all of us know so well, that where we work, entertain, receive healthcare and connect has changed and our homes are now central to our lives more than ever before and they're also more tech connected than they ever had been before.
As a result, there is an overall larger installed base of consumers using technology.
People own more tech devices than ever before.
This combination of more devices and more activities also means customers need their tech to work seamlessly every day.
True tech support when the customer wants it underpins living this way and is our unique asset across all these devices.
And technology is extending into all aspects of our home, and we've all grown to depend on it.
This is not a heat-driven category.
It is an industry that is need-based, stable and has been growing.
We firmly believe people will continue to use technology more and both need and want to replace or upgrade their products.
Billions of dollars of R&D spend by some of the world's largest companies and likely some we haven't even heard of yet means innovation is constant, and that innovation drives interest, upgrades and experimentation into the future.
This is not a static industry.
We continue to lead the tech industry with significant high share in high-consideration categories.
What I mean by a high-consideration category, generally higher ASPs and a longer period of time from when you start to think about purchasing to when you actually purchase.
Continuing to grow our share in these large categories like television and computing will always be a cornerstone of our strategy, but to be truly there for our customers and all their technology needs, we need to accelerate our share across other areas of technology as well and also some new spaces.
This is where Totaltech comes in.
On products with lower ASPs and shorter upgrade and consideration cycles, our share is generally lower.
Totaltech creates a new value proposition that benefits customers when they consolidate their technology shopping at Best Buy.
I want to give three examples of a customer journey that illustrate this point.
Let's start with a customer that actually wants to upgrade their kitchen.
They want to buy an entirely new kitchen suite with three pieces.
That customer that has Totaltech does not have to worry about delivery and install.
It's included in the price.
That could be between a $400 and $500 value.
A little bit later in the year, the same customer hypothetically breaks their phone.
They want to get a new iPhone.
When they purchase that iPhone at Best Buy, AppleCare is included.
Just in the first year, that's just under $120 of value.
Then a little bit later in the year, they want to get a new pair of wireless headphones.
If you purchase those headphones at Best Buy, the warranty is also included if you're a Totaltech member.
That's a $30 value.
Examples like these is where Totaltech benefits come to life for our customers and create a reason to make a considered visit to our app, our website, our store and increases Best Buy share across all of the categories on the slide behind me.
Technology innovation never stops.
And even when you look over the past three years, you can see value of the new technology and what it creates for our customers.
During the pandemic, the majority of the focus was around creating products to meet customer demand.
This was a distraction, but even with that, there was significant innovation and value created by our vendors.
The slide behind me highlights an upgrade over a three-year period of similar price points across laptops and televisions.
While I won't hit on every new feature and advancement that happened, I'll highlight a few.
For televisions, you get a full 10 inches more in screen size, almost no Bezel and the ability to navigate your TV with voice if you'd like to.
On the laptop side, you can log in with your face.
It's faster, thinner, lighter and has significantly longer battery life.
These continued evolutionary innovation cycles are never ending, and they drive growth.
They create reasons to upgrade and unlock new and better experiences for our customers each and every year.
In fact, when we look at our customers' behavior, we're seeing a 7% to 15% reduction in the amount of time it takes a customer to get back into a category.
They're coming back to categories faster because of these innovations by our vendors.
I've highlighted how Totaltech and our vendor innovations will drive growth.
Now, I'd like to highlight some macro trends that will also drive opportunities in our business.
I'll start with 5G and fiber.
The expansion of speed and networks in general are really, really good for customers and technology.
You can download a movie in minutes, collaborate with others instantly, access a video game or video content anywhere you want without latency.
These are things that will drive new experiences and growth for our customers.
The next trend is the metaverse and cloud.
Have virtual experiences, play golf with friends or family members virtually, travel to places that you actually can't and have a full experience in the virtual world.
In addition to that, when you look at the virtual world and cloud, there are new experiences that are created.
Previously, you could just play a game on a gaming system and your television.
Now, you can take that same game seamlessly from the system to your phone to your tablet.
In fact, if some of you have children like I do, you're constantly battling the ability for them to play anywhere they want, anytime they want.
The cloud also solves a significant customer pain points.
Previously, our customers would tell us when they wanted to upgrade a computing product, it would take them 60 minutes to get it the exact way they'd want to that would be moving their icons, their data, just getting it the way the old one was and having the features of the new.
Today, with cloud, you simply put in your credentials and in 10 to 15 minutes, it's actually exactly the way you want.
You get all the benefits of the new technology, and you get all of the placement and all the setup of your old product instantly.
That does drive upgrade and it drives interest in customers in upgrading more frequently.
The next trend I would like to talk about is automation and support.
The connected home has been around for years, and it's now moving into automation and support more specifically.
Single-function devices like robot vacuums today.
Tomorrow, they'll move into security of the entire home, communication and assistance for individuals.
This is very, very important as our population ages and people want to stay in their homes longer.
Automation and support is one of the ways where technology can enable people to just do that and accomplish their goals and solve that pain point.
Next, I'd like to talk about customization and personalization.
Customers have always wanted to express themselves, and technology is not excluded from that.
But there has been significant advancement in manufacturing from appliances to cellphones where customers can express themselves with a touch of color, a family photo or any other type of personal expression that they'd like to integrate into the products.
Sustainability is also a significant trend that's important to customers but also very important to Best Buy.
I'll start with a vendor example.
Samsung televisions that we sell in our stores today have what is called Samsung solar cell technology in their remote controls.
This eliminates the need for batteries, which is obviously very beneficial to the environment.
But it also charges off of not only solar but ambient light in the home, and it means that you're never going to have a remote that's out of power.
That solves a significant customer pain point.
Technology like this will expand to more and more categories and drive upgrade cycles.
In addition to that, we want to make sure that we're supporting customers that want to upgrade more frequently.
Today, you see that come to life with our recycling and trade-in programs which are a very important part of our value proposition to customers.
Over time, that will start to move into new usage models that may actually be upfront conversations about exactly how long a customer wants to use a product and when that next upgrade will happen.
Will it be one year?
Will it be two years?
Or will it be three years as we move forward?
Let's watch a video highlighting many of the areas I've talked about and even some new additional areas that will drive growth.
As we look over the past decade, we've had over $12 billion in sales growth with the vast majority coming from large categories like TVs, computing and appliances and a third coming from new categories like wearables and VR, just to name a few.
As we move forward, that innovation will continue, and there will continue to be new categories that don't even exist today.
We're also looking to accelerate that expansion by entering new categories that are aligned with where our customers want us to be and places where Best Buy can solve real customer pain points.
For the next 12 to 24 months, we'll continue to focus on these five areas of expansion.
I'll go a bit deeper on three of these, fitness and wellness, outdoor living and personal electric transportation, in the next few minutes.
I'll start with fitness and wellness.
This is a $34 billion industry that we are uniquely positioned to compete in with our Blue Shirts but also our large product fulfillment network that was built for televisions and appliances.
Our assortment has grown by 650% in the last 12 months, and we are implementing a larger, more premium experience in 90 stores over the next 18 months with dedicated zones for vendors.
Damien will touch on the virtual store a little bit later, but customers today actually have the ability to have a virtual chat or video consultation with a fitness expert.
The next area I'd like to talk about is personal electric transportation.
This is a $3 billion industry with rapid growth.
We've introduced 250 new products this holiday with 500 additional accessories around those products.
We'll be adding physical assortment to 900 stores and a more premium experience in 90 stores over the next 18 months.
We currently offer assembly, and we're in the pilot stages of service and support and repair for our customers.
The last category I'd like to highlight is outdoor living.
This is over a $30 billion industry, and our acquisition of Yardbird, a leading premium outdoor furniture company, provides the ability for us to accelerate this business across a nationwide network.
That acquisition, combined with our strength in outdoor television and audio and new partnerships with leading brands like Traeger, Weber and Bromic, create a comprehensive solution for our customers.
When we couple that assortment with our home consultants and the physical and digital experiences that we've developed for customers, this is a really, really fast-moving category that has the ability to grow.
You'll start to see Yardbird products as fast as this spring in Southern California market, and we're very excited about that.
To reiterate, we expect growth from Totaltech, consistent innovation from our vendors, macro trends that I've mentioned, new product categories that we don't even know about yet and five new areas of expansion to move our business forward.
I'll hand it back to you, Corie.
Obviously, you are the expert.
Back to our second key takeaway.
We have built a unique ecosystem of customer-centric assets delivering experiences that no one else can.
Consumer electronics is a distinctive industry.
The products are constantly evolving, they're connected to networks that are constantly evolving, they all use different operating systems, and they range from small and powerful to large and breakable, often at high price points.
And customers are more comfortable using tech than they have ever been yet.
They also admit it's likely not doing all it could to make their lives better.
Against that backdrop, we have built a unique ecosystem of assets that all work together to create a stickier and more valuable relationship with the customer.
And we're investing in this ecosystem as we pivot against a backdrop of even higher customer expectations.
So anchoring this ecosystem is our expert advice and service.
Customers are excited about tech and want to be confident in their purchase.
We provide that in ways literally no one else can, from our expertly curated assortment to in-home consultations all the way to tech support when your tech isn't working the way you want or trade in and recycling when you want to upgrade.
And then, building on that strength, our Totaltech membership ties these experiences together and provides unique benefits that customers value and no one else can provide.
We then combine those unique experiences with our strength in omnichannel retailing, industry-leading and seamless shopping experiences and services across all channels, including in home, in store, digitally, remotely and virtually.
And finally, all these interactions provide us rich data and insights across customer experiences to create personalized technology solution tailored to the customer-specific technology and needs.
And all this data fuels our business like Best Buy Ads, matching our partners' marketing to the most appropriate audiences based on our first-party data.
When this ecosystem works together, it provides a unique experience tailored to the customer.
It also reaches beyond our consumers into business partners, suppliers and other strategic relationships that leverage our capabilities.
Whether it's our consultative services highlighted on partners' websites or vendors leveraging our in-store pickup to fulfill from their websites, others value our capabilities.
So let me add some color around the first part of the ecosystem.
As I said, customers are excited about tech and want to be confident with their purchase, particularly when it's part of their daily life at home.
So instead of me trying to describe all the parts and pieces to you, I think this video does an excellent job bringing to life the unique ways we provide expert advice and services seamlessly across all our touch points.
[Commercial break]So again, just to reinforce, there is no one else that can provide this type of immersive experience at scale in a world where more and more of our lives are being lived in a way that requires technology.
And we felt it was important to double down on our unique capabilities with an equally unique membership offer.
This represents literally years of customer research and innovation and truly puts the customer at the center of our investments.
Matt talked earlier about the financial implications of our new membership program.
Now, I get to talk about the fun part.
Fundamentally, Totaltech is designed to provide our customers complete confidence in their technology, buying it, getting it up and running, enjoying it and fixing it if something goes wrong.
Matt and Jason already mentioned some of the benefits, but as a reminder, Totaltech includes product discounts and periodic access to hard-to-get inventory, free delivery and installation, free technical support, extended warranties on products and much more.
Because the membership is so comprehensive, it has broad appeal among our customers.
There is truly something for everyone.
And the benefit that's most appealing can vary based on a customer's unique shopping journey or their stage in life.
So let me share some early examples.
I say early because as a reminder, we literally just rolled this program nationally in mid-October.
The benefits associated with purchasing products like product warranty and member pricing are being leveraged the most.
Younger generations are using these benefits, especially AppleCare, at a higher rate than older generations.
This is exciting and important as extended warranties as a stand-alone business was definitely not a growing part of our business or strategy.
And additionally, it's exciting that our employees have embraced this offer.
Realizing the suite of benefits means there is something in it for every customer.
This makes for a more comfortable and natural sales environment and allows the employees to truly focus on the customers' needs.
The VIP access to phone and chat support and access to Geek Squad support and services in general are used more often by older generations, which our legacy plans over indexed on.
And the access to hard-to-get inventory is resonating with some of our most engaged customers who already interact and spend with us very frequently.
That broad appeal is one of the main reasons we rolled out this program.
We have significantly elevated the customer experience by packaging up unique benefits our customers value that no one else can provide, and by doing so, we believe we have made it inconceivable for them to purchase their tech anywhere else.
From a business perspective, of course, the goal is to increase customer frequency and capture a larger share of CE spend.
As a specialty retailer, our customer frequency has a different profile than mass merchants.
As a result, it is even more crucial that we stay in the consideration set as customers are building out their technology solutions.
I am incredibly happy to say that we are indeed seeing increased interactions with our Totaltech customers to the tune of about 60%.
Also, when we look at NPS surveys specifically from customers who are Totaltech members, they are running about 1,400 basis points higher than nonmembers.
From a spend perspective, it's difficult to calculate with precision given the early stage of the membership and our historical customer frequency, but we currently believe customers who sign up for the membership are spending about 20% more than they would have if they did not have the membership.
We already have 4.6 million members.
Now, to be transparent, we auto converted 3.7 million Totaltech support and other legacy support programs.
We have actively enrolled more than 1 million members since launching nationwide in October, and we see a path to double the number of members by the end of fiscal '25.
This membership program is a vital addition to our customer relationship ecosystem, providing an offer that no one else can and interaction data that is incredibly valuable to all aspects of our business, fueling our growth over time.
And to deliver this offer seamlessly, we leverage another part of our ecosystem: omnichannel retailing strength.
It's great to be here with you today to talk about our accomplishments and our plans for this year and beyond across our omnichannel portfolio.
As Corie mentioned earlier, omnichannel retail is a critical component of our strategic ecosystem.
It's the most direct way to connect our strategy to the needs of our customers and employees.
Let's look at the last two years before we dive into where we're going.
These last two years have challenged our employees in ways we could have never imagined.
Powered by our strategic investments, we were able to serve our customers' needs and grow the business.
There are two areas I want to highlight.
First, the connection between our online sales, which expanded to 34% of our total domestic revenue, and the 150% growth we've seen in our virtual interaction across video, chat and voice.
Today, 84% of Best Buy customers use digital channels throughout their shopping journey.
These virtual opportunities have created new ways for us to offer customers the immediate ability to shop with an expert wherever they are.
Second, and also connected to our customers using digital channels throughout their shopping journey, is we've seen a 72% growth in customers who are using our app while in our stores.
This also creates an opportunity for us to build more digital interactions and technology-related solutions to support their needs.
These numbers are amazing.
We could not be more proud of our teams and how they've delivered.
Just as importantly, it gives us an incredible foundation for continued growth and optimism as we look to the future.
Now, from an omnichannel perspective, we look at the combination of customer experience, loyalty plus operating efficiency.
The two main drivers of that and what I'm going to talk about today are how we optimize our workforce and reimagine our physical presence in ways that serve our customers' needs in an ever-growing digital world.
Our focus is on further developing our teammates to give them the skills to help customers inside and outside of our stores, but more importantly, through any number of digital channels at our customers' fingertips.
At the same time, we will optimize our store portfolio, and as Matt mentioned, we will maintain the trend of closing 20 to 30 stores per year.
However, with online penetration growing so rapidly in the last two years, we're making investments in our stores to provide a better, more seamless shopping experience as customers move from online shopping to visiting our stores to video chatting from their home.
So I'll start with our people.
We have significantly improved efficiency and productivity of our store labor model.
We've seen a more than 100 basis point improvement in store domestic labor expense as a percentage of revenue compared to FY '20.
We've also materially increased store productivity over the past two years.
We've done this by reskilling our teammates and making investments that lean into physical and digital shopping experience.
A few examples include our fulfillment improvements, consultation labor and our virtual store.
This allows us to leverage our employees more effectively inside and outside of our stores.
The great news is that as we've made these adjustments, we've maintained a strong NPS in our stores.
These investments in our people have allowed us to help them learn new skills, grow their careers, gain flexibility and realize their dream by keeping them with us longer.
We've increased our average wage rate 20% in the last two years by raising our minimum wage to $15 an hour and shifting some of our employees into higher-skilled, higher-paying roles.
In fact, our average wage for our field employees this year will be over $18 an hour.
Since we've started our flexible workforce initiative in 2020, 80% of our talented associates are now skilled to support multiple jobs inside and outside of our stores, and we're proud of the fact that our field turnover rates remain significantly below retail average and are near our pre-pandemic turnover rates.
Overall, we're in a place we like right now.
We're becoming more efficient without losing sight of delivering amazing experiences for our customers and our employees.
We're going to continue to strike the balance between spend and productivity as we look at the factors that I've just outlined.
Now, an obvious differentiator for our workforce is our Geek Squad team, which continues to deliver an experience that creates repeat customers, builds trust, and drives an incremental spend.
As I showcased earlier, we have nearly 21 million services interactions across in-store and in-home services.
We've significantly expanded our repair capabilities in categories that are important to customers' everyday lives like mobile phone repair.
This work is expanding our customer base.
In fact, 35% of our mobile phone customers are new reengaged with Best Buy.
This is enabled by a technical workforce that has an average tenure of almost nine years and a retention rate at 86%.
No one can match that level of expertise at the scale we can.
That tenure has helped us produce fantastic NPS results in-store, in-home, and through our remote support.
And after we complete the repairs, customers spend 1.7 times more and engage 1.6 times more often across all Geek Squad services.
Geek Squad will be a vital part of our Totaltech initiative, and we'll continue to offer stand-alone services that matter to customers, deepen those relationships and drive frequency.
Now, customers, are also leveraging our expertise through consultations as well, both inside and outside of our stores.
These consultations provide a direct access to customers for our ever-growing set of experts.
Employees who have the skill sets to complete the consultation has grown by 78% last year.
And with each consultation, we can inspire what's possible.
Customers spend 17% more across their lifetime value and they purchase more often when engaged for a consultation.
Customers are loving this experience, and we're seeing strong NPS.
When surveyed 92% of customers say they will likely continue working with their expert.
And when customers engage with one of our consultants or designers, they shop with Best Buy two times more frequently.
So looking ahead, we believe our annual consultations will grow by more than 200% by fiscal '25.
As you saw earlier, we had 45 million virtual interactions across all channels, creating opportunities to engage our customers differently.
We're excited about our virtual store, which just launched last fall.
To date, our virtual store in comparison to historical chat experiences is generating higher close rate, higher sales and a 20% improvement in customer satisfaction.
And that's not all.
Our vendors are extremely excited about it as well.
We started with 17 vendors onboard, and we will end fiscal '23 with over 60 vendors investing in our virtual store.
This is an investment in us and the belief that we're creating a totally differentiating experience.
We're expanding our virtual store and adding more categories like appliances and home theater, and we expect our virtual sales interactions to double by fiscal '25.
So let's talk about ways we're reimagining our store in support of our physical and digital shopping experiences.
We are very excited about the things that we're testing, learning and in some cases, implementing in our stores.
First, let's talk about our experiential store.
In 2020, we launched a test in one of our Houston stores and added two additional locations since then.
Some of the key enhancements include dedicated showcase spaces for some of the new categories Jason mentioned earlier like e-transportation, outdoor living, fitness.
We expanded our Microsoft and Apple shops and dedicated more space to premium experiences like appliances, home theater and audio.
We expanded our Geek Squad presence for more customer interactions and space for repair services.
And we've also enhanced fulfillment capabilities to include exterior lockers, additional space for shipping, packing and fulfilling from our store warehouses.
And we're excited about the performance.
We've seen a 370-basis-point improvement in NPS.
We've seen a steady lift in customer penetration in the retail trade area, as well as overall customer spend.
And we expect to continue to see strong revenue lift in these experiential stores.
And we will remodel 50 locations in fiscal '23 and about 300 locations expected by fiscal '25.
Now, I want to highlight our 16 outlet stores that are sort of open box, clearance, end-of-life, and otherwise distressed large product inventory across major appliances and televisions which might otherwise be liquidated at a significantly lower recovery rate.
These outlets unlock value by alleviating space and capacity from our core stores, and they are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in the landfill.
In FY '22, gross liquidation recovery rate is almost two times higher than alternative channels.
These locations are attracting new and reengaged customers.
16% of customers are new and 37% of customers are reengaged.
In FY '23, we will double the amount of outlet stores, and we'll test expanding our assortments by adding computing, gaming and mobile phones.
As we discussed last year, we launched a test in Charlotte of a new holistic market approach.
And as I mentioned earlier, the ways people are shopping today are entirely different than how they shop two years ago, and our stores and the way they operate need to change and adjust accordingly.
This work in Charlotte is a manifestation of the shopping evolution, and this pilot leverages all of our assets in a forward portfolio strategy across stores, fulfillment, services, outlets, consultation labor, and we bring it all together with our digital app.
Within the test, we are looking at how a variety of store formats across 15,000, 25,000 and 35,000-square-feet locations can serve the customer's needs.
And this summer, we will be introducing a 5,000-square-foot store into the marketplace.
When you look at the before and after map of the Charlotte market, you can see we have reduced our overall square footage by 5% and yet, we've increased our customer coverage in the marketplace from 76% to 85%.
We've also added 260 access points where customers can get their gear and employee delivery covers nearly half of the metro.
So looking ahead, we'll be focusing on using this market to learn in fiscal '23 before we make decisions on what to scale or what not do.
Technology enhancements are at the center of many of the changes I just mentioned, from self-checkout to virtual store, technology supporting our teams and customers in new and exciting ways.
Take a look at this video to see what we're doing.
[Commercial break]As you can see, technology brings it all together in support of our optimized workforce and how our physical locations will enhance the shopping experience inside and outside of our stores.
We're excited about this year and our future as we focus on the combination of customer experience, loyalty plus operating efficiency.
Here is the ecosystem slide Corie and Damien shared, and it's a perfect introduction to Best Buy Health as our work is an excellent example of the Best Buy ecosystem and flywheel.
Today, I will share the strategy of health at Best Buy.
But first, let's see it come to life in this video.
[Commercial break]I hope the video begins to answer the question that I hear often: Why in the world is Best Buy in health?
I understand the question because health is complex, it has a longer return on investment and other companies have not succeeded.
So why will Best Buy succeed?
We didn't build this strategy to be like any other company or to change who Best Buy is.
We built our strategy on Best Buy's strengths, our world-class omnichannel, distribution and logistics, strong analytics, presence in the home and our empathetic caring center agents.
Our strategy is supported by the rapid consumerization of health and two significant trends.
First, technology is moving into health.
We recognize an $80 billion market opportunity for health technology and the desire for consumers to use technology to manage their health.
And second, health is moving into the home.
By 2025, an estimated $265 billion in Medicare services will move into the home and 61% of patients say they would choose hospital care at home.
And Best Buy has long proven we're a trusted advisor for technology in the home.
70% of the U.S. population lives within 10 miles of a Best Buy store, able to shop health and wellness products, speak with our expert blue shirts and utilize our distribution hubs to fulfill their health technology needs.
Geek Squad makes 9 million home visits annually, helping consumers set up technology and perhaps more importantly, teaching them how to use it.
And we have the confidence of our customers and partners as we work to help enhance the health industry.
Our strategy is to enable care at home, building on the strengths in three focal areas.
In consumer health, we provide curated health and wellness products.
In active aging, we offer health and safety solutions to enable adults to live and thrive at home.
In virtual care, we connect patients with their physicians and enable care at home.
Our presence in each of these focal areas creates a flywheel where growth in one adds momentum to the other two.
This is the strength of our story.
Now, let us look at the customer journey.
Jason touched on a few areas of consumer health earlier, and our video introduced you to Angela, a 45-year-old mother and caregiver to an aging father.
You saw her purchase a Tyto Care home medical kit when her son was sick, and Angela can find countless other products to support the health of her family, from weighted blankets to exercise equipment to blood pressure cuffs and more.
These products not only support our customers in their day-to-day health but also serve as an entry to our other two focal areas, active aging and virtual care.
Lively supports adults who want to age independently at home.
Our easy-to-use phones and personal emergency response devices feature one-touch access to our caring center and services like urgent response, fall detection and more, providing patients and caregivers with the peace of mind that care is only a call away.
Last year, we launched our new Lively brand and a Lively partnership with Apple to feature our health and safety services on Apple Watch.
And today, I'm happy to announce Lively on Alexa, which will launch this spring.
Our Lively monthly subscription service provides a consistent revenue stream, and last year, we drove 15% year-over-year growth by adding 348,000 new lives served.
Our caring center agents connected with our customers over 9 million times last year, offering a variety of health and safety services.
So let's jump back to Angela's story.
Angela worries about her father living at home alone, so she purchases a Lively smartphone and an Amazon Echo for her dad from Best Buy, along with a monthly Lively health and safety subscription plan.
Jacob uses his Lively Smart to request a Lyft ride to a doctor's office through a caring center agent.
He had a minor fall at home and uses his Amazon Echo to alert the caring center, who can follow protocol to determine if emergency medical services are needed.
And this patient journey is just one example of the many ways Lively supports active aging adults at home.
Now, let's look at virtual care.
Accelerated by the COVID-19 pandemic, perhaps the most exciting opportunity lies within virtual care, where we enable patients to connect with their care teams.
In November, we acquired Current Health.
Current Health is making inroads into care at home through securing strong partnerships with successful programs at Baptist Health, Mount Sinai, AbbVie, the Defense Health Agency and more.
Our acquisition merges Current Health's FDA-cleared at-home platform with Best Buy's scale, expertise and connection to the home.
Together, we create a powerful virtual care experience.
Jacob is in the hospital with sepsis.
The hospital physician identifies and enrolls Jacob into the hospital's hospital at home program.
Best Buy sets up Jacob's home with the technology needed for remote patient monitoring and trains both Jacob and Angela on how to use it.
This ensures the hospital physician can focus on treating patients rather than being a tech consultant.
This is a job that physicians had to play during the pandemic and it overtaxed our health system.
At home, Jacob is monitored by Current Health's platform and a virtual command center.
The hospital physician checks in daily with video visits to ensure he's healing on track.
The command center coordinates Jacob's home medications and notices a lack of data from his monitor.
After discovering that he's improperly wearing the device, the Geek Squad is deployed to a system.
The platform's algorithm alerts the command center that Jacob has a persistent fever and the on-call health system physician prescribes therapeutic, which is delivered by the pharmacy partner.
When Jacob recovers, the hospital physician discharges Jacob, and Jacob continues to be supported by Lively.
A few of the pieces in this patient journey are still in development, the Geek Squad integrated with Current Health, for example, but this is our direction.
And you can see Best Buy is there for the patient with technology, support and connections to enable care at home.
And we're not building this alone.
We're creating an ecosystem to support consumers in their care-at-home journey.
Consumers are at the heart of our strategy, and throughout a lifetime of health needs, Best Buy is there to help enrich and save lives through technology and meaningful connections.
As I mentioned earlier, our health opportunity creates a flywheel, driving growth in all three focal areas.
Our revenue in fiscal year '22 was $525 million.
We're growing 35% to 45% a year, and we are accretive in fiscal year '27 as the health industry has a longer return on investment.
You've heard details from Corie, Jason, Damien and Deborah about some key areas that give us excitement about the opportunity in front of us.
We firmly believe our differentiated capabilities and focused investments will lead to compelling returns over time.
While fiscal '22 was certainly an amazing year, we see a path to even higher revenue and earnings by fiscal '25.
And as we look beyond fiscal '25, we see even more opportunity for revenue growth and operating income rate expansion as the benefits from our initiatives like Totaltech and Best Buy Health grow even further.
Before I share additional details on our fiscal '25 targets, I would like to review a few guiding behaviors that have been our brand for several years.
First, we plan to fund our growth through the cash we generate to return excess cash to shareholders.
Second, we are committed to leveraging cost reductions and efficiencies to help offset investments and pressures in our business.
Our current target set in 2019 is to achieve an additional $1 billion in annualized cost reductions and efficiencies by the end of fiscal '25.
We achieved approximately $200 million during fiscal '22, taking our cumulative total to $700 million toward the $1 billion goal.
Let me take a moment to reflect on our past performance.
We have talked about our record results over the past couple of years, but it is also important to note that we have had very steady growth in the years leading up to the pandemic.
This past year was the eighth straight year of comparable sales growth.
In addition, we have expanded our operating income rate, earnings per share and ROI.
We expect our revenue in fiscal '25 to be in the range of $53.5 billion to $56.5 billion.
This range reflects a three-year compound annual growth rate of approximately 1% to 3%, despite the anticipated decline in sales in fiscal '23.
I would also note that due to expected store closures, our comparable sales CAGR would be approximately 2% to 4%.
There are a few key assumptions underlying the revenue expectations.
First, as Corie shared, we believe the consumer electronics industry will remain significantly higher than it was pre-pandemic, and we expect that fiscal '25 will be back to a level similar to fiscal '22.
Second, we believe we have an opportunity to capture even more market share than we have in the past.
This is due to growth from Totaltech and the store initiatives that Damien talked about.
As it relates to Totaltech, we believe that the combination of membership revenue and incremental purchases by members will add approximately $1.5 billion in revenue by fiscal '25 compared to fiscal '23.
This is a net impact.
So it incorporates the impact of cannibalizing other stand-alone services now part of our membership offering.
Of course, we also expect revenue growth from Best Buy Health and the expansion into additional categories that Jason shared earlier.
As we move to our fiscal '25 operating income rate outlook, we expect to expand our rate to a range of 6.3% to 6.8%.
As we have highlighted, Totaltech is currently pressuring our fiscal '23 operating income rate.
Health has also been an area of investment for us over the past few years.
However, as each of them scales, we expect them both to meaningfully contribute to our fiscal '25 rate outlook.
We also see opportunities to lean in even further on capabilities like our in-house media business, Best Buy ads, which as Corie mentioned earlier, is fueled by our first-party data.
We expect this business will benefit our fiscal '23 operating income with benefits increasing in the out-years.
In addition, we expect to see rate benefits from our continued focus on finding cost efficiencies that benefit both gross profit and SG&A.
Damien highlighted a number of strategies that are part of this effort.
As we've discussed over the past few years, technology will be critical in unlocking many of these opportunities.
Of course, there are areas where we will likely see pressure on our rate in the future.
The first example of this is pricing.
Throughout most of the pandemic, the level of promotions in our categories has been well below levels of fiscal '20.
This has been largely a result of higher demand and more challenged or constrained inventory environment.
We have seen pockets of promotional activity increase over the past two quarters, and our belief is that the promotions will continually progress back to fiscal '20 levels.
A second area I would highlight is increased spend in technology in our store portfolio.
As we have shared over a number of quarters, our technology spend has been increasing in support of our initiatives and overall omnichannel experience.
In addition, we expect more depreciation expense from our capital investments in our stores.
Lastly, there are a few other factors we will continue to assess, but at this point, don't see as being material to our rate in fiscal '25 compared to fiscal '23.
First, from a store labor standpoint, we expect to maintain expenses at a similar rate of revenue.
We will continue to invest in higher pay for our employees, but expect to balance the higher wages to efficiencies, leveraging technology and more flexible workforce.
Second, we do not expect channel mix to have a material impact to our rate.
As Damien shared earlier, our outlook assumes closing 20 to 30 stores per year through fiscal '25.
This assumption reflects our belief that the online channel mix will grow approximately to 40% in fiscal '25.
We will continue to apply a rigorous process for lease renewals to ensure we are comfortable with the financial return and overall customer experience.
Currently, the vast majority of our stores are cash flow positive, and we believe are essential for us to serve our customers.
I'll move next to our cash flow and our capital allocation approach.
To start with, we have been generating healthy levels of free cash flow for several years, which provides us ample room to fund our growth investments.
Our average annual free cash flow over the past five years is more than $2.3 billion.
Our capital allocation strategy has been consistent for several years.
Our first priority is to reinvest in our business to drive growth, highlighted by the strategies you've heard today.
This includes both capital expenditures and operating expense investments.
Next, we may explore additional partnerships and acquisitions if we believe they will accelerate our ability to achieve more profitable growth.
We also plan to continue to be a premium dividend payer and return excess cash through share repurchases.
Let me quickly expand on a few of these areas.
We expect our annual capital expenditures to increase to a range of $1 billion to $1.2 billion over the next three years.
Earlier, Damien outlined a number of changes to our stores to further our strategy.
Consistent with our iterative approach, we will test, learn and deploy once we have vetted anticipated returns of our initiatives.
Technology investments are expected to remain similar to fiscal '23, simply decreasing as a mix of our capital deployment.
Our targeted dividend payout remains in the range of 35% to 45% of prior year's non-GAAP diluted earnings per share.
Lastly, this year marked a record level of share repurchases at $3.5 billion.
In fiscal '23, we plan to spend approximately $1.5 billion on share repurchases.
So with that, let me turn the stage back over to Corie.
Extraordinary ecosystems have formed over the past 20, 30, 40 years as digital has transformed every aspect of how we all do business.
That same transformation is happening in our homes, meaningfully accelerated in the last two years.
And while we started as a music retailer selling fun-to-have products, we're now the only company built around the same extraordinary transformation of technology in our lives and in our homes.
While others sell some of the same products we do, we alone offer the complete technology solution across manufacturers and operating systems.
We are the only company in all channels and at scale that can do everything from design your personalized hardware and software solution in the home, to install and connect all of it, to keep it working when there are any issues from unreliable networks to broken screens.
These assets appeal not only to our customers, but they are also unique and investable for our marketing partners, technology vendors, small business and education relationships and other strategic connections.
As we look to the future, we see technology as a permanent and growing need in the home, constantly evolving as the world's largest companies innovate with new use cases around the metaverse, transportation, green electricity and health, just to name a few.
We have a unique value creation opportunity into the future and are investing now as we have successfully invested ahead of change in our past to ensure we pivot to meet the needs of our customers and retain our exclusive position in our industry.
We are excited to help customers enrich lives through technology in ways no one else can.
And with that, we will break for 10 minutes before beginning our Q&A session.
We are excited to begin the Q&A portion of our event, which we expect to run approximately 45 minutes.
Many of you spent time with Rob Bass and may know that he recently announced that he is stepping away from a life in retail to pursue some other passions as we have been discussing for quite some time.
That incredible work extended to his ability to bring in top-tier talent.
One example of that is Mark Irvin, who came to Best Buy in 2013, specifically to work with and learn from Rob.
Mark has been an instrumental part of the team that has led our supply chain transformation and is ready to use his lifetime of knowledge in the space to continue to advance our industry-leading supply chain efforts.
We are thrilled to have Mark Irvin taking over the reins in supply chain.
And we've invited him to join us for Q&A.
So operator, we are now ready for our first question. | sees fy adjusted earnings per share $3.58 to $3.62.
sees q4 adjusted earnings per share $1.00 to $1.04 excluding items.
q3 revenue rose 9 percent to $3.2 billion.
now expects full-year u.s. gaap earnings per share of $2.82 to $2.86 and adjusted earnings per share of $3.58 to $3.62.
expects full-year 2021 sales growth of 7% to 8% on a reported basis.
baxter international - worldwide sales in q3 totaled about $3.2 billion, a year-over-year increase of 9% on a reported basis. | 0 |
Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer.
During today's call, we will review our fourth-quarter 2020 financial results and discuss our financial guidance for the first quarter of 2021 and full-year 2021.
The guidance we will provide today is based on our assumptions as for the macroeconomic environment in which we will be operating.
Those assumptions are based on the facts we know today.
Many of these assumptions relate to matters that are beyond our control and changing rapidly including, but not limited to, the time frames for and severity of social distancing and other mitigation requirements, the continued impact of COVID-19 on customers' purchasing decisions, and the length of our sales cycle particularly for customers in certain industries.
We'd also like to point out that the company presents non-GAAP measures in addition to, and not as a substitute, for financial measures calculated in accordance with GAAP.
All financial figures we will discuss today are non-GAAP except for revenues, net income; remaining performance obligations or RPO, and current RPO or CRPO.
A replay of today's call will also be posted on the website.
Let me begin by extending my hope that you and your loved ones are healthy and safe.
Needless to say, we delivered a market-leading 2020.
We significantly beat expectations across the board, bringing great momentum into the new year.
I could not be prouder of our team's execution.
We delivered over 30% organic top line growth, 25% operating margins and $1.4 billion in free cash flow, just an outstanding performance and a testament to our ServiceNow strong culture.
Throughout the year, we led with courage and conviction.
We took care of our team, our customers and our communities.
And most importantly, we led with ServiceNow's purpose to make the world of work better for people.
We strive to see the world for our customer's eyes with empathy to address their needs.
The workflow revolution is happening, and the pandemic is accelerating digital transformation.
Every business needs speed, agility and resilience, and every C-suite leader wants to deliver great experiences for their employees and their customers.
Businesses are changing the way they operate.
They need to deliver fierce customer loyalty and deep employee engagement to win.
It's all about people, empathy at mass scale as the business imperative of the 21st century.
The secular tailwinds of digital transformation, cloud computing and business model innovation have all intersected at a perfect moment in time.
A paradigm shift is happening worldwide.
In 2020, for the first time in history, we saw digital transformation spending accelerate despite GDP declining globally.
Digital investments are at an all-time high and are expected to continue growing.
According to IDC, worldwide digital transformation investments will total more than $7.4 trillion by 2044.
the digital economy is firing on all cylinders.
ServiceNow is the platform company for digital business.
The Now Platform, what I call the platform of platforms, offers the speed, flexibility and innovation companies need.
Our simple low-code app development enables fast workflows to solve any business challenge, delivering consumer-grade digital experiences.
And Now Platform enables easier and faster implementation, delivering unbeatable time to value and fast ROI.
That's the beauty of the Now Platform: One platform, One data model and One architecture.
We seamlessly integrated all of this and through our system.
And that system integrates seamlessly with all systems of record that matter most to our customers.
We deliver workflows through their preferred collaboration platform as well.
We give our customers the freedom of choice to use their preferred tools and the unique ability to build apps at record speed.
Hungry and nimble is a core ServiceNow value.
It's proven now or never.
We are grateful to be in such a strong position at such a pivotal moment, and we are hungry.
We are eager to use our strengths to help our customers succeed, help make our community stronger and help create great experiences for people.
We are seeing an extraordinary expansion of use cases in our business.
Health care organizations are using ServiceNow to improve operations and service delivery, which means better outcomes for people.
St. Jude Children's Hospital has been on a journey to accelerate progress toward finding cures and saving children.
In 2020, COVID-19 created a significant headwind to that mission.
With much of the hospital staff required to work from home, the need to digitize manual workflows became more important than ever.
The hospital leveraged ServiceNow's low-code app engine and innovation to integrate disparate systems and build custom end-to-end workflows, ultimately allowing them to ensure seamless delivery of clinical services.
Jude's Children's Hospital and everybody was moving toward their goal.
We're also proud to be supporting NHS Scotland in their efforts to vaccinate 5.5 million citizens.
NHS Scotland is using the Now Platform and our customer workflow to deploy a customized solution designed to meet their specific needs.
Deployment took only six weeks, showing the agility of the Now Platform.
ServiceNow is enabling a comprehensive solution for the schedule and reporting of vaccination for Scotland's most vulnerable citizens.
Within 12 hours of rollout, NHS Scotland booked over 220,000 appointments.
So as you can see, it's not just about business workflows.
It's about real people, enterprise digital transformation with how every organization in every sector in every geo are adapting, growing, creating new business models and empowering their people to be productive in any environment and in condition.
That's modern, agile, resilient business at work.
And it's being powered by the Now Platform.
Our unique platform and innovative product suite, our strong brand, high customer satisfaction and compelling value proposition are the differentiating factors and competitive advantages fueling our performance.
Our Q4 results are testament.
We dreamed big and delivered.
We grew billings by more than 40% year over year organically.
We delivered 89 deals greater than $1 million and now have close to 1,100 customers paying us over $1 million annually.
Department of Veteran Affairs.
Deal sizes overall keep getting larger.
Our renewal rate remained best in class at 99%.
Here are some key customer wins from Q4.
We signed a multiyear and multi-product strategic deal with AT&T.
They are transforming by focusing on broadband connectivity, 5G and software-based entertainment while relentlessly focusing on digital, consumer preferences and experiences.
We're delighted to work with AT&T Communications in its transformation.
ServiceNow's AI-powered platform and service operations product lines will provide AT&T accurate and real-time operational visibility into every layer of the network fabric and help deliver the best-in-class customer experience, better experiences for people enabled by ServiceNow.
One of the U.K.'s big four banks is using multiple ServiceNow products, including our purpose-built new financial services operations product to help transform the way it operates and to deliver better customer experiences.
The bank has seen a 70% efficiency and improvement of payment processing by integrating the Now Platform into its core banking systems.
With ServiceNow, this bank implemented new automated processes in 60 workdays.
In their words, employees moved from cut and paste, swivel chair manual processes to efficient, automated workflows.
In one case, employees went from managing 10 requests an hour to 1,000 requests in three minutes on the Now Platform, better experiences for people.
PayPal recently expanded their relationship with ServiceNow as a key partner for elements of their digital transformation.
And we're proud to have expanded our relationship with Nike, who is using the Now Platform to create better customer and employee experiences.
and USAA in financial services.
And the list goes on and on.
I hear so many ServiceNow success stories every day.
Companies are onboarding thousands of people in a work from home environment, making them feel productive and part of the team from day one.
Customers are going live on the new platform in days, not months, making a difference for people now, not next month or next year.
More productive employees, happier customers, more efficient operations, there is not a CEO on the planet who doesn't want that.
The Now Platform delivers.
These examples show how technology is no longer supporting the business technology in the business.
Our IT leadership in workflows gives us a uniquely strong foundation to be the leading platform for digital transformation across the enterprise.
In Q4, IT workflow products remained strong.
ITSM delivered 17 deals over $1 million.
Our AI and machine learning capabilities embedded within our Pro SKU continue to resonate with our customers.
ITSM Pro penetration is now over 20%.
And the AI/ML capabilities of our Pro SKUs are automating processes to allow people to focus on the work that really matters.
We saw a three-time increase in usage of our virtual agent technology in 2020.
And our Element AI acquisition underscores our commitment to being the leader in AI-enabled workflows.
Element AI's deep bench of world-class scientists and practitioners will accelerate our AI innovation on the Now Platform, delivering not only better capabilities for it, but for employee and customer experiences as well.
ITOM was included in 16 of the top 20 deals and had 15 deals over $1 million.
Risk had a very strong Q4, booking more wins than all of the prior year combined.
Our ability to manage risk is really resonating with customers.
ServiceNow is no longer viewed as back-end IT-oriented solution.
We're now seen as a strategic partner that impacts the entire business.
Customer workflows is our next $1 billion-plus market opportunity for ServiceNow, and Q4 showed strong momentum.
Customer workflows were included in 11 of our top 20 deals, driving such wins as AT&T.
Ten of our customer workflow deals were greater than $1 million.
In this pandemic, the employee experience is more important than ever, and our employee workflows is seeing strong demand.
In Q4, 11 of our top 20 deals included employee workflows.
The pandemic is creating the greatest workflow challenge of our time, and ServiceNow is responding with agility speed and continuous innovation.
We began last spring, as you'll remember, with our emergency response apps helping the state of Washington and many others respond to COVID.
We fast followed that release with our Safe Workplace suite of apps that has demonstrated the power of the Now Platform and great employee workflows that we can deliver very quickly.
In fact, more than 900 organizations now have downloaded the suite already.
This week, we just launched the first in a suite of planned vaccine administration applications to deliver out-of-the-box functionality for our customers.
Our comprehensive approach enables workflow solutions to the complex challenges of vaccine distribution, administration and monitoring.
As we have done with Safe Workplace, we will be delivering continuous innovation with our vaccine administration management applications.
I'm excited to announce that the state of North Carolina Department of Health and Human Services is already leveraging the ServiceNow platform to power its COVID vaccine management system to help quickly and efficiently vaccinate 10 million North Carolinians.
President Biden has declared the distribution of COVID vaccines a top priority for his administration.
This is one of the great workflow challenges of our time.
As we are doing right now in Scotland, North Carolina and many other places, ServiceNow is ready to ensure vaccine distribution, administration and monitoring that it's simple, it's fast and it's effective.
It will be so at the federal, state and local level.
In summary, we had an outstanding close to 2020, and we are not slowing down.
We are changing the world one workflow at a time, and our vision is really resonating.
C-level executives realize that behind every great experience is a great workflow.
Our company is hitting on all cylinders.
In 2020, we grew our global workflows by 26%, hiring 3,000 people in 25 countries, with most hired and onboarded digitally.
We are hiring incredible talent, including some of the greatest minds in the AI industry.
Our culture is incredibly strong.
Our employee engagement is at historic highs.
So too is our employee retention.
Our brand is strong.
C-suite awareness increased in double digits.
Our innovation pipeline is robust.
We delivered 70% more features and innovations on the platform in 2020.
Our partner ecosystem is expanding.
IBM, Microsoft, Accenture, Deloitte, EY, KPMG and all the great partners in India, and many others have joined the workflow revolution with us.
Together, we're bringing the innovation speed of a start up with the scale and reach of a rapidly growing $5 billion-plus pure-play SaaS company.
And our RPO is nearly double that at $9 billion.
We're the only born in the cloud software company to have reached this size with our large-scale M&A.
And we have a clear path to achieve our $10 billion revenue target.
We are also deeply committed to making the World of work work better for people to helping our customers succeed.
We are deeply committed to making the world work better, too.
Gina will share more about our focus on elevating our global impact.
I'm incredibly proud of our just announced $100 million investment in an impact fund benefiting underserved communities.
And we're deeply committed to being a leader in building a diverse, inclusive workforce in which everyone feels that they belong.
Because diverse teams with an indomitable will to win create great companies.
ServiceNow is such a company, and we are well on our way to becoming the defining enterprise software company of the 21st century.
That's our dream, and we will pursue it tirelessly with courage, passion and conviction.
Over to you, Gina.
Happy New Year, everyone.
I want to start off by echoing Bill's praise for all the employees of ServiceNow.
It has been a year of unprecedented challenges, but the team has remained focused on executing and meeting the needs of our customers.
I couldn't be more impressed with our resilience, which is a testament to our great culture here at ServiceNow.
We exceeded the high end of our subscription revenues and subscription billings guidance, which carried through to strong free cash flow generation.
Q4 subscription revenues were $1.184 billion, representing 32% year-over-year growth, inclusive of a three-point tailwind from FX.
Q4 subscription billings were very strong at $1.828 billion, representing 41% year-over-year growth and $183 million beat versus the high end of our guidance.
Adjusted growth was 38% year over year.
The outperformance was driven by tremendous execution from our sales team, which resulted in significant net new ACV upside for the quarter as well as $80 million of billings pulled forward from 2021 due to early customer payments.
We believe the high levels of early payments were onetime in nature as a result of customers having excess cash at the end of the year, given the incremental cost savings enterprises saw from COVID.
Excluding these early payments, normalized Q4 billings would have grown 35% year over year, still well ahead of our guidance.
Remaining performance obligations, or RPO, ended the quarter at approximately $8.9 billion, representing 35% year-over-year growth.
And current RPO was approximately $4.4 billion, representing 33% year-over-year growth.
FX was about a three-point tailwind.
The traction we are seeing in our top line results reflect our focus on meeting the needs of our customers and their employees.
As Bill noted, the workflow revolution is under way and is centered around the best experiences.
And that's the Now Platform's super power, the ability to deliver workflows that create those great experiences for people.
The Now Platform is playing a critical role in accelerating digital transformation.
We're treating our customers as partners, listening and learning about their challenges so we can help solve them.
We aren't selling point products.
We're providing them with comprehensive solutions with measurable results and quick time to value.
Better together, that's the power of our portfolio.
It's this attention to our customers' needs that's driving our best-in-class renewal rate of 99%, demonstrating the stickiness of our business as the Now Platform remains a mission-critical part of our customers' operations.
Our sales teams continued to win bigger deals in Q4, including our largest deal ever, which is three times the size of our previous largest deal.
We closed 89 deals greater than $1 million in ACV in the quarter, with average deal sizes up 18% year over year.
In 2020, we added nearly 700 net new customers, ending the year with almost 6,900 enterprises.
The number of customers paying us $5 million or more in ACV grew over 40% in fiscal 2020.
Customers are realizing the strategic value of combining ServiceNow IT workflows with everything from HR, CSM and our App Engine to deliver greater value across the enterprise.
Our ability to land new logos and expand our existing relationships amid a pandemic further validate the strength of our platform and the value we're delivering to enterprise C-suite.
Q4 operating margin was 22%, a 100-basis-point beat versus our guidance, driven by our strong top line outperformance.
Year over year, our Q4 operating margin was consistent with last year as lower T&E expenses were offset by planned incremental R&D investments and marketing spend on pipeline generation.
Our free cash flow margin was 45%, up 900 basis points year over year, driven by lower T&E spend and strong collection.
For full year 2020, operating margin was 25%, up 300 basis points year over year.
And free cash flow was 32%, up 400 basis points year over year.
Together, these results show the power of our business model and our ability to drive a balance of growth and profitability.
Before I move to guidance, I want to give a brief update on the macro trends we're seeing in the business.
The highly affected industries we outlined early last year, which represented about 20% of our business, continue to see macro headwinds but remained resilient.
Three of our top 20 deals in the quarter were from highly impacted industries, including retail, automotive and energy.
We do expect headwinds in some severely impacted industries to persist in 2021.
However, retention of existing customers remained very strong in Q4.
Overall, we're entering 2021 with strong secular tailwinds created by a surge in demand for digital transformation.
Our pipeline continues to look healthy, and our brand continues to resonate with enterprise leaders.
ServiceNow is exceptionally well positioned to seize this opportunity.
We have the unique platform and innovative product suite businesses need, the workflow standard for enterprise transformation.
For transparency and clarity, I'd like to call out a few items.
First, as I noted earlier, we saw $80 million in early payments from customers in Q4, which was an approximately 200-basis-point tailwind to full year subscription billings growth in 2020.
These result in a more significant headwind of about 350 basis points for 2021 billings growth.
To be clear, these early payments have no effect on the timing of revenue.
We've also previously talked about how early renewals and success with very large customers were impacting billing cycles as they can add additional volatility to timing and duration.
This makes billings a less reliable leading indicator of top line growth.
Given this noise and to provide investors with even greater transparency, we're introducing quarterly CRPO guidance.
We believe CRPO will provide better visibility and is a more consistent indicator of business performance, normalizing for timing and duration noise.
We will continue to provide billings guidance throughout 2021 as a transition period.
Second, the need to digitally transform has been accelerated by the current macro environment, creating a very large opportunity for ServiceNow.
With the savings we are recognizing from our more efficient operating environment, we're continuing to invest in R&D and quota-bearing resources to drive innovation and pipeline to fuel our tremendous organic growth engine, ensuring that we maintain our market leadership and are well positioned to take advantage of the digital acceleration.
These investments include those we were making in AI, such as the acquisition of Element AI.
Similar to previous investments and successful growth initiatives like our Pro Skus or geographic expansion, we will be disciplined about our spend.
Beyond our business investments, we will also be investing in people and communities.
We've always been focused on diversity, inclusion and belonging.
And as Bill noted, we recently announced our first ever $100 million investment in a racial equity fund to build equitable opportunity for Black communities.
This investment is expected to earn a solid return while facilitating sustainable wealth creation through homeownership, entrepreneurship and neighborhood revitalization.
Finally, COVID cases have been spiking in recent weeks, and some regions have reentered lockdown protocols.
While we haven't seen any significant impact on our business, we will continue to monitor and be transparent in our disclosures throughout 2021.
With that in mind, for Q1, we expect subscription revenues between $1.275 billion and $1.28 billion, representing 28% to 29% year-over-year growth, including a four-point FX tailwind.
We expect subscription billings between $1.31 billion and $1.315 billion, representing 24% to 25% year-over-year growth.
Excluding the early payments from customers in 2020, our Q1 normalized subscription billings growth outlook would be 32% year over year.
Growth includes a net tailwind from FX and duration of four points.
We expect CRPO growth of 32% year over year, including a five-point FX tailwind.
We expect an operating margin of 25% and 202 million diluted weighted outstanding shares for the quarter.
For the full-year 2021, we expect subscription revenues between $5.48 billion and $5.5 billion, representing 28% year-over-year growth, including a three-point FX tailwind.
We expect subscription billings between $6.205 billion and $6.225 billion, representing 25% year-over-year growth.
Excluding the early customer payments in 2020, our 2021 normalized subscription billings growth outlook would be 28% to 29% year-over-year growth.
This growth reflects an acceleration in net new ACV in 2021, and it also includes a net tailwind from FX and duration of two points.
We expect subscription gross margin of 85%, reflecting some federal and public sector customers moving to our newly launched Azure offering as well as increased support for customers impacted by new and evolving data residency requirements.
We expect an operating margin of 23.5%, representing 150-basis-points expansion off of our pre-COVID 2020 run rate.
I would note that this is also an incremental 50 basis points more than the 100 basis points of expansion we target each year.
Finally, we expect free cash flow margin of 30% and 202 million diluted weighted outstanding shares for the year.
In summary, in 2020 we delivered a combination of both strong top line growth and profitability, an incredible accomplishment in a COVID environment.
Our outstanding results continue to demonstrate our strong product portfolio, our focus on building deep customer relationships and our commitment to enabling their digital transformation.
We're delivering great experiences that drive powerful employee engagement, fierce customer loyalty and significant productivity gains.
We are the platform company for digital business.
I'm extremely proud of our team's performance and our unrelenting execution in a turbulent year.
We're well on our way to becoming a $10 billion revenue company on the strength of incredible organic innovation.
I'm excited about the opportunities ahead of us in 2021. | subscription revenues of $1,330 million in q2 2021, representing 31% year-over-year growth, 27% adjusted for constant currency. | 0 |
Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time.
We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question.
Before I get into the slides, I would like to share some perspective on our first quarter.
As you will see in the results, we are benefiting from our diverse portfolio and are continuing to execute on our margin expansion plans.
While markets have been very dynamic over the past year, we are seeing improving conditions across the majority of them.
Against this backdrop, we are demonstrating not only the resiliency of our operations, but also the ability to drive organic content growth ahead of our markets while expanding operating margins and demonstrating strong free cash flow generation that is in line with our business model.
We are positioned to continue to benefit from secular trends and growing markets, while driving the margin expansion plans that we've highlighted to you.
And you'll see the benefit of these efforts in our first quarter results, as well as our guidance for the second quarter.
With that as a quick backdrop, let me now frame out some of the key messages of today's call.
First, I am very pleased with our execution in the first quarter and I believe our teams delivered strong results.
We delivered sales growth of 11% and adjusted earnings-per-share growth of 21% year-over-year, demonstrating the strength and diversity of the portfolio and the benefits from our operational improvements.
Our sales were ahead of our expectations in each segment, but with the greatest outperformance in transportation, where we continue to generate strong content growth from electrification of the powertrain as well as increased data in the vehicle.
We continue to demonstrate our strong cash generation model with our quarter-one free cash flow being at a first quarter record of approximately $530 million.
We continue to expect approximately 100% free cash flow conversion to adjusted net income for this fiscal year.
And as we look to our second quarter, we are expecting our strong performance to continue.
We expect sales and adjusted earnings per share, similar to the first quarter, at approximately $3.5 billion of revenue and a $1.47 in earnings per share.
And like in the first quarter, we again expect double-digit sales and adjusted earnings-per-share growth year-over-year.
Now, I'd like to take a moment to discuss our performance relative to where our markets were in the pre-COVID timeframe of our fiscal 2019.
And we do hope this will provide a baseline for evaluating our performance and progress this year.
At the overall company level, our revenue is approximately back to pre-COVID levels, despite the majority of our markets being below 2019 levels and I'd like to give you some color by the three different segments.
In our Communications segment, we have seen strong improvement in our end markets.
And this has helped enable sales to recover above pre-COVID levels and for example, in Data and Devices as well as in Appliances, we're benefiting from continued data center build-outs and home investments respectively.
In our Industrial segment, it is a very different environment.
We have markets that continue to remain weak as a result of COVID impacts.
Commercial layer and medical markets and car sales are still well below pre-COVID levels.
However, what we are seeing is it does look like order patterns are indicating that we could be touching along the bottom in both of these businesses and we could see some improvements later in the year.
And in our Transportation segment, our Auto and Commercial Transportation businesses are now generating revenue above the levels we saw prior to COVID, even though global auto and truck production is still forecasted to be below fiscal 2019 levels.
Content growth and share gains have driven the outperformance, reflecting our leadership position in these markets.
TE products and technology are designed in the next generation of sustainable vehicles at every leading OEM worldwide.
The real proof of the traction is our content-per-vehicle progression.
In fiscal 2019, our content per vehicle in Auto was in the low 60s and it's now trending into the low 70 range.
As consumer adoption increases for hybrid and electric vehicles and we continue to bring more innovation to our customers, we expect our content per vehicle to expand into the 80s over time.
What surprises is that consumer preference continue to drive the features and the technology and we will continue to benefit as vehicles become more safe, green and connected, driving more content for connector and sensing solutions.
While I am pleased with our results and the progress that we've made operationally, I'm even more excited about the sales growth and margin expansion opportunities that we still have ahead of us.
We continue to execute on our margin expansion plans in Transportation and Industrial that we started prior to COVID and accelerated during the pandemic.
I'm also very proud of the margin progression in Communications, which has offset the volume-related pressure that we're seeing in Industrial as a result of the market impacts due to COVID.
Quarter-one sales of $3.5 billion were better than our expectations, up 11% on a reported basis and 6% organically year-over-year.
We had 12% organic growth in both Transportation and in Communications with growth across all businesses in those two segments.
Industrial segment sales were down 8% organically due to the COVID-related impacts I already talked about.
During the quarter, we saw orders of $4 billion and this was up 25% year-over-year, reflecting an improvement in the majority of the end markets we served and I'll come back to orders in a couple of slides.
From an earnings per share perspective, our adjusted earnings per share was $1.47.
This was up 21% year-over-year.
It is a strong operational performance where we showed adjusted operating income being up approximately 25% year-over-year.
As we look forward, we expect our strong performance to continue into our second quarter, with sales and adjusted earnings per share being similar to first-quarter levels despite lower sequential auto production.
For the second quarter, we expect sales to be approximately $3.5 billion and this is up approximately 10% year-over-year on a reported basis and mid-single digits organically.
Similar to our first quarter, year-over-year growth will be driven by Transportation and Communications, partially offset by an organic decline in Industrial.
Adjusted earnings per share is expected to be approximately $1.47 in the second quarter and this will be up 14% year-over-year with adjusted operating margin expansion included in the earnings performance.
For the first quarter, our orders will approximately $4 billion with a book-to-bill of 1.15.
I would like to highlight that this level of orders reflects improvements in a number of our end markets, as well as some supply chain replenishment.
As we see markets improving, it is not surprising that our orders reflect the impact of supply chains being replenished after the shutdowns that occurred in the U.S. and Europe in the third quarter of last year.
We are also seeing customers placing advanced orders in some cases due to product constraints in the broader electronic component categories like semiconductors and certain passive components.
And the guidance that we give does factor in the impacts of these supply chain dynamics.
In looking at orders by segment, on a year-over-year basis, Transportation and Communication orders both grew 36% with broad-based growth across all businesses.
Industrial orders declined slightly year-over-year, but on a sequential basis, we did see orders grow in all businesses in each segment.
So, let me also add some color on what we're seeing in orders from a geographic perspective and I'll provide this on an organic basis.
In China, our orders were up 33% in the first quarter with growth, driven by Transportation and Communications.
We are benefiting from our strong position in Auto, Commercial Transportation and Appliances and continue to see strong improvement across those markets in China.
We also saw 26% year-over-year growth in Europe, with growth in all segments.
This represents the second consecutive quarter of orders growth in Europe with some markets improving, following the large drops from COVID, back in the middle of last year.
And in North America, our orders were flat with growth in Transportation and Communications being offset by declines in Industrial.
Now, what I'd like to do is touch upon our segment results briefly and I'll cover those on Slide 5 through 7 of the slides we issued.
Starting with Transportation, our sales were up 12% organically year-over-year, with growth in each one of our businesses.
In Auto, sales were up 11% organically versus global auto production growth in the low single digits.
The outperformance is driven by continued strong content growth and some benefits from the supply chain replenishing.
We are seeing gains from our leadership position in next generation products and technology and the value that we bring to our customers.
As I mentioned earlier, we are seeing strong content growth from the move to an electric powertrain and increased data connectivity, as well as the continued electronification of the vehicle.
In our Commercial Transportation business, we saw 25% organic growth, driven by electronification trends, which are helping content outperformance as well as ongoing share gains.
We are also benefiting from higher emission standards and new increased operator adoption of Euro 5 and 6 in China and new emission standards in India.
We saw growth in all regions as well as all market verticals that we serve in our Commercial Transportation business and continue to benefit from our strong position in China.
We are also seeing increased program wins in the electric powertrain and commercial transportation that will provide future content growth.
In Sensors, we saw 29% growth on a reported basis, which included the revenue contribution from the First Sensor acquisition.
On an organic basis, sales increased 3%, driven by growth in auto applications and we continue to expand our design win pipeline in auto sensing and expect growth at these platforms continue to increase in volume.
From an operating margin perspective, the segment expanded margins by 200 basis points to 19.4%, driven by strong operational performance.
Now, let me move over to the Industrial segment, where, as I mentioned, our sales declined 8% organically year-over-year and our adjusted operating margins were down slightly to 13.5% despite the 8% organic sales decline.
I am very proud, we were able to maintain our mid-teens adjusted operating margins due to the cost actions that we initiated over the past couple of years.
During the quarter, the segment continued to be impacted by the decline in the commercial aerospace market, with our AD&M business declining 22% organically.
As I mentioned earlier, we do believe we're touching along the bottom in this business and could see improvement in Comm Air later in this year.
Our Industrial Equipment business was up 8% organically, with growth in all regions and strength in factory automation applications.
And we continue to see weakness in our Medical business with ongoing delays in interventional elective procedures that have been caused by COVID.
We anticipate this to be a short-term dynamic in Medical that is consistent with what our customers are seeing and expect this market to return to growth as these procedure start to increase later in the year.
And lastly, in our Energy business, we saw a 4% organic decline, driven by COVID impact on utility spending, but we did see growth in renewable energy applications and the wind and solar applications.
Now, let me turn to the Communications segment, where our sales grew 12% organically year-over-year, with growth in both Data & Devices as well as appliances.
We do continue to benefit from the recovery in China and Asia more broadly, which represents over half of our sales in this segment.
In Data & Devices, our sales grew 5% organically year-over-year due to the strong position we've built in high-speed solution for cloud applications.
And in Appliances, we grew 21% organically year-over-year, with growth across all regions and benefits from home investments and an improved housing market.
I would have to say, our Communication team continues to perform very well, delivering 17.6% adjusted operating margins, which is up 550 basis points versus the prior year.
Adjusted operating income was $624 million, up approximately 25% year-over-year with an adjusted operating margin of 17.7%.
GAAP operating income was $448 million and included $167 million of restructuring and other charges and $9 million of acquisition-related charges.
We plan for the restructuring to be front-end loaded this year and continue to expect total restructuring charges in the ballpark of $200 million for fiscal '21 as we continue to optimize our manufacturing footprint and improve the fixed cost structure of the organization.
Adjusted earnings per share was $1.47 and GAAP earnings per share was $1.13 for the quarter and included a tax-related benefit of $0.09.
We also had restructuring, acquisition and other charges of $0.43.
The reconciliation is provided.
The adjusted effective tax rate in Q1 was approximately 20%.
For the second quarter, we expect our tax rate to be in the high teens and continue to expect an effective tax rate of around 19% for fiscal '21.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
Currency exchange rates positively impacted sales by $106 million versus the prior year.
We are demonstrating our business model execution with adjusted earnings per share of $1.47, up 21% year-over-year.
Adjusted operating margins were 17.7% as I mentioned earlier, and that is an expansion of 190 basis points versus prior year.
I am pleased with the progress we are making in driving improvements to our cost structure and our strong operational performance.
And we continue to execute on our footprint consolidation and cost reduction plans in both Transportation and Industrial, and we are now benefiting from the heavy lifting that we have already completed in our Communications segment.
Transportation adjusted operating margin was 19.4%, which is nearing our business model target of 20%.
Industrial adjusted operating margins remained in the mid teens, despite significant volume drops, which demonstrates the benefits of our cost actions we have been discussing with you over the past few years.
I'm also very pleased with the 17.6% adjusted operating margin in Communication, which reflects our strong operational execution that I mentioned earlier.
In the quarter, cash from continuing operations was $640 million and we have very strong cash flow for the quarter of approximately $530 million, which represents a first-quarter record, as Terrence mentioned.
And we returned $286 million to shareholders through dividend and share repurchases.
Our strong cash flow performance last year and into the first quarter of this year demonstrates the strength of our cash generation model and we continue to expect free cash flow conversion to approximately 100% for the full year.
We remain committed to our disciplined use of cash and over time, we expect two-thirds of our free cash flow to be returned to shareholders and about a third to be used for acquisitions.
And before we go on to questions, I want to reiterate that we remain excited about how we've positioned our portfolio with leadership positions in the markets we serve, along with organic growth and margin expansion opportunities ahead of us.
To summarize, we've discussed the benefits of secular trends across our portfolio.
You are seeing content growth enabling sales performance above our markets in Auto and Commercial Transportation, benefits from the market recovery in Data & Devices and Appliances and some markets that have been impacted by COVID in the Industrial segment that are now showing signs of stabilization.
We initiated cost actions well ahead of the COVID downturn and you are seeing strong margin expansion as a result of our efforts.
We expect to continue to generate strong cash flow, maintain a disciplined and balanced capital strategy and drive to business model performance and our focus on value creation for our stakeholders going forward.
Sujal, Sherryl, could you please give the instructions for the Q&A session? | teledyne technologies q3 gaap earnings per share $2.81.
q3 non-gaap earnings per share $4.34 excluding items.
q3 gaap earnings per share $2.81.
q3 sales rose 75.2 percent to $1.312 billion.
sees fy non-gaap earnings per share $16.35 to $16.45.
sees q4 non-gaap earnings per share $4.07 to $4.17.
sees fy gaap earnings per share $9.13 to $9.29.
sees q4 gaap earnings per share $2.53 to $2.69. | 0 |
Today's presenters are Chris Martin, Chairman, President and CEO and Tom Lyons, Senior Executive Vice President and Chief Financial Officer.
Now I'm pleased to introduce Chris Martin, who will offer his perspective on the fourth quarter.
Providence core earnings of $0.43 per share were impacted by continued margin compression, albeit slight and increased expenses primarily from consulting fees related to CECL modeling and implementation.
Our core return on average assets was 1.13% and core return on average tangible equity was 11.36% for the quarter.
We experienced only 2 basis points of margin compression in Q4 and forecast it being relatively neutral in 2020.
The repricing of deposit relationships that had discretionary rates positively impacted overall deposit flows.
This affords us an opportunity to reduce the rates on our CD book, although not a large portion of our overall deposits.
Key to our success will be our ability to continue to grow our non-interest bearing and core deposits.
We believe we have reached an inflection point in loan pricing and predict lower single-digit growth in the loan portfolio, which continues to be bombarded by payoffs and refinances away from us.
Our loan portfolio is skewed to variable rate products and we continue to swap out longer term fixed-rate loans.
C&I lending has become more competitively of late but we are winning our share of quality loans and relationships.
The middle market space has faced headwinds relating to the origination of loans at levels that meet our ROE hurdles.
We'd take all commercial lending expectations to the level of GDP growth, so low single-digit growth is what we expect to see in 2020.
Residential lending has picked up of late and we continue to be selective in our credit decisioning and leave the aggressive lending to competition, so these had outsized growth targets to bolster their margins.
Further, we are seeing more and more interest-only periods extended and longer fixed rate terms than we have in a long while, emanating from the agencies and life companies.
On the matter of CECL implementation, we expect incremental volatility since reserve levels will be very dependent on the macroeconomic forecasting.
This could affect loan pricing in the future also.
Our credit costs were elevated this quarter versus the same quarter in last year as we continue to conservatively evaluate our classified credits.
We have deemphasized our exposure and concentration in certain industries while also staying away from leverage lending.
We believe the current economic backdrop supports a relatively stable credit outlook and our net charge-offs for the year were slightly higher, but still in line with peers.
Speculation about a potential recession has been on our and other banker's minds over the last couple of years, but it has not happened yet and we try to spot the potholes beforehand.
Fee income continued its improving trend with Wealth Management leading the way along with loan level swap income and loan prepayment fees.
The additional valuation adjustment to the T&L transaction has proved positive as this acquisition is exceeding our initial estimates.
Expenses were higher in the quarter with the majority being in compensation and the non-cash contingent liability for the T&L acquisition.
Consulting and technology expenses continue to increase as we prepare it for CECL.
Regulatory costs were being $10 billion and technology investments to remain relevant in the new digital banking paradigm.
We continue to balance expenses with investments in the customer platform and product set.
Our tech spend is embodied in more consumer-centric, efficient and agile decisioning for our clients to enhance their relationship with us.
Information compiled in our data warehouse and our use of data analytics will be key to understanding our client's needs.
Reliance on AI will likely expand in the years ahead, especially in the payment channels.
We're also investing in the universal banker model, better recruiting processes and on boarding orientation and to constantly evaluating our branch network.
As for M&A, we expended a fair amount of time and energy in 2019 assessing potential acquisitions and continue to have more than enough capital to achieve better returns for our stockholders through whole bank transactions and RIA purchases.
We can fund our organic growth and support a solid and consistently above average cash dividend with only a 54% pay-out ratio and supportive buybacks when they meet our total return criteria.
The consumer segment appears to be in good shape for both the credit and spending perspective and the labor market may be the best that we have seen in a generation.
Fed interest rate policy is expected to be on hold for a while with geopolitical issues, pandemic risk and the presidential election grabbing the headlines, we believe the economy will continue to grow in spite of these distractions.
Our net income was $26 million or $0.40 per diluted share compared with $35.8 million or $0.55 per diluted share for the fourth quarter of 2018 and $31.4 million or $0.49 per diluted share in the trailing quarter.
Current [Phonetic] quarter earnings were adversely impacted by a $2 million or $0.03 per basic and diluted share net of tax expense increase in the estimated fair value of the contingent consideration liability related to the April 1st, 2019 acquisition of New York City-based RAI Tirschwell & Loewy.
As previously disclosed, the earn out of the contingent consideration is based upon T&L achieving certain revenue growth and retention targets over a three-year period from the date of acquisition.
Based upon T&Ls recent positive operating performance and improved projections for the remaining measurement period, an increase to the estimated fair value of contingent consideration was warranted.
At December 31st, 2019, the contingent liability was $9.4 million with maximum potential future payments totaling $11 million.
Excluding this charge, the Company would have reported net income of $27.9 million or $0.43 per basic and diluted share and net income of $114.6 million or $1.77 per basic and diluted share for the quarter and year ended December 31st, 2019 respectively.
Our net interest margin contracted 2 basis points versus the trailing quarter and 23 basis points versus the same period last year.
And that margin compression would continue to reprice downward deposit accounts with negotiated exception rates.
This deposit rate management coupled with an $80 million or 21% annualized increase in average non-interest bearing deposits resulted in a 3 basis point decrease in the total cost of deposits this quarter to 65 basis points.
Noninterest-bearing deposits averaged $1.6 billion or 23% of average total deposits for the quarter.
We will continue to thoughtfully manage liability costs as the rate environment evolves.
Quarter-end loan totals increased $66 million or 3.6% annualized from September 30th as growth in CRE construction and residential mortgage loans was partially offset by net reductions in C&I multifamily and consumer loans.
Loan originations excluding line of credit advances reached their best levels of the year, up $106 million or 30% versus the trailing quarter to $461 million.
But payoffs remained elevated, up $46 million or 18% versus the trailing quarter to $298 million.
The pipeline at December 31st decreased to $905 million from $1.1 billion at the trailing quarter end, reflecting strong year-end closing activity.
The pipeline rate has decreased 14 basis points since last quarter to 3.97% at December 31st.
The lower pipeline rate reflects current market conditions and a decline in interest rates.
Our provision for loan losses was $2.9 million for the current quarter compared with $0.5 million in the trailing quarter.
Our annualized net charge-offs as a percentage of average loans were 26 basis points for the quarter and 18 basis points for the full year.
Overall, credit metrics remained stable this quarter with non-performing assets totalling 55 basis points of total assets at quarter end.
The allowance for loan losses to total loans decreased to 76 basis points from 79 basis points in the trailing quarter largely as a result of improvements in qualitative allowance factors.
Non-interest income decreased slightly versus the trailing quarter to $17.7 million as lower swap fee income offset increased bank-owned life insurance benefits and loan prepayment fees.
Excluding the increase in the fair value of the contingent consideration liability related to the T&L acquisition, non-interest expenses were an annualized 2.05% of average assets for the quarter.
Core expenses increased $1.2 million versus the trailing quarter with consultancy and audit costs related to CECL implementation, additional examination and consulting fees that totaled $1.4 million driving the increase.
We did, once again, benefit this quarter from an FDIC insurance small bank assessment credit of $758,000 and our total remaining FDIC credit potentially realizable in future quarters is $1 million.
Our effective tax rate decreased to 23.6% from 24% for the trailing quarter and we are currently projecting an effective tax rate of approximately 24% for 2020.
We'll be happy to respond to questions. | q4 earnings per share $0.40. | 1 |
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