text
stringlengths 2.82k
70.1k
| summary
stringlengths 23
1.68k
| score
int64 0
1
|
|---|---|---|
I'm Hallie Miller, Evercore's Head of Investor Relations.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it is important to evaluate Evercore's performance on an annual basis.
As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
What a difference a year makes.
This time last year, we were in the early stages of the global pandemic.
There was uncertainty about the science and trajectory of the virus and there was no visibility on vaccines.
The economic environment was weak, and the pace and shape of an economic recovery was unclear.
With so much uncertainty and the weak economic environment and outlook, most of our clients turned inward to focus on operations, liquidity and in many cases, restructuring, while restructuring activity was -- and strategic activity was paused.
From an operational perspective, I don't think any of us expected to spend the remainder of 2020 and a good portion of '21 working predominantly remotely.
Fast forward one year and we've made tremendous progress.
Monetary and fiscal stimulus helped stabilize the economy, and financial markets and the recovery is well under way.
Vaccine distribution is gaining momentum and as a firm, we are actively planning for a gradual return to our offices over the next several months.
And our business is robust, as we continue to act as an advisor to clients on strategic financial investment and capital initiatives.
The momentum we experienced through the first half of last year has continued into the first quarter.
Our results, which represent our best first quarter ever, reflect our team's client focus, the breadth of capabilities that we can offer and the continued favorable environment for M&A and capital raising activity.
Transactions announced in the second half of 2020 and some even earlier moved toward completion during the quarter and translated to revenues.
We've also realized revenues from transactions announced and closed within the first quarter and it benefited from increased demand for activist defense advice over the past several months.
Capital advisory, both public and private, has continued its strong contribution.
The breadth of our equity capital markets capabilities, including IPOs and follow-ons, convertibles and SPACs has enabled us to participate in a meaningful way in the sustained strong levels of market issuance.
In the first quarter, we participated in nearly 40 public market transactions that raised more than $22 billion in total proceeds.
In Private Capital Advisory, GP-led transactions remained strong during the quarter and we have seen a strong recovery of volumes in new capital needs.
In the face of economic recovery and strength in M&A and capital raising, classic restructuring activity has slowed and is concentrated among key sectors and issuers that have not rebounded as quickly as some others have.
Our Equities business, Evercore ISI, has continued to stay connected and engaged with our clients and has provided valuable research insight and sales and trading execution.
And solid performance drove AUM growth in our Wealth Management business.
We continue to focus on expanding coverage of key industries and building out our capabilities.
And we are benefiting from Kristy Grippi joining us earlier this year as our new Head of ECM, as well as other strategic adds we've made on our ECM team.
With the key ingredients for M&A activity in place, a positive economic outlook, strong equity markets and available credit, high CEO confidence and continued private equity activity, the momentum for strategic activity continues and the desire for capital raising persists.
Several of our key markets continue to be busy and our backlogs are strong.
The strategic merger market accelerated in the first quarter.
Global and US announced M&A dollar volume increased 95% and 164% respectively compared to the first quarter of 2020 and increased 3% and 13% respectively from a strong fourth quarter.
In ECM, the desire for capital raising remained strong, though we have seen a cooling off in the SPAC underwriting market over the past several weeks.
Our investments in SPAC capabilities have positioned us well to serve many new clients, though we remain selective in our participation in underwriting opportunities.
We continue to see activity and shareholder advisory and activist defense.
The number of new activist positions in the US reached its highest level in more than two years at the end of 2020 and activists are focusing on larger targets.
On the private capital advisory side of things, we are seeing accelerating activity in both capital raising for new funds as well as secondary and GP level activity.
In short, we feel continuing momentum in our business and we are excited by the prospects we see in front of us.
Our broad capabilities have positioned us well to offer more services to clients as they execute on their priorities.
Let me now turn to our financial results.
We achieved record first quarter adjusted operating income, adjusted operating margin, adjusted net income and adjusted earnings per share driven by solid revenue growth and good operating leverage.
First quarter adjusted net revenues of $669.9 million grew 54% year-over-year.
First quarter advisory fees of $512.1 million was 43% year-over-year.
Based on current consensus, estimates and actual results, we expect to maintain our number-four ranking on advisory fees among all publicly traded investment banking firms for the last 12 months and to grow our market share relative to these same firms.
We also continued to narrow the gap between us and the number-three ranked firm on a latest 12-month advisory revenue and market share basis.
Our first quarter underwriting fees of $79.3 million more than tripled year-over-year.
As we said last quarter, this business experienced a step-up in 2020 as the demand for capital raising increased substantially and the expansion of our capabilities and enhanced sector coverage enabled us to work on diverse assignments for clients.
We've continued to broaden our participation across sectors, which we believe is helping us grow our business.
While healthcare still represents the largest portion of revenues, TMT and Industrials more than tripled their combined portion of revenues in the first quarter compared to full year 2020.
First quarter commissions and related revenue of $53.5 million decreased 4% year-over-year as volumes declined relative to the elevated levels in the first quarter of 2020.
First quarter asset management and administration fees of $17.8 million increased 16% year-over-year on higher AUM, which was $10.6 billion at quarter end, an increase of 11% year-over-year.
Turning to expenses, our adjusted compensation revenue for the first quarter is 59%.
First quarter non-comp costs of $72.7 million declined 12% year-over-year.
Our non-compensation ratio for the first quarter is 10.9%.
Bob will comment more on our non-comp expenses in his comments.
First quarter adjusted operating income and adjusted net income of $201.8 million and $162.5 million increased 145% and 181% respectively.
We delivered a first quarter adjusted operating margin of 30.1% and a first quarter adjusted earnings per share of $3.29 increased 172% year-over-year.
Finally, we continued to execute on our capital return strategy.
We returned $275.3 million to shareholders during the quarter through dividends and the repurchase of 1.9 million shares.
And we achieved our commitment to offset the delusion associated with our annual bonus RSU grants through share repurchase in the first quarter.
Our Board declared a dividend of $0.68, an increase of 11.5%.
We expect to continue our annual reassessment of the dividend each April.
Our Board also approved a refresh of our share repurchase authority to $750 million.
We will resume our historical policy of returning cash not needed for investment in our business to our shareholders through additional share repurchases.
Our first quarter results clearly demonstrate that we are operating at a higher level than the level at which we have operated historically as measured by any financial metric; revenues, operating income, net income, earnings per share, operating margins and Senior Managing Director productivity and Advisory.
While our operating margins clearly are benefiting modestly from the decline in travel and entertainment due to the pandemic, the strength in the other financial metrics is indicative of a real uptick in our business.
Our diverse capabilities and the more balanced mix of our business contributed to our record first quarter results, the third best quarter in our firm's history as well as to the record fourth quarter and full year results last year.
On top of our strong financial performance, we sustained our number-one league table ranking in the dollar volume of announced M&A transactions both globally and in the US among independent firms for the last 12 months ending March 31 and in the first quarter of 2021.
And we advised on the two largest M&A transactions announced in the first quarter.
Additionally, while not first quarter events, we have prominent roles on the two biggest tech announcements this year, both of which were announced in April.
We served as the lead advisor on Grab's $40 billion IPO buyer, a SPAC merger, the largest tech merger this year, the largest SPAC merger in history and the largest pipe issued in conjunction with a SPAC merger at a little over $4 billion.
And we also served as the sole advisor to Nuance on its pending $19.7 billion sale to Microsoft, the second largest tech merger this year.
These are franchise-defining transactions for our clients and for Evercore and are reflective of the breadth of our capabilities and the strength of collaboration and teamwork across the firm.
Our underwriting business continues to perform well and produced its third best quarter ever.
When we first acquired ISI almost seven years ago, we identified one of the most important opportunities created by that transaction to be our ability to increase our underwriting revenues to perhaps $75 million to a $100 million of revenue per year over the ensuing few years.
It unquestionably took a little bit longer than we initially expected to get to that level of revenue annually, but we have definitely seen a real step function increase in this business.
In fact, three of the past four quarters, including the first quarter of 2021, where in just one quarter, within that $75 million to a $100 million target that we had set for the full year.
Activity in backlogs and underwriting continued to be strong, and we remain focused on building out this business strategically so that we can continue to serve the needs of our clients without any use of our balance sheet.
Needless to say, our revenue aspirations for this business have grown materially.
The first quarter also saw a number of significant transactions in the convertible debt space, which we launched in the third quarter of 2020, including our first sole book-run convertible offering and an active book-runner position on a biotech convert.
These transactions are indicative of the breadth and diversity of our platform and our capacity to meet increasingly diverse client needs.
Our investments in ECM have earned us a place in the top 20 for underwriting revenue as estimated by Dealogic when bot deals are excluded.
We continue to believe that we have runway here and we are focused on systematically gaining share as we have done in Advisory historically.
The breaking into the Top 10 currently seems challenging given our aversion to block trades and our independent balance sheet light approach.
Activity in our Private Capital Advisory businesses.
Our secondaries advisory business, which we call PCA; our primary fundraising business, which we call PFG; and our real estate fund-raising in secondaries business, which we call RECA continues to be strong as volumes increased meaningfully during the quarter.
Our success in this area is driven by the strength of our client relationships and our superb execution track record, including our unique success executing transactions done solely through remote communication.
In restructuring, the team's activity level and footprint are resetting back toward historical levels as the economy and debt market liquidity have meaningfully improved.
The team continues to work through assignments started in 2020 and is also focused on new liability management, private financing and conventional restructuring assignments in sectors that are still stressed by the pandemic.
In equities, client connectivity and engagement continue to be strong as our macroeconomic and fundamental analysts continue to provide valuable insights to institutional clients.
Our team also has continued to meet high client demand for our robust virtual conferences, webinars and corporate access events.
The investments that we have made in our platform to support our ECM franchise including convertibles performed well during the quarter and are natural capability extension for us.
And we continue to expand our sector coverage with Mark Mahaney's launch on Internet stocks earlier this month.
And as we've always said, we will continue to look for senior impactful analysts who will serve our clients and contribute to the growth of this business.
Finally, our Wealth Management business continue to grow AUM as long-term performance has remained very solid and as we have continued to provide important advice to our client.
Let me now turn to discuss some of our priorities for the remainder of the year.
As we think about the rest of the year, we are focused on several important items.
First, we are intensely focused on continuing to position our business for sustaining long-term growth by number one, providing outstanding advice and execution of our clients as we continue to advise them on their most important strategic financial and capital decisions; number two, by continuing to enhance our coverage of the most significant client groups, including our initiatives around the Evercore 100 and financial sponsors; number three, investing to further deepen and broaden our capabilities by continuing to build out certain industry groups, geographies and product capabilities.
Second, we are focused on planning for our return to our offices globally with the health and safety of our employees and their families paramount as we develop and execute our plans.
Third, we are highly focused on integrating diversity, equity and inclusion and sustainability more completely into how we conduct our business and how we hire, train and mentor our talent.
And finally, we are focused on operating with financial discipline and delivering strong returns to our shareholders, returning excess cash not needed for growth investments to our shareholders through dividends and share repurchases while maintaining a strong and liquid balance sheet.
We are actively recruiting A-plus and A talent in advisory to our team, and we continue to have many conversations with talented individuals in key sectors and geographies, including TMT, fintech, biopharma, healthcare, consumer, financial sponsors, and Europe.
Equally important is our long-term commitment to attracting, recruiting, mentoring and promoting talented professionals and promoting them to Senior Managing Director from within.
We strongly believe that in-person collaboration, training and mentorship are crucial to our culture and our apprenticeship model.
These experiences are most effective when we are together and contribute to the development of our future leaders, which is why we are so focused on our return to office over the next several months.
We are pleased to be sustaining advisory Senior Managing Director productivity that is at a materially higher level than our long-term average.
However, we are finding, probably due to the pandemic, that it is taking new hires and new internally promoted Senior Managing Directors a little longer, perhaps a year or so longer, to reach full productivity.
Fortunately, this longer ramp time means that we have more partners who will contribute to our future growth.
The first quarter results and achievements that John and I have summarized and really are results over the past year could not have happened without the dedication, teamwork, collaboration and commitment of our entire team.
Every single one of our employees has stepped up to the challenges of the past year plus and there have been many such challenges.
We very much look forward to bring our teams back together in person soon, so that we can continue to build and strengthen the culture that has been the foundation of our success.
Beginning with GAAP and some related metrics.
For the first quarter of 2021, net revenues, net income and earnings per share on a GAAP basis were $662 million, $144 million and $3.25 respectively.
Our GAAP tax rate for the first quarter was 16.1% compared to 25.8% for the prior year period.
The appreciation in the firm's share price upon vesting of employee share-based awards above the original grant price positively affected our effective tax rate on both the GAAP and adjusted basis.
On a GAAP basis, our share count was 44.5 million shares for the first quarter.
The share count for adjusted earnings per share was $49.4 million for the quarter.
Focusing for a moment on non-compensation costs, as John noted, we continued to generate significant operating leverage, in part due to lower non-compensation costs.
Firmwide non-compensation costs per employee were approximately $40,000 for the first quarter, down 9% on a year-over-year basis.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related expenses.
As we continue to evolve toward more normal operations, including returning to our offices and engaging in person with our clients, costs associated with recruiting, travel, entertainment and other expenses are expected to increase.
Commissions and Related Fees has been renamed to Commissions and Related Revenues and now includes riskless principal profits, which were previously in Other Revenue including interest and investments.
The reclassified revenue principally represents the spread income earned from riskless principal transactions in convertibles and other fixed income securities.
Finally, focusing on the balance sheet, two points.
On March 29th, we issued $38 million of aggregate principal amount of unsecured senior notes with a 1.97% coupon through a private placement.
We used the proceeds from the notes to refinance senior notes that matured on March 30th.
And finally, at the end of the quarter, we held $411 million in cash and cash equivalents and $873 million in investment securities down from year-end due to compensation-related payments and strong return of capital.
Operator, if you could open the line? | compname reports record first quarter 2021 results increases quarterly dividend to $0.68 per share.
compname reports record first quarter 2021 results; increases quarterly dividend to $0.68 per share.
qtrly earnings per share $3.25.
qtrly adjusted earnings per share $3.29.
qtrly adjusted net revenues of $669.9 million increased 54%. | 1 |
Jim Hatfield, Chief Administrative Officer; Daniel Froetscher, APS's President and COO; and Barbara Lockwood, Senior Vice President, Public Policy, are also here with us.
First, I need to cover a few details with you.
Note that the slides contain reconciliations of certain non-GAAP financial information.
It will also be available by telephone through May 15.
Before I get started, let me say, I hope everyone is doing well.
This is certainly an unexpected way to start our year, but the last several weeks have only reaffirmed to me that our company and our people are resilient, agile and prepared to handle whatever comes our way.
We recognize the realities of COVID-19 and the challenges that people are facing, and we remain committed, first and foremost, to safely delivering reliable power to Arizona, building shareholder value by ensuring customer value.
In March, we made the decision to deploy as much of our workforce as possible to work from home and to change our work practices for those essential workers needed to keep the lights on for our customers and to prepare for the Arizona summer.
The transition from normal course of business to social distancing and revised safety procedures was seamless from our reliability standpoint and for our customers.
While our processes have changed, our priorities have not.
From a financial perspective, our strengths lie on a strong balance sheet, good credit rating and sufficient liquidity.
We can and will weather the storm.
We recognize that in order to serve both our customers and our shareholders, it is important to maintain our financial health.
Financial stability is a key driver in our decision-making, and it's essential to support our long-term goals.
Operationally, the rigor of our preparation and the strength of our team position us well to navigate the challenges presented by COVID-19.
Our pandemic plan was established, tested, refined and rehearsed before any of the COVID-19 impact began to hit us.
As I mentioned earlier, we've transitioned as many employees as possible to working from home.
I'll note, that includes over 140 call center associates who we moved very quickly to seamlessly continue to provide customer service from their homes, and that includes the oversight folks as well, an incredible job by the IT group there, as well as our field employees who continue to prepare for our peak summer season.
All necessary summer preparedness work, including vegetation management and planned outages at our power plants, have continued.
In an effort to minimize the duration of those outages and the number of people required to be physically present, we prioritized essential work and deferred some discretionary maintenance until later in the year.
I'm pleased to share that we completed the Palo Verde Unit two refueling outage earlier this week, ensuring that this key resource will be available to serve customers this summer.
The refueling outage had a reduced scope to allow the completion of the essential work, with 40% less contractors than normal.
In addition, we've deferred nonessential transmission and distribution work that would require more than a two hour planned outage to our residential customers during this time.
We are grateful for the support we've received from so many who've helped our employees stay safe, including Armored Outdoor Gear, one of our commercial customers in Flagstaff.
We were able to quickly secure 3,000 masks for APS, including an expedited quantity of 300 for Palo Verde employees at a time when masks were harder to come by.
It was really a win-win situation.
We were able to keep our employees safe and, at the same time, support our local economy.
Based on what we've seen so far in energy usage and customer load growth, and Ted will talk more about this, but we know that circumstances will continue to evolve.
Our resource plans for additional generation remain in place.
We expect to announce the results of outstanding wind and solar request for proposal in the near future.
Just as in our pre COVID-19 world, as we learn more about our customer needs and how we are all recovering from the impact of our current situation, we will evaluate our assumptions for future generation resource needs and make any necessary adjustments.
To date, we have not experienced any material supply chain disruptions.
Our team is actively monitoring for potential disruptions and has conducted a contract review to confirm the adequacy of our summer resource needs.
In addition, they've solicited supplier input to identify market risks associated with 800-plus high-volume suppliers, including all of our critical suppliers.
As with many other aspects of our operations, mitigation plans are in place to minimize any potential supply chain disruptions.
On the regulatory front, the Arizona Corporation Commission has been busy addressing COVID-19 concerns and adjusting their work to accommodate social distancing guidelines.
Not surprisingly, as a result, a number of their work streams have been delayed.
As you may recall, the original rate case schedule that staff had was going to file testimony on May 20.
At the request of the commission staff, that date has been extended to August 3, and the hearing is now scheduled to begin on September 30.
On May five and 6, the commission held open meetings discussing our rate comparison tool, how to refund or collect the demand-side management funds and treatment for cost associated with COVID-19.
As a result of the discussion, the commission voted to return $36 million of overcollected demand-side management funds to customers through a onetime bill credit in June.
No votes were taken regarding the other matters.
However, I'll note that Chairman Burns did indicate that he plans to bring the topic of an accounting order for COVID-related cost before the commission again at a later date.
Our clean energy commitment received some positive validation in March after the commission held a workshop to discuss clean energy rules.
Following that workshop, Chairman Burns, Commissioner Kennedy and Commissioner Marquez Peterson all publicly expressed support for a 100% clean by 2050 standard.
And obviously, that's aligned with our clean energy commitment, and I think that's a good sign for the future of clean energy in Arizona.
A good future for clean energy in Arizona means robust economic development in our state and an opportunity for financial growth for Pinnacle West.
We've never experienced anything like COVID-19, but we've been through many challenging times in our 136 years of service to Arizona.
We don't know today what the ultimate disruptions or impacts of this pandemic will be, but I have no doubt we'll navigate both through the near term and continue to deliver on our long-term goals.
I want to add to Jeff's appreciation and recognition of our team's accomplishments under these unusual circumstances.
I have always been proud of the APS workforce, but seeing our teams lead through this pandemic with such tenacity and strength has truly been inspiring.
I would also like to share our appreciation for those in the medical profession and other essential service providers, making very real sacrifices to help our communities navigate the COVID-19 impacts.
Before I discuss some of the unique aspects of our service territory and strengths that will serve us well through this current challenge, I want to briefly touch on our first quarter results.
2020 started out strong, earning $0.27 per share compared to $0.16 per share in the first quarter of 2019.
Lower adjusted O&M and higher pension in OPEB nonservice costs contributed to the increase in earnings.
We also experienced 2.2% customer growth and 0.8% weather-normalized sales growth in the first quarter compared to the same period in 2019.
Excluding the last two weeks of March, weather-normalized sales for the quarter were within our original 2020 annual guidance range of 1% to 2%.
While we started the year strong, we have also begun to experience impacts, including a reduction in load from the COVID-19 social distancing and stay-at-home guidelines.
From March 13, the date when many Arizona schools and businesses closed, through April 30, we have seen an approximate 14% reduction in weather-normalized commercial and industrial load compared to the same period last year, partially offset by an approximate 7% increase in weather-normalized residential load.
The reduction in C&I load equates to an earnings decrease of around $0.14 per share, while the increase in residential usage contributes about $0.04 per share for a net reduction of approximately $0.10 compared to our original expectations for this period.
We cannot predict the ultimate duration or impacts from the social distancing and stay-at-home guidelines resulting from COVID-19 pandemic.
However, we are committed to sharing with you today the information we have, scenario sensitivities and mitigating factors.
On April 30, Governor Ducey extended the stay home, stay healthy, stay connected order through May 15, with some reopenings prior to that date.
On May 4, retail establishments were committed to reopen, while following certain restrictions.
Effective today, hair salons may open.
And on Monday, restaurants are permitted to reopen.
While the process and timing for a full reopening is still uncertain, this is a positive step to restarting the Arizona economy.
Despite the fact that Arizona has already started to reopen, if we assume the trend we experienced from March 13 through April 30 continues through the end of the second quarter, we would anticipate a net weather-normalized sales decrease of approximately 7% compared to the second quarter 2019 and an earnings per share decrease of approximately $0.20 compared to our original second quarter 2020 expectations.
The impacts from COVID-19 are not unique to us, but there are a few differentiating factors I'd like to highlight, most notably weather, cost management and sales growth.
As most of you know, in the hot Southwest desert, our demand is significantly influenced by weather and air conditioning load.
For this reason, our earnings are heavily weighted toward the third quarter.
Historically, approximately 56% of our annual earnings comes from Q3, 28% from Q2 and only 6% from the first quarter.
While we have already experienced a reduction in load from COVID-19, this reduction has occurred in our milder, shoulder season months.
As we saw last year, with the weather impact of negative $0.25 per share, weather alone can play a significant factor in our annual earnings.
This year, Phoenix reached triple-digit temperatures already in April, setting record highs, and we've maintained above 100 degrees every day this week with excessive heat warnings already in effect.
Cost management is another key lever for us to mitigate the potential decrease in sales.
We will continue our focus on cost management using Lean Sigma that we introduced throughout the organization in 2019.
Our commitment to becoming a lean operating company through continuously eliminating unnecessary costs out of the business contributed to our success in meeting earnings expectations in 2019.
The current COVID environment is giving our team another reason to rally in 2020, as we work hard to realize additional efficiencies this year.
We've already experienced a number of successes in this space, in addition to natural O&M reductions from adjustments in our processes and scope of work related to COVID.
For example, by the end of this year, we'll have deployed 28 bots across the enterprise as part of our digital transformation program.
In our fossil fleet, as an example, we're now using robotic process automation to complete all work packages.
The use of technology to automate this process will save employees about 1,800 hours per year.
Just five of the automations planned for the first part of this year are expected to produce an NPV benefit of $1.8 million over the next five years.
These examples and our focus on reducing costs will serve us well, not just through the interim challenges, but also in achieving our long-term goals of providing customers with affordable and reliable service.
While total sales will likely continue to lag during the duration of the stay-at-home period, we remain confident in the long-term growth of our service territory.
According to the Arizona Technology Council's quarterly impact report, Arizona tech sector is growing at a rate 40% faster than the U.S. overall.
Metro Phoenix area showed strong job growth through February of 2020, which has consistently been above the national average.
Through February, employment in Metro Phoenix increased 3.2% compared to 1.5% for the entire U.S. Construction employment in Metro Phoenix increased by 5.4%, and manufacturing employment increased by 2.1%.
This data reflects pre COVID-19 conditions, and we expect to see the 2.2% customer growth rate we experienced in the first quarter to slow in the near term.
However, the qualities and fundamentals that I mentioned that have consistently attracted residents to Arizona, including a low cost of living, attractive weather and robust employment opportunities, remain intact and likely to continue supporting long-term growth after the economy normalizes.
In regard to our future capital investments, we remain committed to the $4.7 billion capex forecast for the 2020 through 2022 time frame, largely driven by clean energy investments.
Information regarding COVID-19 and the potential impact is fluid and changing rapidly.
We will continue to assess our capex plans, load forecast, sales expectations, O&M and other financial data points as more information becomes available.
We recognize there are potential scenarios where COVID-19 impacts could necessitate changes in the timing or scope of our investment plans.
However, as of today, we do not believe the limited load reductions experienced thus far require any alterations to our long-term plans.
Similarly, we continue to believe 2020 Pinnacle West consolidated earnings of $4.75 to $4.95 per share remain achievable, assuming the impacts for COVID-19 dissipate by the end of the second quarter, and customer and sales growth resumes once the economy normalizes.
Additional O&M savings are also being assessed by our management team to mitigate the impact from lost revenue.
A complete list of key factors and assumptions underlying our 2020 guidance can be found on slides three and four.
Another advantage for Pinnacle West is our financial health.
We have a strong balance sheet, A- credit rating, well-funded pensions, sufficient liquidity and no equity needs in 2020.
We currently have $1.2 billion in revolver capacity with an option to increase by another $500 million.
As of May 1, we have drawn down $310 million on our revolvers.
In addition, all remaining Pinnacle West long-term debt maturing in 2020 will occur in November and December, and APS's $200 million term loan matures in August.
With all the long-term maturities falling late in the year, we have ample flexibility to assess the market conditions and evaluate our options.
Further, at year-end 2019, our pension was 97% funded.
With our liability driven investment strategy, our pension was 96.4% funded as of March 31, 2020, highlighting our resilience to the market volatility.
Last week, we proudly celebrated 136 years of service to Arizona customers and communities, and we've been through plenty of challenges before.
As Jeff mentioned, we were well prepared for this current challenge.
We started from a position of financial strength.
The seasonality of our jurisdiction and the exceptional skills and sophistication of our team give us confidence that we will effectively navigate the near term and continue to work toward our long-term commitments. | q1 earnings per share $0.27.
sees fy 2020 earnings per share $4.75 to $4.95.
continues to believe its 2020 consolidated earnings guidance of $4.75 to $4.95 per diluted share is still achievable.
will continue its focus on managing costs and utilizing lean principles to help mitigate any impacts of pandemic.
pinnacle west capital - 2020 outlook assumes impacts from covid-19 dissipate by end of june, customer and sales growth resume once economy normalizes. | 1 |
To follow along with the slides, please visit jabil.com within our investor section of our website.
At the conclusion of today's call, the entire call will be posted for audio playback on our website.
These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2020 and other filings.
I appreciate everyone taking the time to join our call today.
In stepping back and reflecting for a moment, it's hard to believe that 12 months have passed since we first encountered COVID.
I think about sitting alongside Mike and Adam one year ago during our March 2020 earnings call when clarity vanished and uncertainty ran wild.
Yet, in typical Jabil fashion, our people did what they do.
They dove in and gave their very best to combat the pandemic.
They did so by looking after one another while taking outstanding care of our customers.
It's a point in time that I'll never forget.
It's a point in time that highlights the level of respect and admiration that I have for our team here at Jabil.
Their attitude and their actions continue to impress.
And for sure, there is no other team I'd rather be part of.
Our second quarter came in well ahead of expectations, driven by stronger than expected product demand, solid execution, and a well-balanced contribution throughout the entire company.
The team delivered core earnings per share of $1.27 and revenue of $6.8 billion, resulting in a core operating margin of 4.2%.
I'm really pleased with our financial results for the quarter.
Although, what's quite interesting to me is the overall construct of the business in combination with the improvements we've made to our balance sheet.
All in all, our performance during the first half of the year gives us excellent momentum as we push toward the back half of fiscal '21.
It also sets a firm foundation for further margin expansion as we look to FY '22.
I'd now like to share a pie chart which is indicative of our commercial portfolio.
Slide 6 underscores the effectiveness of our approach and the base from which we operate.
Today, our business is wide-ranging and resilient.
This is especially true when any individual product or product family is faced with a macro disruption or cyclical demand.
Furthermore, our current business mix provides a unique set of capabilities, innovative capabilities openly shared across the enterprise with speed and precision as we simplify the complex for our customers.
It's a proven formula that's trusted by many of the world's most remarkable brands.
Moving to Slide 7, I'll address our updated outlook for the year.
We now believe core earnings will be in the neighborhood of $5 a share, an increase of 25% from what we anticipated back in September, with top-line revenue coming in around $28.5 billion.
This incremental revenue improves our portfolio as evidenced by another 10-basis-point increase to core operating margin, which we now forecast to be 4.2% for the year.
Lastly, we remain committed to generating a minimum of $600 million in free cash flow, a testament to how we're managing our capital investments.
As I wrap up the outlook, it's notable that our strategy is working, our path is well understood, and how we go about producing results is important.
On this last point, when we think about the how, we think about purpose.
A purpose that guides us in our journey.
A purpose which is grounded in a series of behaviors.
Behaviors such as keeping our people safe, servant leadership, ensuring a fully inclusive environment, and giving back to our communities around the world.
I'm just so proud that our team is hitting the mark in all of these areas.
Their efforts over the past two to three years have allowed us to reshape the business as we've targeted growth in select markets.
Markets that largely align with secular trends.
A few example of these being 5G, personalized healthcare, electric vehicles, digital learning, cloud computing, clean energy, and eco-friendly packaging.
Our team continues to develop deep domain expertise in concert with these secular tailwinds.
I like the decisions we're making and what we're doing.
And we do what we do while respecting the environment and safeguarding our workplace.
We're committed to a workplace which encompasses tolerance, respect, and acceptance.
We encourage each and every employee here at Jabil to be their true self.
We strive to make the world just a little bit better, a little bit healthier, and a little bit safer each and every day.
One factor that makes good companies great is possessing a value system which allows them to solve problems over and over again.
As Mark has detailed, our second-quarter performance was outstanding, driven by the combination of broad-based end market strength and associated leverage, an improved portfolio mix, and excellent operational execution by the entire Jabil team.
We saw broad-based revenue strength across the business, most notably in mobility, cloud, healthcare, connected devices, automotive, and semi-cap.
Given the additional revenue, I am particularly pleased with the strong leverage we achieved during the quarter which enabled us to deliver a strong core operating margin of 4.2%.
And finally, our net interest expense came in better than expected during the quarter due in large part to better working capital management coupled with the proactive steps we've taken over the past year to optimize our capital structure.
Putting it all together on the next slide, net revenue for the second quarter was $6.8 billion, $300 million above the midpoint of our guidance range.
On a year-over-year basis, revenue increased by $700 million or 11%.
GAAP operating income was $236 million and the GAAP diluted earnings per share was $0.99.
Core operating income during the quarter was $285 million, an increase of 78% year over year, representing a core operating margin of 4.2%, a 160-basis-point improvement over the prior year.
Net interest expense in Q2 was $33 million and core tax rate came in at approximately 23%.
Core diluted earnings per share was $1.27, a 154% improvement over the prior-year quarter.
Now, turning to our second quarter segment results on the next slide.
Revenue for our DMS segment was $3.6 billion, an increase of 26% on a year-over-year basis.
The strong performance in our DMS segment was extremely broad-based as several of the end markets we serve are becoming increasingly critical such as connected devices, healthcare, automotive, and mobility.
Core margins for the segment came in at an impressive 5.1%, 210 basis points higher than the previous year.
An incredible performance by the team.
Revenue for our EMS segment was $3.2 billion, also reflecting strong broad-based demand.
Core margins for the segment were 3.1%, 80 basis points over the prior year.
Turning now to our cash flows and balance sheet.
Cash flows provided by operations were $20 million in Q2 and capital expenditures net of customer co-investments total $152 million.
We exited the quarter with a cash balance of $838 million.
We ended Q2 with committed capacity under the global credit facilities of $3.8 billion.
With this available capacity, along with our quarter-end cash balance, Jabil ended Q2 with access to more than $4.6 billion of available liquidity, which we believe provides us ample flexibility.
During Q2, we repurchased approximately 1.9 million shares or $82 million.
At the end of the quarter, $254 million remain outstanding in our current stock repurchase authorization and we intend to complete this authorization during the second half of FY '21 as we remain committed to returning capital to shareholders.
Turning now to our third-quarter guidance.
DMS segment revenue is expected to increase 19% on a year-over-year basis to $3.5 billion.
This is mainly due to the strong end-market outlook.
EMS segment revenue is expected to be $3.4 billion, an increase of 1% on a year-over-year basis.
It's worth noting, our EMS business remains strong and healthy.
The modest increase is reflective of our previously announced transition to a consignment model in the cloud business.
We expect total company revenue in the third quarter of fiscal '21 to be in the range of $6.6 billion to $7.2 billion for an increase of 9% on a year-over-year basis at the midpoint of the range.
Core operating income is estimated to be in the range of $220 million to $270 million.
Core diluted earnings per share is estimated to be in the range of $0.90 to $1.10.
GAAP diluted earnings per share is expected to be in the range of $0.69 to $0.89.
Next, I'd like to take a few moments to provide an update on the long-term secular trends under way across our businesses, which we believe will drive sustainable growth across the enterprise in FY '21 and beyond.
In healthcare today, the industry is undergoing tremendous change due to rising costs, aging populations, the demand for better healthcare in emerging markets, and the accelerated pace of change and innovation.
Consequently, we are witnessing healthcare companies shifting their core competencies away from manufacturing toward innovative and connected product solutions.
We're in the early days of outsourcing of manufacturing in the healthcare space.
On top of this, we're also seeing the impact of connectivity and digitization across healthcare.
I expect these trends to accelerate over the next few years.
Our deep domain expertise within the healthcare industry uniquely positions us to both technology-enabled products that help our customers excel in today's evolution of healthcare.
Another end market experiencing a rapid shift in technologies is the automotive market.
Today, electric vehicles account for less than 2% of total vehicles in the market.
Climate change, fuel efficiency, and emissions are ongoing concerns, and regulatory policies worldwide are beginning to mandate more eco-friendly technologies.
As a result, OEMs are making a substantial investment into vehicle electrification effort.
Jabil's long-standing capabilities and over 10 years of experience and credibility in this space has positioned us extremely well to benefit from this ongoing trend.
Turning now to 5G.
5G will transform the way we live, work, play, and educate.
As the underlying infrastructure continues to roll out, 5G adoption is accelerating.
Jabil is well-positioned to benefit from both the worldwide infrastructural labs and with devices which would be needed to recognize the full potential of a robust 5G network.
5G is also accelerating secular expansion of cloud adoption and infrastructure growth.
This, coupled with the value proposition Jabil offers to cloud hyperscalers, is helping us gain market share in an expanding market evidenced by the significant growth over the last three years.
The value proposition that continues to resonate with our customers is our design to those capabilities, which incorporates engineering, manufacturing, and eco-friendly decommissioning of servers, all within co-located facilities.
This is incredibly powerful as accelerating cycle times, security, and transparency at every step of the hardware lifecycle become continually more important to our U.S.-domiciled hyperscalers.
Shifting now to packaging.
We are uniquely positioned to benefit from the global shift to smart and eco-friendly packaging.
As consumers become more informed about the environmental impact of plastic waste, demand for sustainable packaging solutions is accelerating.
And then finally, within semi-cap, the demand for semiconductors has never been higher with the accelerated convergence of technologies and the associated data generation and storage needs.
Nearly every part of the economy runs on silicone today.
Jabil serves the semi-cap space with end-to-end solutions spanning the front end with design and complex fabrication equipment, along with the back end, the validation, and test solutions.
In summary, I'm extremely pleased with the sustainable broad-based momentum under way across the business which has allowed us to deliver much better than expected results in the first half of FY '21.
As we turn our attention to the back half of the year and beyond, we fully expect the long-term secular tailwinds that are driving our business to continue.
This, coupled with our improving portfolio mix and lower interest and tax expenses, has given us the confidence to meaningfully raise our FY '21 estimates for revenue, core operating income, core margins, and core earnings per share.
We now expect core operating margins to be 4.2% on revenue of approximately $28.5 billion.
This improved outlook translates to core earnings per share of approximately $5.
And importantly, despite the stronger growth, we remain committed to delivering free cash flow in excess of $600 million for the year.
We've been working extremely hard as a team to grow margins, cash flows, and positively impact our interest in tax.
I am very pleased with our team's exceptional execution of our strategy on all fronts.
As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address any customer or product-specific information.
We appreciate your understanding and cooperation.
Operator, we're now ready for Q&A. | jabil raises outlook for fiscal year.
q2 non-gaap core earnings per share $1.27.
q2 gaap earnings per share $0.99.
q2 revenue $6.8 billion versus refinitiv ibes estimate of $6.56 billion.
sees q3 2021 net revenue $6.6 billion to $7.2 billion.
sees q3 2021 u.s. gaap diluted earnings per share $0.69 to $0.89 per diluted share.
sees q3 2021 core diluted earnings per share (non-gaap) $0.90 to $1.10 per diluted share.
expect fy21 to deliver revenue in range of $28.5 billion, core earnings per share of about $5. | 1 |
Joining the call today are Tom Ferguson, chief executive officer; Philip Schlom, chief financial officer; and David Nark, senior vice president, marketing, communications, and IR.
Those risks and uncertainties include, but are not limited, to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the company's growth strategies.
In addition, AZZ customers and its operations could potentially be adversely impacted by the ongoing COVID pandemic.
We continue to gain momentum in the third quarter and completed our fifth consecutive quarter of solid performance after the disruption from COVID in the first half of last year.
Their perseverance continues to allow us to achieve these kinds of results.
Consolidated sales of almost $232 million improved 2.3% versus the prior year or 4.1% when adjusted for the divestiture of SMS last year.
metal coatings generated another excellent quarter with sales up 15.4% to over $133 million and infrastructure solutions sales down 11% at about $99 million.
We are pleased to have completed another strong quarter of performance.
We continue to generate solid cash flow and returned capital to our shareholders during the third quarter.
We generated net income of over $21 million and earnings per share of $0.85 per diluted share, reflecting the resiliency of our businesses and the dedication of our people.
Our businesses leverage the realignment actions taken last year to improve profitability while maintaining their focus on providing outstanding quality and service to our customers.
We also benefited from lower interest expense and a lower tax rate of 22% for the third quarter.
In line with our strategic commitment to value creation, we repurchased over 148,000 shares for $7.6 million and distributed $4.2 million in dividends.
In metal coatings we achieved 24.5% in operating margins on sales of $133 million.
This resulted in operating income being up over 14% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rapidly rising zinc, labor and energy costs.
In spite of the ongoing challenges of COVID, our team succeeded in completing the acquisition of Steel Creek Galvanizing in South Carolina.
This site was completed in 2019 and includes a lot of automation, making it the newest and most modern in our fleet.
Our team is excited about the growth opportunity it presents in a region we were not present in.
Our metal coatings team continues to demonstrate their ability to perform and deliver great results while managing labor shortages and the increasing costs.
Our infrastructure solutions segment demonstrated continued profitability improvement in the quarter, leveraging the cost reduction actions that they took last year.
We were down about 8% when considering the impact of the SMS divestiture.
The infrastructure solutions segment delivered operating income of over $9 million, with operating margins improved 140 basis points to 9.3% as compared to the prior year.
The segment did face growing labor constraints and delays in materials due to supply chain disruptions resulting from COVID, including components from customers.
One WSI international project was significantly impacted by COVID outbreak, which was managed well, that resulted in lower profitability.
We remain focused on strategic selling initiatives across both the electrical and industrial platforms and we believe we are well positioned to finish this fiscal year well.
For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors given our strong performance in the first three quarters and due to seeing more opportunities than risks the balance of this year, we are tightening our earnings per share guidance.
We anticipate annual sales to be in the range of $865 million to $925 million and earnings per share at $3 to $3.20 per diluted share.
We do not anticipate any material impact in the fourth quarter from the recently announced acquisition as we're focused on integration these first couple of months.
Metal coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increase due to inflation.
Our infrastructure solutions segment is cautiously optimistic as it enters the fourth quarter with some momentum in bookings activity, particularly in the electrical platform.
Our WSI business is seeing good results from the expanded Poland facility, although internationally, the business continues to experience some intermittent project delays due to COVID outbreaks at some customer sites.
As we noted on the last call, some of the fall season projects will now be completed in the fourth quarter.
We also have some spring projects that look to kick off a little earlier than normal.
The electrical platform is focused on operational execution and growing its e-house and switchgear businesses.
Due to the project extensions from the third quarter, we expect a better-than-normal performance in the fourth quarter.
I will note that our outlook for the spring turnaround season is quite good based upon the level of quotations, but we remain cautious due to the ongoing battles with COVID outbreaks at customer sites.
For the balance of fiscal year 2022, AZZ will continue to execute on our strategic growth initiatives to drive shareholder value while positioning for a strong start to fiscal 2023.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives that drive operational excellence, tightly manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure, so we continue to drive profitable growth and enhance shareholder value.
Bookings or incoming orders in the third quarter were $248 million, a $53.6 million or 28% increase over the third quarter of the prior year.
Our bookings-to-sale ratio remained consistent with last quarter, 107% and well above the book-to-sales ratio of 0.86 for the same quarter last year.
As Tom had alluded to, we have seen consistently strong markets for our metal coatings segment and continue to experience improving markets in our infrastructure solutions segment.
Third quarter fiscal 2022 sales were $231.7 million, $5.1 million or 2.3% higher than the prior-year third quarter sales of $226.6 million.
Year over year, for the third quarter, metal coatings segment sales were up $17.8 million and were partially offset by lower sales in the infrastructure solutions segment, mostly in the industrial segment where we took significant actions to restructure the business in the middle of last year.
The business generated gross profit of $57 million compared with gross profit of $54.7 million in the third quarter of the prior year.
Our gross margin was 24.6% for the third quarter compared with gross margin of 24.1% in the third quarter of last year as business in both the segments continue to improve.
Operating income for the quarter was $30.1 million compared with $27.9 million in the third quarter of the prior year, a $2.2 million or 8% improvement year over year.
Our earnings per share was $0.85 or $0.09 higher than last year's third quarter reported earnings per share of $0.76 and adjusted earnings per share of $0.80 in the prior-year third quarter.
The prior year was impacted by our loss on the divestiture of southern mechanical services or SMS. Third quarter EBITDA of $39.8 million was flat compared with EBITDA in the third quarter of the prior year.
Year-to-date sales through the third quarter of fiscal 2022 were $678 million, a 5.4% increase from last year's third quarter, year-to-date sales -- from last year's third quarter year-to-date sales of $643 million.
Excluding the impact of SMS divestitures, sales would have increased 8.6% year over year on a pro forma basis.
Fiscal 2022 year-to-date net income of $62.4 million was $38.9 million or 166% above the prior year-to-date reported net income of $23.5 million and $23.1 million or 58.9% above the adjusted net income from the prior year-to-date period, wherein the company had recorded impairment and restructuring charges net of tax of $15.8 million.
EPS on a year-to-date diluted share basis is $2.48 compared with $0.90 reported in the prior year and $1.50 on an adjusted basis.
Current year-to-date earnings per share improved $0.98 or 65.3% over the year-to-date 2021 results.
While we continue to return capital to our shareholders through dividends and share repurchases, our balance sheet remains strong.
The following are capital allocation highlights for the year.
On a gross basis, outstanding debt at the end of the quarter was $192 million, consisting of $150 million on our 7- and 12-year senior notes and $42 million outstanding on our revolving credit facility.
This reflects a $13 million increase in borrowings from the end of the last fiscal year.
Borrowings have increased, primarily as a result of our continued share repurchase activity, higher receivables and higher inventories as the business volumes improve.
Year to date, we have deployed $19.1 million in capital investments and anticipate capital investments of roughly $32 million this year, slightly below our previous estimate of $35 million.
Supply chain constraints have continued to impact and delay the timing of spending on our planned capital expenditures.
We repurchased 7.6 million in outstanding stock during the quarter and year-to-date have repurchased 712,000 shares or $28.9 million.
We declared and continue to make quarterly dividend payments.
Through the nine months ended November 30, 2021, cash flows generated from operations was $49.7 million, down $9.7 million or 16.4% from the same period in the prior year.
Operating cash flows were positively impacted by the higher earnings but were more than offset by higher receivables on increased sales and increased inventories, primarily as a result of higher zinc costs in our metal coatings.
We continue to remain active on the merger and acquisition front and completed the acquisition of the galvanizing operation in South Carolina that will expand our Southeast footprint and should be accretive during the first year of operation, as Tom had noted earlier.
Here are some key indicators that we are paying particular attention to.
For the metal coating segment's Galvanizing business, we are carefully tracking fabrication and construction activity and material and labor cost inflation as well as OSHA's COVID vaccine mandate.
For the surface technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance.
For infrastructure solutions, domestic turnaround and outage activity has returned to a normal level.
The spring season is currently looking to be good, although we remain cautious due to COVID, particularly for international customers.
The electrical platform is benefiting from transmission distribution and utility spending and growing data center and battery energy storage activity.
In regards to the strategic review of infrastructure solutions and stated desire to become predominantly a metal coatings company, we have meaningfully advanced our work on a couple of strategic options that are designed to achieve this commitment.
Unfortunately, due to related NDAs, we are not able to comment further at this time.
We remain committed to our growth strategy around metal coatings and achieving 21% to 23% operating margins with galvanizing performance being quite steady, while we continue to improve Surface Technologies.
We will remain acquisitive, particularly in metal coatings and hope to complete one more acquisition before the end of this fiscal year.
For infrastructure solutions, we are focused on profitability and cash flow.
This segment's business unit should benefit from more normalized turnaround outage seasons and a solid market for renewables, transmission and distribution, utility, battery energy storage, data center e-houses and switchgear.
We did issue our first ESG report this past quarter and we'll continue to pursue improvement in these areas.
And finally, our normal cadence would be to issue guidance for fiscal year 2023 later this month, but we will not be doing so.
While we are committed to providing sales and earnings per share guidance, we may not be in a position to do so until our work on the strategic options can be factored in. | compname reports results for third quarter of fiscal year 2022 generates earnings per share of $0.85.
compname reports results for third quarter of fiscal year 2022; generates earnings per share of $0.85.
q3 earnings per share $0.85.
q3 sales rose 2.3 percent to $231.7 million.
reaffirms fy earnings per share view $3.00 to $3.20.
sees fy sales $865 million to $925 million.
compname reports results for third quarter of fiscal year 2022; generates earnings per share of $0.85.
azz inc - qtrly sales of $231.7 million, up 2.3% versus last year.
azz inc - reaffirming fiscal year 2022 sales guidance and anticipate annual sales to be in the range of $865 million to $925 million.
azz inc - sees earnings per share to be in the range of $3.00 to $3.20 per diluted share for fiscal year 2022. | 1 |
With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Chief Financial Officer; Andrew Johnson, Executive Vice President and Chief Legal Officer; and John Nypaver, Vice President and Treasurer.
Actual results may differ materially.
Before we begin, let me wish all of you a healthy and happy New Year ahead.
2020 was an unprecedented year for everyone dealing with the COVID virus, but I'm happy to see improvements around the world as the new vaccines are being distributed in increasing numbers.
I trust that 2021 will be a much better environment as we emerge from this crisis period.
Before discussing our progress in 2020, let me comment on the postponement of our 10-K filing.
As you know, one of our key actions last year was to begin divesting assets that were not core to our Additive Manufacturing business.
We quickly prioritized the sale of our two software businesses GibbsCAM and Cimatron.
They were focused on subtractive or machining technology.
This divestiture, while complex to execute, went very well, and we closed at the end of the year, which allowed us to eliminate our debt and have cash on the balance sheet for future investment.
Our auditors have asked for a little more time to bring their work to a close, and we therefore filed for an extension of our 10-K.
With that said, we were very pleased to be able to release our Q4 and full year operational results last evening, which we have labeled as 'Unaudited' for clarity, and to discuss them with you today.
With that, let me now recap the progress we've made in our business and our view of the future.
For 3D Systems, 2020 presented both significant challenges and, along with them, clear opportunities for us to focus our company on what we believe will be an accelerating need for Additive Manufacturing across many industries moving forward.
Many of you may recall that one of my first actions upon joining the company last May was to clearly define our purpose statement, that is to be the leader in enabling additive manufacturing solutions for applications in growing markets that demand high reliability products.
Using this as our guidepost, we then developed a four-stage plan to deliver increased value to both our customers and our shareholders.
Our four-part plan was simple: reorganize into two business units, Healthcare and Industrial solutions; restructure our operations to gain efficiencies; divest non-core assets; and invest for accelerated profitable organic growth.
We set aggressive measurable goals and timelines and focused intensely on execution.
These efforts began bearing fruit quickly with a return to growth in Q3, and rapidly building momentum on both our top and bottom line in Q4.
From a topline perspective, the results really speak for themselves.
Both our Healthcare and Industrial businesses delivered exceptional double-digit revenue growth on a consecutive quarter basis with our Healthcare business even surpassing last year's pre-COVID performance by a significant margin.
From a bottom-line perspective, the combination of volume growth and the increasing benefit from our restructuring efforts, improved operating margin significantly, returning the company to profitability and positive operating cash performance.
This was our first quarter of year-over-year revenue growth since 2018, and we delivered it while still battling the worst global pandemic in modern history and while executing a massive top to bottom reorganization and restructuring of the company.
I could not be prouder of our leadership team and our tremendous employees worldwide who never took their eye off meeting our customer commitments through all of this change.
This success has left us in a terrific position moving forward as the virus subsides and the world begins recovering in earnest later this year.
With that quick summary, let me share a few highlights from each phase of our plan.
Let's begin with reorganization.
As a reminder, our company is focused on application-specific solutions for our core vertical markets, Healthcare and Industrial.
Over the second half of 2020, we reorganized our sales and marketing activities, combining our hardware, material, software, and services resources into a unified application-oriented customer-focused organization, rather than having multiple independent teams as in the past.
This reorganization not only improved our sales efficiencies, it also allowed us to work much more effectively with our customers on specific application solutions, which is a cornerstone of our strategy moving forward.
Within each of our two business units, we have market-specific vertical leaders focused on key growth markets, such as dentistry, personalized health services, and medical devices within our Healthcare business, and aerospace, automotive, electronics, and consumer products for our Industrial business units.
These business and market leaders determine both our go-to-market strategies and our development priorities for new products and services, ensuring the specific customer application needs are kept at the forefront of our resource allocation process.
In addition to these changes in our sales structure, we also created a new group we call our customer success team.
This group ensures that our customer needs continue to be met after their initial purchase over the life of the system.
It includes servicing and upgrades of the equipment, providing our customers immediate access to our rapidly expanding materials portfolio, and delivering software upgrades that drive improved efficiencies in their manufacturing environment.
These benefits ensure that the value our customers receive from their 3D Systems solution grow substantially over the life of their ownership, which can often exceed 15 years from the initial purchase.
A testament to our success in delivering this value is seen in our customers' operations around the world each day.
The 3D Systems technology provides over a 0.5 million production parts every 24 hours, 365 days a year, which is more than the rest of the industry combined.
And with the breadth of our additive technologies now spanning an enormous range of plastic and metal application solutions, we're well positioned to build upon this foundation at an even faster pace moving forward.
So with an understanding of how we're organized, let me comment briefly on our sales performance in the fourth quarter and the current market dynamics.
For Healthcare business, we delivered exceptional growth in Q4 and notably this growth was seen broadly in both dental and medical applications, the latter of which includes medical devices, personalized healthcare, simulation systems and -- moving forward -- regenerative medicine or bioprinting for short.
I'll comment further on this new area of the business in a few moments.
But for now, suffice to say that our Healthcare business exited the year firing on all cylinders and we're very excited about the short and long-term outlook for this business.
For our Industrial business, while we are still in a recovery phase from the extreme softness we experienced in the middle of 2020, in Q4 we were pleased to build upon the positive momentum we had established in Q3.
Our Industrial business growth reflected increased demand in markets like aerospace, automotive and consumer applications as the industrial economy continued to slowly recover.
We expect this momentum to continue in 2021.
However, the risks of COVID headwind still linger until the vaccines are more widely distributed later this year.
Once these pressures fully subside, we're very bullish on the outlook for this business.
Next, I'll spend a few minutes summarizing our restructuring efforts.
Last summer, we announced a restructuring program that was designed to ultimately yield a $100 million of run rate cost savings with $60 million to be achieved by the end of 2020.
I'm pleased to say that we achieved our $60 million savings target by year-end and that our efforts are continuing unabated.
Looking ahead, we have detailed plans within our core additive business to deliver an additional $20 million in savings this year, with the balance of $100 million linked to our analysis of future divestitures.
As these efficiencies are realized, we will make prudent investment decisions to support the increasing opportunities for growth and profitability that we see ahead for our company and for the additive manufacturing industry in total.
Jagtar will talk more about this in a few minutes.
Moving next to our divestiture efforts.
Having defined our company's focus last summer, we progressively evaluated all of our assets using this lens.
It quickly became clear last year that certain of our businesses, while good performers in their own right, clearly did not feel well within our focus on additive manufacturing.
As such, we began discussions with interested parties in several areas and successfully completed the sale of Cimatron and GibbsCAM at the year-end.
These two businesses were focused on digital machining technologies and, as such, were outside of our core.
Completion of the sale brought us increased organizational focus while enabling us to eliminate our debt and add cash to our balance sheet for future investment.
We will continue to evaluate assets for divestment, consistent with our core strategy in the quarters ahead.
The fourth phase of our transformation process corresponds to investment for growth.
As we move into 2021, we see two significant drivers of accelerated demand.
One is the technical maturity of additive solutions on an industrial scale, which is now become increasingly clear to OEMs worldwide.
The second is an accelerating cultural change in our customer base associated with the rise of a new generation of engineering design leadership that was exposed from a young age to additive manufacturing.
These engineers, which began entering the workforce in large numbers over the last decade, are embracing the benefits and design paradigms associated with additive manufacturing, which essentially decouples component complexity for manufacturing costs.
This allows our customers to design products that have greatly enhanced performance and reliability, while avoiding cost penalties that would occur using traditional machining, molding, or casting methods.
When combined with the new materials that are now available for printing, the result is a dramatic increase in demand for Additive Manufacturing solutions.
To be a leader in this exciting market, we believe that a company must have expertise in hardware and software, with a strong portfolio of advanced materials to enable application solutions that are critical to our customers' product performance and cost objectives.
Solving for specific applications often requires a unique combination of these elements which we bring together through our application engineering experts.
Moreover, many customers have a strong need for both polymer and metal solutions, which is why we continue to invest systematically in both technology areas and leverage them as required to meet these rapidly evolving needs.
Looking ahead, we see significant growth opportunities in each of our core markets.
Within Healthcare, this includes dental applications as well as a rapidly growing range of medical device applications and the emerging field of personalized health services.
These services encompass both surgical aids that are custom-created, to match a patient's specific procedure as well as implanted devices that aids in the patient's recovery or quality of life.
We anticipate all of these applications for which performance and quality are of paramount importance to be both the near-term and long-term drivers of the business.
Adding additional exciting momentum to our Healthcare business over the long-term, meaning 2022 and beyond, will be our newest area of development, regenerative medicine.
As we announced in mid-January, over the last three years, our Chief Technology Officer and the Inventor of the entire Additive Manufacturing industry, Chuck Hull and his team, have been working very closely with our partner, United Therapeutics, to demonstrate the capability to actually print human organs in order to address the enormous need of transplant patients.
The first application selected for development was a fully functioning biocompatible human lung.
In December, we created a -- we reached a critical milestone in these efforts.
In short, we demonstrated the capability to reproducibly print extremely complex, ultra-thin walled structures using collagen-based and other biocompatible materials.
These structures which have the required balance of properties needed for organ application, enable vascularization to support blood flow, and thus the ability to sustain human life.
The printed structures are perfused with human cells, which can thrive and multiply, which is why the team has named the process Print to Perfusion.
While there is more work to do, including completion of the required regulatory approvals, the printing technology that has now been demonstrated for the lung application can be taken in many additional directions.
Near term applications are numerous, such as the creation of customized soft tissue implants for trauma patients or for use in breast reconstruction following mastectomy.
In the laboratory, the creation of test modules termed tissue-on-a-chip could be used to better simulate human response to new drug therapies, shortening the development time and reducing or even eliminating the need for animal testing.
All of these applications and a host of others are now within reach, which is why we've made the decision to increase our internal investments and to expand our application partnerships in regenerative medicine in 2021.
So in short, looking ahead for Healthcare business, we see an exciting year ahead.
This momentum continues to build with expanding applications and an even more exciting long-term outlook as regenerative medicine opens entirely new and potentially significant markets for the company.
Turning to our Industrial business, we see a continuation of recovery as the impact of COVID on the global industrial economies recedes.
We are particularly excited about our near-term efforts in space systems, where additive manufacturing of large, complex, metal components for rocket propulsion is helping build a foundation of experience for our newest generation of metal printers, which are particularly well suited to high temperature, lightweight materials.
Automotive and semiconductor equipment applications are also offering near-term growth potential, as is electrical componentry applications where customization is beneficial to performance.
Based upon our development pipeline, we also expect 2021 to be an exciting year for expansion of our materials portfolio, which is central to the benefits that our customers derive from the use of additive manufacturing.
The availability of these new materials in concert with our customer success team, organizational change, is intended to maximize the benefits we bring to our customers over the lifetime of their investment in our printing technology.
To end on an exciting note, with regard to our Industrial business, we were very pleased to announce last week a brand new industrial product platform for 3D Systems, which we refer to as High Speed Fusion or our HSF technology.
This filament fusion process developed in conjunction with Jabil is specifically targeted at aerospace and automotive applications.
Growing out of a project, we referred to as Roadrunner, the printer itself is three times faster and more precise than competing systems in the market today.
It also has a significantly larger working volume and very high temperature printing capability that is essential to next generation polymer systems for the demanding aerospace and automotive applications with size, speed and precision that exceeds any of the current market offerings.
Equally important, we will be offering a broad range of materials for this new platform, which should further accelerate its adoption in the market.
Based upon our initial analysis, these new markets that Roadrunner will open for us are in excess of $400 million and we'll expand from there as the full capabilities of the new platform are adopted.
This development effort has been under way for over a year, and we expect the platform to be fully available to the market in 2022.
This adds one more exciting dimension to our Industrial business.
So let me conclude my introductory comments by saying simply that we're very pleased with our progress over the last six months.
We look forward to building upon this momentum with a strong focus on growth and gross profit margin expansion in our core Additive Manufacturing business moving forward.
With a strong balance sheet, improving margins and exciting growth opportunities opening ahead of us, we look forward to a terrific future for all of our stakeholders.
Let me begin my commentary by reminding everyone that the financial data that we are discussing remain subject to final audit by our independent registered public accounting firm.
As a result, our actual results may differ from the anticipated results discussed.
As Jeff discussed earlier, in the fourth quarter, we achieved a development milestone in our regenerative medicine efforts.
This triggered a cash payment from one of our development partners related to this achievement.
That payment and our growing initiative in regenerative medicine prompted us to reevaluate our accounting methodology for this contract.
However, it is important to note that this recasting has only a minor impact on the numbers and does not have any impact at all on our bottom line reported results.
In addition, to be extremely clear, when viewed in the context of our overall revenue growth in the fourth quarter, the impact of this payment was immaterial to our results.
Even if the payment would have been entirely excluded, we would still have seen year-over-year growth in the fourth quarter.
Now moving on to the numbers, starting with a look at the full year 2020.
2020 revenue of $557.2 million decreased 12.4% compared to the prior year, primarily due to the impacts of COVID-19, the effects of which occurred most severely at the onset of the pandemic, with a strong rebound in activity in the second half of the year.
As we discuss our results in the future, it will be important to compare our growth to a baseline that excludes revenue from divestiture activities, such as the divestitures that closed just after the new year.
This revenue will no longer be part of our operating model, and we want to provide a clear baseline revenue for 2020 on which we intend to grow organically in 2021.
As such, excluding $44.4 million of revenue from businesses that were divested last year or at the beginning of this year, baseline 2020 revenue would have been approximately $512.8 million.
Our growth from this baseline provides a way to measure performance of our Additive Manufacturing business in 2021.
Gross profit margin on a GAAP basis for the full year 2020 was 40.1% compared to 44.1% in the prior year.
Non-GAAP gross profit margin was 42.6% compared to 44.8% in the prior year.
Gross profit margin decreased primarily due to the under-absorption of supply chain overhead resulting from lower production and end-of-life inventory changes of $12.4 million and mix.
Operating expenses for the full year 2020 on a GAAP basis increased 1.4% to $342.3 million compared to the prior year.
On a non-GAAP basis, operating expenses were $236.9 million, a 16.2% decrease from the prior year.
The lower non-GAAP operating expenses reflected savings achieved from cost-restructuring activities as well as reduced hiring and lower travel expenses resulting from the coronavirus pandemic.
Moving on to the specifics of the fourth quarter.
For the fourth quarter, we expect revenue of $172.7 million, an increase of 2.6% compared to the fourth quarter of 2019 and an increase of 26.8% compared to the third quarter of 2020, driven by growth in both Healthcare and Industrial.
We were quite pleased with this organic revenue growth, which we delivered while still facing headwinds from the pandemic that impacted our operations and those of our customers.
We expect a GAAP loss of $0.16 per share in the fourth quarter of 2020 compared to a GAAP loss of $0.04 in the fourth quarter of 2019.
Turning to non-GAAP results.
We expect non-GAAP income of $0.09 per share in the fourth quarter of 2020 compared to non-GAAP income of $0.05 per share in the fourth quarter of 2019.
Consistent with our new strategic focus announced late last year, we are now discussing revenue by market, Healthcare and Industrial.
Revenue from Healthcare increased 48% year-over-year and 42.4% quarter-over-quarter to $86.6 million, driven by all parts of the Healthcare business: dental, medical devices, simulators and regenerative medicine.
Excluding dental applications, revenue in the balance of the Healthcare business, which we refer to broadly as medical applications, increased 27.7% year-over-year.
In short, we were very pleased with both the magnitude and the breadth of the revenue growth in our Healthcare business in the fourth quarter.
Industrial sales decreased 21.6% year-over-year to $86 million as demand has not fully rebounded to pre-pandemic levels.
On a sequential quarter-over-quarter basis, we saw broad-based revenue improvement of approximately 14.2% in our Industrial business, with no single customer or segment responsible for the improvement.
Now we turn to gross profit margin.
We expect gross profit margin of 42% in the fourth quarter of 2020 compared to 44.1% in the fourth quarter of 2019.
Non-GAAP gross profit margin was 42.9%, compared to 44.3% in the same period last year.
Gross profit declined year-over-year, primarily as a result of timing and the reallocation of costs from opex to cost of goods sold.
Looking forward, and as mentioned previously, our gross profit will be impacted by the sale of our Cimatron and GibbsCAM software business.
While revenue in these two businesses were expected to decline, their divestiture is expected to negatively impact gross margins going forward by about 300 to 400 basis points, while our restructuring and transformation activities will benefit gross margins.
Net, going forward in 2021, we expect non-GAAP gross margins in a range of 40% to 44%.
Operating expenses for the fourth quarter were $71.7 million on a GAAP basis, a decrease of 9.2% compared to the fourth quarter of 2019, including an 11.2% decrease in SG&A expenses and a 3.1% decrease in R&D expenses.
Importantly, our non-GAAP operating expenses in the fourth quarter were $58 million, a 15.8% decrease from the fourth quarter of the prior year as we saw the benefits from our restructuring efforts.
The primary differences between GAAP and non-GAAP operating expenses are $6.1 million in restructuring charges as well as $4 million in amortization of intangibles and stock-based compensation and $3.7 million in legal and divestiture-related charges, consistent with our historical GAAP to non-GAAP adjustments.
Next, I would like to briefly touch on our cost-reduction activities.
Recall that in 2020 we announced a restructuring to reduce operating costs by $100 million per year, with $60 million of annualized cost reduction by the end of 2020.
As Jeff mentioned, we were pleased that we delivered on our objective of $60 million cost reduction in 2020.
In addition, we have plans for an additional $20 million of cost reductions in 2021.
Additional cost reductions beyond what is currently planned for 2021 require us to streamline and integrate parts of our business that we may instead choose to divest.
Therefore, the plans to achieve the remaining $20 million toward our $100 million cost-reduction plan will be achieved by divestitures or through further cost reductions that we will implement once we have finalized our divestiture analysis.
As we look forward in 2021, our operating expenses will be impacted by the sale of our Cimatron and GibbsCAM business, our cost-transformation activities and our investment decisions that are expected to drive future growth.
We are excited about the opportunities in our markets and will continue to make investments in 2021 to position the company well for future growth.
This quarter, we are introducing adjusted EBITDA as a metric that we find useful in measuring the health of the business.
We focus on adjusted EBITDA as evidence of the results of our strategy and restructuring actions, and we believe it is a helpful metric to use to compare to prior results.
Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $28.7 million or 5.2% of revenue in 2020, compared to $31.2 million in 2019 or 4.9% of revenue.
For the fourth quarter of 2020, adjusted EBITDA improved materially to $22.9 million or 13.2% of revenue, compared to $12.9 million or 7.7% of revenue in the fourth quarter of 2019.
The improvement is the result of the business growth in the quarter as well as the results from our restructuring efforts.
We were pleased that we could grow adjusted EBITDA in Q4 despite the challenging economic environment.
Now let's turn to the balance sheet.
We ended the quarter with $84.7 million of cash on hand, including restricted cash and cash and assets held for sale.
Cash on hand decreased $50 million since the beginning of 2020.
Importantly, our cash on hand increased $8.4 million from Q3 2020 to Q4 2020.
We did not issue any shares under our at-the-market equity program called the ATM program during the quarter.
Therefore, the increase in cash on hand reflects the improved operating performance of the company and the flow-through of cost actions that we have taken.
Our term loan at the end of the year was $21 million.
We have a $100 million revolver that was undrawn as of December 31, 2020, and has approximately $62 million of availability based on terms of the agreement.
Following the sale of our Cimatron and GibbsCAM business, which officially closed at the beginning of January, we used part of the proceeds to pay off the term loan, making us debt-free and in net cash position as we moved into the new year.
Additionally, as previously discussed, we terminated the ATM program.
As we look forward into 2021, we have greatly improved the operating efficiencies of our business and are continuing to do so.
We are focused heavily on reinvesting for growth based on the increasing opportunities we see for our core additive manufacturing business, and we are continuing the evaluation of our portfolio with an eye toward the potential for divestitures and subsequent reinvestment of proceeds into our core business efforts.
We believe that our market opportunity has considerable growth potential.
We have made tremendous progress in cost reduction and operational efficiency and have chosen to reinvest portions of the savings back into the business to drive future growth.
In 2020, we completed the reorganization and restructuring of our company to drive growth in our core businesses, successfully achieving our targeted cost savings while focusing on delivering application solutions for our customers.
As a result, we're now a company with a strong focus on two key markets, Healthcare and Industrial Solutions, and one that has a much more streamlined and efficient cost structure.
We started 2021 by completing the sale of our Cimatron and GibbsCAM software businesses, and we'll continue to see cost savings from our restructuring efforts throughout the year.
We'll continue to explore divesting noncore assets and look to grow our customer relationships through focusing on application solutions in our most exciting growth markets.
We believe revenue in our core business centered around a solutions-based approach to Additive Manufacturing will grow rapidly moving forward.
And we'll selectively invest for growth opportunities like regenerative medicine, materials development and ongoing improvement in our product lines.
Many may ask what rapidly means in terms of growth rates.
All we can say today is that uncertainty remains around the pace at which COVID impact will receive and the global economies rebound.
We're hopeful that the momentum continues to accelerate.
And with that, we'll be able to deliver double-digit growth rates in our core additive business in the year ahead, but these next few months will ultimately determine this outcome.
What I can say with certainty is that our continued focus on operational execution.
We are very excited about the trajectory we're on and the future value we expect to bring to all of the stakeholders in our company. | compname says q4 loss per share $0.16.
q4 revenue $172.7 million versus refinitiv ibes estimate of $168.5 million.
on a non-gaap basis, company expects 2021 gross profit margins to be between 40% and 44%.
qtrly loss per share $0.16.
qtrly non-gaap basic and diluted income per share $0.09. | 1 |
Let's begin with the summary of results on Page 3.
As we guided back in September.
July August trends were positive and we are exceeding our internal forecast.
This dynamic continued through September.
In addition to the improving demand environment, we are very encouraged by our manufacturing operations and supply chain performance in the quarter.
This solid operation execution had two tangible benefits in Q3.
First, it increased our capacity to deliver a higher volume than expected from the backlog in our long cycle businesses, and as you see the positive impact to the top line.
And second, through a combination of mixed and fixed cost absorption, it drove a robust margin performance for the quarter.
Demand trends continued to improve sequentially across most of the portfolio.
The trajectory continues to vary by market, and I'll talk more about that, but our diverse end market and geographic exposure is clearly an asset to us in the downturn.
Revenue declined 5% organically and bookings were flat, with a third of our operating companies posting positive year-over-year bookings for the quarter, and more than half posting positive comparable growth in the month of September.
We are not out of the woods yet, but the trajectory is encouraging and we continue to carry a healthy backlog going into the fourth quarter and into next year.
We delivered strong margin performance in the quarter and year-to-date.
We achieved margin improvement in the quarter despite lower revenue, driven by our operational multiyear efficiency initiatives gaining further traction and by improved business mix, some of which we highlighted at our recent Investment Day, focused on the Pumps & Process Solutions segment and biopharma business in particular.
With the strong results to date, we expected to over deliver on our full-year conversion margin target and are now driving toward achieving a flat consolidated adjusted operating margin for the year.
Cash flow in the quarter was strong at 17% of revenue and 127% of adjusted net earnings.
Year-to-date, we have generated $117 million more in free cash flow over the comparable period last year, owing to a robust conversion management and capital discipline.
As a result of our performance in the first three quarters of the year and a solid order backlog, we are raising our annual adjusted earnings per share guidance to $5.40 to $5.45 per share.
We are not in the clear on the macro backdrop and performance remains uneven between markets, but we believe that our performance to date and the levers we have in our possession will enable us to absorb any possible dislocations in the fourth quarter should they materialize.
Let's move to Slide 4.
General industrial capital spending remains subdued in Q3, resulting in a 10% organic decline for an Engineered Products, driven by softness in capex levered industrial automation, industrial winches and waste handling.
Additionally, our waste handling business had the largest quarter ever in the comparable period last year, making it a challenging benchmark.
On the positive side, aerospace and defense grew double digits on shipments from a strong backlog and we've seen robust recovery in our vehicle aftermarket business after a difficult couple of quarters.
Productivity actions, cost actions and favorable mix minimize margin erosion in the quarter, nearly offsetting the impact of materially lower volumes.
And Fueling Solutions saw continued albeit sequentially slower growth in above-ground equipment in North America on EMV compliance and regulatory activity, whereas national oil companies in China continued to defer capital spending amid ongoing uncertainty.
Demand for below-ground equipment has improved sequentially as construction activity restarted, but remain subdued globally.
And in China, we are still weathering the roll off of the double-wall replacement mandate.
Margin performance in the segment was very good and a testament to the operational focus and capability of the management team and was achieved through productivity improvements, cost controls and favorable regional mix, more than offsetting volume under-absorption.
Sales in Imaging & Identification declined 8% organically due to continued weakness in digital textile printing.
We've seen improving demand for textile printing consumables, reflecting recovering in printing volumes, however, has been insufficient to prompt fabric printers to invest in new machinery.
We expect conditions to remain challenged for the balance of the year.
Marking and coding was flat on strong demand for consumables and overall, healthy activity in the US and Asia despite lingering difficulties with customer site access and service delivery.
Despite segment margins being down relative to the comparable quarter driven by digital printing volume and fixed cost absorption, margin improved in marking and coding on flat revenue was a result of the mix of effect on consumables and operational initiatives undertaken in prior periods, which also provide a solid base for incremental margins in 2021 as textiles recover.
Pumps & Process Solutions continued to demonstrate the resilience of its product portfolio, some of which we highlighted in last month's Analyst and Investor Day.
Strong growth continued in biopharma, medical and hygienic applications.
Plastics and polymers shipped several large orders from its backlog, which were initially slated to ship in Q4, getting it to a slightly positive revenue performance year-to-date.
Compression, components and aftermarket continue to be slow on weaker activity in US upstream and midstream.
Industrial pumps activity remained below last year's volumes, but has improved sequentially.
This was another quarter of exemplary margin performance in the segment, with more than 300 basis points of margin expansion driven by broad based productivity efforts, cost controlled and impacted businesses, favorable mix and pricing, which more than offset lower volume and some of the portfolio.
Moreover, the recovery was broad based.
Our food retail business, the largest in the segment, grew organically and restarted remodeling activity in supermarkets.
Belvac, our can making business began shipping against its record backlog, which we believe is in the early innings of a secular growth trend.
Heat exchangers were approximately flat with continued weakness in HVAC, offset by strength in residential and industrial applications, including semiconductor server and medical cooling.
Commercial food service improved, but margins remain impacted due to continued weakness and institutional demand from schools and similar venues, while activity and large chains have slowly recovered.
Cost actions taken earlier this year, as well as improved efficiency in volume more than offset the demand headwinds in food equipment, resulting at appreciable margin accretion.
We expect to continue delivering improved comparable profits in the segment in line with our longer term turnaround plan.
I'll pass it to Brad from here.
Let's go to Slide 5.
On the top is the revenue bridge.
Several of our businesses, including plastics & polymers, beverage can making and food retail returned to positive organic growth in the third quarter, while biopharma continued its strong growth trajectory from prior quarters.
FX, which had been a net revenue headwind for us since mid-2018, flipped in the quarter and benefited top line by 1% or $12 million, driven principally by strengthening of the euro against the dollar.
Acquisitions more than offset dispositions in the quarter by $3 million.
We expect this number to grow in subsequent quarters.
The revenue breakdown by geographic area reflects sequential improvement in each major geography, but particularly encouraging is the trajectory in North America and Europe.
The US, our largest market, declined by 4% organically due to softness in waste handling industrial winches and precision components, partially offset by a strong quarter in our above-ground retail fueling, marking and coding, beverage can making, and food retail businesses among others.
Europe declined by 4% organically, a material improvement compared to a 19% decline in Q2, driven by constructive activity in our pumps, biopharma and hygienic, and plastics and polymer businesses.
All of Asia declined 10% organically, while China representing approximately half of our business in Asia, posted an 8% year-over-year decline.
We continue to face headwinds in China in retail fueling due to the expiration of the underground equipment replacement mandate and slower demand from the local national companies [Phonetic].
Outside of retail fueling, we saw a solid growth in China.
Moving to the bottom of the page.
Bookings were nearly flat, down 1% organically year-over-year, compared to a 21% decline in Q2, reflecting continued momentum across our businesses.
In the quarter, we saw organic declines across four segments, but sequential improvement across all segments, and a particularly strong booking quarter for our Refrigeration & Food Equipment segment, driven primarily by record order intake in our can making business.
These orders relate to large projects that are mostly projected to ship in 2021 and 2022.
Overall, our backlog is currently approximately $200 million or 14% higher compared to this time last year, positioning us well for the remainder of the year and into 2021.
Note that, a material portion of the backlog increase was driven by orders in our can making business, which I mentioned above.
Let's go to the earnings bridges on Slide 6.
On the top of the chart, despite a $77 million revenue decline in the quarter, we were able to keep our adjusted segment earnings approximately flat year-over-year, a testament to our proactive cost containment and productivity initiatives that help drive 100 basis points of adjusted EBITDA margin improvement.
Some of the recent initiatives will continue supporting margins into 2021.
Going to the bottom chart.
Adjusted net earnings declined by $3 million, principally driven by higher corporate costs related to deal fees and expense accruals, partially offset by lower interest expense and lower taxes on lower earnings.
The effective tax rate excluding discrete tax benefits is approximately 21.5% for the quarter, substantially the same as the prior year.
Discrete tax benefits quarter-over-quarter were approximately $2 million lower in 2020.
Right sizing and other costs were $6 million in the quarter relating to several new permanent cost containment initiatives that we pulled forward into this year.
Now on Slide 7.
We are pleased with the cash performance, with year-to-date free cash flow of $563 million, a $117 million or [Indecipherable] over last year.
Our teams have done a good job managing capital more actively in this uncertain environment, and with the improving sequential revenue trajectory in the third quarter, we rebuilt some working capital to support the businesses and our customers.
Free cash flow now stands at 11.5% of revenue year-to-date, going into the fourth quarter, which traditionally has been our strongest cash flow quarter of the year.
I'm on Page 8.
Let's go segment by segment.
In Engineered Products, we expect similar performance as the third quarter.
Vehicle aftermarket had a very good Q3, as the business is able to deliver on pent up demand.
Notably, we have a tough comp in Q4 due to some promotional campaigns, but this is a business which has excellent prospects for 2021.
Activity in waste handling is picking up with private haulers, but orders placed are mostly for 2021.
We expect municipal volume to remain subdued for the balance of the year.
Demand is reaccelerating for digital solutions in the space and overall, we are constructive on the outlook for this business into 2021.
We are seeing some encouraging signs in industrial automation and automotive OEM markets, in particular, in October.
Aerospace and defense continues to be steady, most of what we plan to deliver in the next quarter is in the segment's backlogs.
We don't expect material upside and/or downside from our forecasts.
We expect margin to be modestly impacted by volume and negative mix relative to Q3, largely due to demand seasonality.
Fueling Solutions remain constructive finishing the year and into 2021.
As we've been guiding all year, we have a tough comp in Q4 due to record volumes in the comparable period.
Despite the top line headwinds, we expect to hold year-over-year absolute adjusted operating profit as a result of our efforts done on product line harmonization, productivity and pricing discipline.
We expect 2021 to be a good year as demand trends remain constructive for our above-ground and software solution businesses and we turn the corner on below-ground, fluid transfer and vehicle wash.
Imaging & ID should remain steady.
We saw robust activity in marking and coding exiting the third quarter and the backlog in the business is higher than last year.
Activity in serialization software space is also picking up nicely.
In digital print, demand for inks has picked up, which is a sign of improving printing volumes.
We are seeing a pickup in quotations for new machines, but we expect a few more quarters before we return to normal levels in this market.
In Pumps & Process Solutions, we expect current trends to continue for biopharma, plastics and processing, continuing the robust trajectory in pumps recovering to more normal levels, particularly in defense and select industrial applications.
Compression product lines within the precision components exposed to mid-and-downstream are likely to see continued weaknesses in Q4 as projects and maintenance continue to be deferred.
Overall, the Pumps & Process Solutions outlook is supported by segment backlog that is aligned with what we had at this point last year.
Let's get on to the last segment, Refrigeration & Food Equipment.
First, as I said, we were in the early innings of what we believe to be a multi-year secular build-out of can making capacity, as evidenced by our backlog, driven by the transition from plastic to aluminum containers and also the spike in demand for cans at home consumption of food and beverages.
In food retail, we delivered low teens margin for Q3, converting on our backlog, providing us a baseline to reach our 2021 margin aspirations.
Our backlog is beginning to build moving into 2021.
As you all know, this is a seasonal business, so Q4 volume and fixed cost absorption declines in Q4.
And frankly, it's all about 2021 from here and Q3 was a sign of good progress.
We have a robust backlog in heat exchanges and are constructive in this market.
Our capacity expansion projects are being completed and we have some interesting new products in the pipe.
Finally, in commercial food service, large chain should continue to support activity, but will not fully offset weakness on the institutional side.
Overall, for the segment, comparable profits and margins for the segment are forecasted to be up in Q4 to the comparable period.
With strong margin performance to date, we intend to deliver approximately flat year-over-year adjusted margin this year, despite a lower revenue base.
As you may recall, we entered the year with a program entailing $50 million in structural cost reductions as part of our multi-year program highlighted at our 2019 Investor Day.
We actioned more structural initiatives, which resulted in approximately $75 million of permanent cost reduction in 2020, leaving a $25 million annualized carryover benefit into 2021.
We view this as a down payment on the 2021 portion of our multi-year margin improvement journey.
And we'll update that with more to come on 2021 when we report the fourth quarter.
We expect robust cash flow this year on the back of solid year-to-date cash flow generation and target free cash flow margin at the upper end of our guidance between 11% and 12%.
Capital expenditures should tally up to approximately $159 for the year, with most of the larger outlays behind us.
In summation, we're raising our adjusted earnings per share guidance to $5.40 per share to $5.45 per share for the full year, above the top end range of our prior guidance.
We remain on the front foot in capital deployment posture with several bolt-ons closed last quarter.
We have multiple opportunities in the hopper, and we hope to report on those soon.
And with that, Andrey, let's go to the Q&A. | sees fy adjusted earnings per share $7.30 to $7.40.
guidance for full year 2021 revenue growth was raised to 15% to 17%. | 0 |
On the call, we have Raghu Raghuram, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer.
Actual results may differ materially as a result of various risk factors described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC.
In addition, during today's call, we will discuss certain non-GAAP financial measures.
These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures.
Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, employer payroll tax and employee stock transactions, amortization of acquired intangible assets, realignment charges, acquisition, disposition, certain litigation matters and other items, as well as discrete items impacting our GAAP tax rate.
Our fourth quarter fiscal 2022 quiet period begins at the close of business, Thursday, January 13, 2022.
I am pleased with the continued strong performance in Q3 fiscal year 2022 with revenue of $3.2 billion and non-GAAP earnings of $1.72 per diluted share.
Earlier this month, we successfully completed our spin-off from Dell Technologies.
As a stand-alone Company, we have more strategic and financial flexibility to deliver on our multi-cloud strategy.
We are also able to partner even more deeply with all the cloud and on-premise infrastructure companies to create a better foundation that drives results for our customers.
Customers continue to choose VMware as their trusted digital foundation to accelerate their innovation, and we continue to expand and advance our portfolio to meet their needs in these three ways: one, deliver a cloud-native app platform for building modern applications in a public cloud-first world; two, migrate enterprise applications to a cloud-agnostic infrastructure; and three, build out the secure edge to optimize across our workspace and edge-native applications.
These three focus areas are built on a horizontal set of offerings across networking, security and management.
It's clear that multi-cloud will be the model for digital business for the next 20 years and in this vibrant dynamic marketplace, the pace of innovation is relentless.
VMware is at the center of it.
In the modern app space, we recently provided the Department of Education for one of America's largest cities with application resiliency as part of their business continuity project.
Leveraging VMware Tanzu, the customer now has improved ability to respond to ever-changing needs of students, their families and faculty while protecting student information and creating an environment to accelerate their innovation and automation.
One of our new beta offerings in the space is the Tanzu Application Platform, which will make it easier and simpler for developers to drive productivity and velocity in a more secure fashion on any cloud.
Our Tanzu portfolio is now one of the most comprehensive in the industry for both Kubernetes operations and developer experience.
We also recently unveiled Tanzu Community Edition, a freely available, easy-to-manage Kubernetes platform for learners and users, and Tanzu Mission Control Starter, a multi-cloud, multi-cluster Kubernetes management solution available as a SaaS service.
We are pleased to share some customer stories in support of our VMware Cloud services across the hyperscalers.
PennyMac, a leading financial services firm is leveraging VMware Horizon on VMware Cloud on AWS to provide loan officers and call center agents a more secure work-from-anywhere virtual desktop in a fully automated and scalable cloud environment.
We also worked with the University of Miami, who looked to the Azure VMware solution to support their VMware workloads on their preferred public cloud provider.
Recently, we announced new advancements for VMware Cloud, the industry's first and only cloud-agnostic computing infrastructure.
Newly unveiled Project Arctic will bring the power of cloud to customers running VMware vSphere on-premises.
It will enable cloud-based management for hundreds of thousands of vSphere customers and vSphere deployments around the world.
Customers will be able to benefit from life cycle management, cloud disaster recovery and cloud burst capabilities as an extension of their vSphere deployments.
We will bring Project Arctic to market next year as the next step in making our portfolio available in a subscription and SaaS form factor.
We also announced VMware Sovereign Cloud initiative, where we are partnering across our VMware Cloud providers to deliver cloud services on a sovereign digital infrastructure to customers in regulated industries.
Lastly, we introduced a tech preview of an exciting new management technology, Project Ensemble.
It is designed to manage apps across multiple public clouds, bringing together a comprehensive set of costs, security, automation and performance capabilities for the public cloud environment.
VMware was once again ranked number one in the September 2021 IDC report titled Worldwide Cloud System and Service Management Software Market Shares, 2020: Growth Continues for the Top Vendors.
In the area of Edge, we recently helped an international wholesaler with 800 stores across 30 countries to refresh its decade-old in-store platform.
The VMware Edge Compute Stack is now serving as a single platform for both the customers existing and modern applications, offering a right-sized resilient solution that is providing ROI for their business.
As a continued commitment to helping our customers at the Edge, we recently introduced VMware Edge, a product portfolio that will enable organizations to run, manage and better secure edge-native applications across multiple clouds anywhere.
Together, VMware Cloud, Tanzu, VMware Edge and Anywhere Workspace offer our customers a solution for all of their applications across their multi-cloud environment.
In the security space, VMware is delivering solutions built specifically for threats customers face today.
We use the power of software, combined with a scaled-out distributed architecture, zero trust design principles and a cloud delivery model for better security that's easier to use.
We are excited about our continuing innovation in SASE, Secure Access Services Edge, especially as many businesses are now working as a distributed workforce.
We also announced the industry's first elastic application security edge, which enables the networking and security infrastructure at the data center or cloud edge to flex and adjust as app traffic changes.
In the third quarter, VMware was positioned as a leader in The Forrester New Wave: Zero Trust Network Access Q3 2021.
On the telco front, Vodafone recently selected VMware to deliver a single platform to automate and orchestrate all workloads running on its core networks across Europe, starting with 5G stand-alone.
This recent work builds on Vodafone's previous selection of VMware Telco Cloud Infrastructure as its network functions virtualization platform.
In the third quarter, VMware received additional recognition from leading industry analyst firms, once again being named as a leader in the August 2021 Gartner Magic Quadrant for Unified Endpoint Management Tools.
Additionally, VMware was once again named a leader in the September 2021 Gartner Magic Quadrant for WAN Edge Infrastructure.
Our innovation engine is thriving as we bought many of these new offerings, features, beta programs and partnerships to the forefront during VMworld 2021, which attracted approximately 116,000 registrants.
We look forward to hosting VMworld China and VMworld Japan in the coming weeks.
Our environmental, social and governance agenda continues to be very important to us and core to our culture.
VMware received recognition for our ESG leadership by being included in the Dow Jones Sustainability Indices, one of the world's leading ESG benchmarks for the second consecutive year.
In summary, we strive to serve our customers in three unique ways: by being the trusted foundation for their most critical business operations; by offering a best-of-breed, innovative portfolio of best-in-class solutions to fulfill their multi-cloud vision; and by having a broad set of strategic partnerships required to unlock the full potential of multi-cloud.
We are pleased with our Q3 financial performance, which exceeded our initial expectations and is a continuation of the good performance we've seen all year.
We saw solid demand in the quarter and continued to execute on our multi-cloud strategy.
Total revenue for Q3 was $3.2 billion.
Combined subscription and SaaS and license revenue grew 16% year-over-year totaling $1.5 billion, ahead of our guidance.
Subscription and SaaS revenue of $820 million was up 21% year-over-year, in line with our expectations, representing 26% of total revenue for the quarter.
Subscription and SaaS ARR was $3.3 billion, up 25% year-over-year in Q3.
Our largest contributors to subscription and SaaS were VCPP, Tanzu, EUC, Carbon Black and VMware Cloud on AWS, which saw strong double-digit year-over-year growth in revenue and ARR.
License revenue in Q3 grew 11% year-over-year to $710 million.
The strength we saw was due to good execution in the quarter and our broad installed base of customers that see us as the trusted ally for their mission-critical workloads.
Our strategy is resonating with our customers who are confident that their investments can be leveraged over the longer-term in multi-cloud environments.
Our non-GAAP operating income for the quarter of $935 million was driven by our revenue performance and lower-than-expected growth in expenses.
Non-GAAP operating margin for the quarter was 29.3% with non-GAAP earnings per share of $1.72 on a share count of 422 million diluted shares.
We ended the quarter with $10.2 billion in unearned revenue and $12.5 billion in cash, cash equivalents and short-term investments, which includes proceeds from our $6 billion bond issuance.
The bond issuance proceeds together with $4 billion of additional borrowings from term loan commitments, as well as other available cash on hand was used to fund a special dividend of $11.5 billion.
The special dividend was paid on November 1 to all stockholders of record on October 29 in conjunction with our spin-off from Dell Technologies.
Q3 cash flow from operations was $1,090 million and free cash flow was $984 million.
RPO was $11.1 billion, up 9% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year.
Total backlog was $124 million, substantially all of which consisted of orders received on the last three days of the quarter that were not shipped and orders held due to our export control process.
License backlog at quarter end was $34 million.
We are pleased with the overall bookings performance in Q3 as we continue to scale our subscription and SaaS offerings.
We saw strong year-over-year product bookings growth in major product categories.
Core SDDC product bookings increased over 20% year-over-year.
Compute was up low-double digits, and Cloud Management was up strong double digits year-over-year.
Both of these were helped by our multi-cloud subscription and SaaS offerings.
We saw momentum in VMware Cloud, which includes hyperscalers such as Amazon, Microsoft, Google and Oracle.
We also continue to drive innovation in new product offerings across our Carbon Black Cloud and Tanzu platforms.
NSX increased in the low double digits versus Q3 last year, and vSAN grew in the high-teens year-over-year.
EUC product bookings, as well as sub and SaaS ACV bookings were up in the strong double digits year-over-year.
In Q3, we repurchased approximately 1 million shares in the open market at an average price of $150 per share.
In early October, our Board of Directors authorized up to $2 billion of stock repurchases through FY'24, which replaced the relatively small balance remaining on our prior authorization.
As a part of our capital allocation framework, we plan to use our cash generation and balance sheet to invest in growing our business both organically and inorganically, paying down debt and returning excess capital to shareholders through share repurchases.
In addition, we are committed to maintaining an investment-grade credit profile and rating.
Turning to guidance for fiscal 2022.
We're increasing our expectation for total revenue to $12,830 million, a growth rate of approximately 9% year-over-year.
We expect the combination of subscription and SaaS and license revenue to total $6,305 million, an increase of approximately 12% year-over-year.
Approximately 50.5% of this amount is expected to be subscription and SaaS.
We are increasing guidance for non-GAAP operating margin for the full-year to 30% and non-GAAP earnings per share to $7.19 on a diluted share count of 422 million shares.
We're also increasing our cash flow from operations guidance to $4.1 billion and increasing free cash flow expectations to $3.7 billion.
This reflects our performance in Q3 combined with our outlook for FY'22.
For Q4, we expect total revenue of $3,510 million or a growth rate of approximately 7% year-over-year.
We expect $1,875 million from subscription and SaaS and license revenue in Q4 or an increase of nearly 9% year-over-year with approximately $860 million from subscription and SaaS, reflecting the current pace of adoption of our subscription and SaaS offerings.
We expect non-GAAP operating margin to be 30.4% for Q4 with non-GAAP earnings per share of $1.96 on a diluted share count of 422 million shares.
We typically provide some color on our upcoming fiscal year at this time.
We are driving innovation across the portfolio, scaling our subscription and SaaS offerings and progressively making our products available as subscription and SaaS.
Consistent with the outlook framework we presented at the Financial Analyst Meeting last month, we currently expect total FY'23 revenue to grow in the high-single digits while we continue to build out our subscription and SaaS portfolio.
We are planning on growing our sub and SaaS revenue to nearly 30% of total revenue with our FY'23 exiting ARR growth rate exceeding FY'22's.
We expect non-GAAP operating margin of approximately 28%, which is similar to our initial outlook for FY'22, reflecting continued investments in subscription and SaaS and the resumption of more normalized level of T&E as we support our customers.
In closing, we are pleased with the progress we are making on our multi-cloud strategy as reflected in our performance this quarter and in our outlook for FY'22 and FY'23.
As a stand-alone Company, we are well positioned to enable our customers' multi-cloud journey and become the multi-cloud leader.
Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible.
Operator, let's get started. | q3 non-gaap earnings per share $1.72.
revenue for q3 was $3.19 billion, an increase of 11% from q3 of fiscal 2021.
subscription and saas arr for q3 was $3.31 billion, an increase of 25% year-over-year. | 1 |
Listeners to any replay should understand that the passage of time by itself will diminish the quality of the statements made.
I hope you and your families are all well.
Although the pandemic has created many challenges, we are seeing a resurgence in open-air shopping center demand as retailers gain a better understanding of the importance of a robust omnichannel distribution platform that includes well-located bricks-and-mortar retail.
Similarly, investors have taken notice and have been allocating more capital toward open-air shopping centers.
This is leading to compressing cap rates for certain retail segments in the private markets, unlocking M&A opportunities in the public markets and recently culminated in the shopping center sector's first IPO since 2013.
At RPT, we spent the last three years thinking strategically and outside the box to reinvent, advance and differentiate our company.
This exercise led to the formation of our grocery-anchored R2G joint venture and our groundbreaking net lease platform, RGMZ.
Together with our wholly owned portfolio, we have created a powerful engine that will drive our business forward and unleash opportunities across multiple retail channels, which we expect will result in strong and sustainable growth.
Within our investments platform, we have always used a rigorous underwriting methodology and acted with discipline and patience.
Investments and our buybacks must be accretive to portfolio quality, earnings and the balance sheet; and b, in our strategic markets.
With these must-haves, RPT transformed on a scale and at a speed that exceeded our own expectations, and we are excited to share the considerable accomplishments of the reinvented RPT.
During the depths of the pandemic in 2020, while we were working on RGMZ, we were also cultivating a significant investment pipeline.
We took a thoughtful and analytical approach to curate our external growth in markets like Boston, Atlanta, Tampa and Nashville that are flourishing in today's modern landscape.
While each of our acquisition markets has its own unique set of economic drivers, we believe they will all experience strong growth over the long term, which should position the portfolio well in the coming years.
Boston, for instance, is seeing a wave of demand centered around the life science industry.
And our centers have significant adjacency advantages with 186 life science companies within a 10-mile radius of the four Boston properties that will soon be part of the portfolio.
Once the remainder of our deals close and net of expected parcel sales, Boston will become our third largest market at just under 8% of ABR.
This underscores our size advantage versus peers as we can quickly reshape our portfolio, which is particularly important in today's rapidly evolving landscape.
Let me give you a few highlights on our investments in Boston that will fit in nicely with our previously acquired Wegmans-anchored Northborough Crossings property and collectively boast a robust $148,000 household income within a 3-mile radius.
Bedford Marketplace in the Boston MSA is situated in a highly affluent suburb right outside the 128 loop with a 3-mile average household income of $193,000.
This is a center where Whole Foods is doing over $1,000 per square foot and has a fresh, newly renewed 15-year lease term.
Marshalls has been here since 1973 and is also doing extremely well.
Shoppes of Canton, this has $133,000 household income within a 3-mile radius.
This is a top-volume Shaw's-anchored center, where the small shop demand is robust.
The expected NOI CAGR on this asset is about 4%.
Lastly, we are in negotiations on a true infill grocery-anchored center inside the 128 loop with above-average household incomes and population densities versus our portfolio averages with the potential for future densification opportunities, given its size and proximity to Boston.
In total, since our last call, we closed or are under contract on eight multi-tenant deals and are in advanced contract negotiations on a ninth asset with a gross value of $500 million, covering 2.6 million square feet, which will increase our AUM by over 20%.
To put this in context, this level of activity equates to almost 50% of our equity-marketed cap, which is quite remarkable.
RPT's pro rata share of all this activity and after expected parcel sales are complete will be around $285 million.
We were only able to execute at this scale because of the power of the platforms that we put together over the last 18 months.
As we discussed last quarter, Northborough is a $104 million deal we might not have pursued without RGMZ, given the large ticket size.
Our partnership with RGMZ also made Northborough a much more attractive use of capital, given the yield enhancement that we expect to generate upon the sale of certain parcels to RGMZ.
In the Southeast region, we acquired $115 million 4-property portfolio that was split between all three platforms: RPT, R2G and RGMZ.
Let me give you a breakdown of this portfolio.
Let's start with East Lake in Tampa.
This is another grocery-anchored center that was added to the R2G portfolio.
This center is anchored by a high-volume Walmart neighborhood market and over 65% essential or investment-grade tenancy.
This is a community center in the Atlanta MSA with a strong lineup of Aldi, Home Depot and Ross.
We are selling the Home Depot and LongHorn to RGMZ and RPT is left with an Aldi-anchored center at an 8.6% yield with almost 80% essential or investment-grade tenancy.
On balance sheet, we bought Woodstock Square in suburban Atlanta.
This center is shadow-anchored by one of the highest-volume Super Targets in the Atlanta MSA.
The center is in the heart of the rapidly growing Northwest Corridor of Atlanta and is adjacent to a luxury rental community owned by Greystar.
We see great mark-to-market opportunities on both the small shop and junior boxes at the center.
Woodstock has also demonstrated great stability over the years and has retained its original anchor tenants since it was developed in 2001.
Another balance sheet deal is Bellevue Place in suburban Nashville.
This center sits on incredible real estate, where we have conviction around a small redevelopment with a potential future grocery add.
To put everything we've done into context, R2G and RGMZ provided us with a lower cost of capital than we could have achieved even after the rally in our stock price since November.
This lower cost of capital, combined with the yield enhancements from fees and multi- to single-tenant arbitrage opportunities, allowed us to lock in higher economic spreads on our capital than we could have otherwise have achieved in the public markets, thereby accelerating our earnings growth and our portfolio transformation.
In summary, power of our platforms is allowing us to grow earnings and to advance our strategic objectives faster than we could do on our own.
When time permits, please take a look.
On the operational front, our second quarter results reflected RPT's reshaped portfolio and platform.
We continue to rebound from the COVID-induced downturn with another strong leasing quarter.
We signed 58 leases covering 442,000 square feet in the second quarter, which is 59% above the trailing 12-month quarterly average leasing volume we reported last quarter, highlighting the strong demand for our high-quality open-air centers.
Demand has been particularly robust from the junior anchor category and is as high as I've ever seen in my career.
Leasing highlights for the quarter was an REI deal at Town & Country in St. Louis that replaced the majority of a former Stein Mart space and a lululemon deal.
Both of these new tenants will significantly improve the vibrancy of the centers, making them more attractive for both customers and retailers alike while also improving the credit of the portfolio.
Reflective of the strength of the off-price category, we signed two new Burlington deals this quarter.
The first is at Winchester Center, where we are replacing our last Stein Mart box.
And the second is at Shoppes at Lakeland, where we are replacing an office supply tenant.
Our leasing pipeline is robust as we are in negotiations with several grocers and wholesale clubs and are eager to announce those soon.
Underpinning all of the accomplishments of the quarter is our belief that value creation lies in our ability to improve the quality, sustainability and growth of our cash flows.
Our success in replacing weaker tenants with stronger ones and our increased exposure to Boston and Atlanta speak to the improved quality and sustainability of our cash flows.
Our increased guidance and the 60% increase in our quarterly dividend reflects our accelerated growth trajectory.
Today, I'll discuss our second quarter results, provide an update on our balance sheet and end with commentary on our improving guidance expectations for the second half of this year.
Against the backdrop of an improving macro environment, second quarter operating FFO per share of $0.22 was up $0.03 from last quarter, driven by lower rent not probable collection and abatements of $0.02 and the reversal of prior period straight-line rent reserves of about $0.01 per share.
The largest driver of the decline in our bad debt was a reduction in our reserves taken for our Regal theaters.
As expected, they have been open for over two months and have resumed rent payments accordingly.
For some context, our rent not probable collection, including abatements, peaked at $5.9 million in the second quarter 2020 and have fallen quickly to the $1.1 million we reported this quarter.
We are down to just a handful of tenants for which we are still reserving and expect our bad debt will continue to be a tailwind to year-over-year growth in the second half of the year, which is in line with the expectations that we set out at the beginning of 2021.
Our fundamentals remain strong.
We continue to experience accelerating leasing demand with one million square feet signed year-to-date, which is just below the 1.2 million we completed for the entire year in 2019.
Our positive leasing momentum resulted in sequential increases for our leased and occupancy rates of 50 and 40 basis points, respectively.
This is in line with our expectations that the trough in occupancy is behind us as we continue to drive occupancy in our newly minted transformed portfolio.
Blended releasing spreads on comparable leases signed in the quarter were 6.6%, including another strong new lease spread of 17.8%, reflecting once again the embedded mark-to-market opportunity in the portfolio.
Over the past four quarters, our comparable new lease spread was 30%.
Our powerful operating platform continued to drive leasing velocity, improved occupancy and secure higher rents.
Remerchandising projects remain our best risk-adjusted use of capital.
And our pipeline of projects continue to grow.
This quarter, we delivered three remerchandising and out-lot projects: the ground lease with Wendy's at Coral Creek Shops; the ground lease with Chase Bank at West Broward; and the combination of the boxes for Aveda at Merchants Square.
These products were completed in an average return on capital of 17%.
We also started our new REI remerchandising project at Town & Country and an expansion project for Burlington at the Shoppes at Lakeland, where we expect returns of 9% to 13%.
We added five new pipeline projects this quarter in Northborough Crossing, Deerfield Towne Center, Southfield Plaza, River City Marketplace and Providence Marketplace, highlighting the demand at our centers and future rent upside.
We ended the second quarter with net debt to annualized adjusted EBITDA of 7.0 times, down from 7.2 times last quarter.
Leverage should fall toward our target range of 5.5 to 6.5 times as our bad debt reserve normalizes to pre-COVID levels and we restabilize occupancy.
From a liquidity perspective, we ended the second quarter with a cash balance of $38 million and our fully unused $350 million unsecured line of credit.
Subsequent to the end of the quarter, we drew down $135 million on the revolver to fund acquisitions, which we expect will be repaid by the end of the year as we close on parcel sales to RGMZ that are expected to generate roughly $142 million in proceeds.
During the quarter, we repaid our $37 million private placement note with cash on hand.
Looking ahead, we have no remaining debt maturing in 2021 and only $52 million maturing in 2022.
Our refinancing options are plentiful, and we are exploring both secured and unsecured options.
We will also continue to look beyond 2022 to refinance debt early to take advantage of a low interest rate environment while adding duration to our capital stack.
And lastly, turning to guidance.
We updated our operating FFO range to $0.88 to $0.92, which is up $0.05 or 6% than last quarter's guidance and about 10% from our initial 2021 guidance provided back in February.
The primary driver of the upside is an increase in our acquisition forecast.
We have closed on or under contract or are in advanced contract negotiation on $285 million of acquisitions at our share, which is above the $100 million of acquisition that was embedded in our prior guidance.
Also, given the strength in our core business and our accretive acquisitions, our Board of Trustees has increased the dividend by 60% to $0.12 per share quarterly.
This rate allows us to maintain a low payout ratio, providing us flexibility to continue to allocate capital accretively but also leaving room for additional dividend increases in the future as we grow earnings. | compname posts q4 adjusted earnings per share $1.28.
q4 adjusted earnings per share $1.28.
q4 sales $1.74 billion versus refinitiv ibes estimate of $1.68 billion.
supply chain challenges and margin pressure expected to persist during fiscal 2022 first-half.
rpm international - expect that fiscal 2022 h1 performance to be significantly impacted by inflation throughout our p&l.
limited availability of certain key raw material components is negatively impacting our ability to meet demand.
largest challenge for first half of fiscal 2022 will be in our consumer group.
expect q1 2022 consolidated sales to increase in low- to mid-single digits compared to fiscal 2021 q1. | 0 |
Please ensure that your lines are muted until the operator announces your turn to ask a question.
Leading our call today will be Mike Manley, our chief executive officer; and Joe Lower, our chief financial officer.
I will be available by phone following the call to address any additional questions that you may have.
But as this is my first call, I was also trying to think about what may be helpful for me to touch on in addition to the financial results.
And I thought that, firstly, I'm going to give a brief overview of some of the things that I've been doing over the last three months.
And then I'm going to go through the highlights of the group's performance and hand over to Joe who will give you more of the fine detail.
After that, I'm going to touch on a number of the key topics I gained attention over the last few weeks.
And in closing, before our Q&A, I thought I may give a knock to the future, which will albeit just a summary of some of my preliminary observations.
So as you can imagine, when you join in the organization, particularly one that has a broad national footprint of retail locations and over 20,000 people in the field, you spend quite a lot of time traveling around the country.
And today, I have the opportunity to visit a number of our franchise dealerships, including our most recent acquisitions, many of our AutoNation USA stores, our auction sites and a number of our collision centers from coast to coast.
Now obviously, I knew from our previous life that AutoNation was the largest automotive retailer in the United States, and that it also begun to build additional brand businesses and capabilities at scale.
But I have to genuinely say that reading about it on paper actually doesn't do it justice to what has been built and the talent that the organization possesses, that could actually see, feel, and get a sense of by actually visiting the locations.
I think when you get the opportunity to travel to our dealerships and businesses, you really start to recognize the incredible assets that the group has been able to build, acquire and develop.
When I think about the 330 franchises in our dealerships, not only do the brands we represent account for 99% of all new vehicles sold in the U.S., but we're also fortunate to have a superbly balanced portfolio of the best automotive brands in the world.
And they are located in some of the most exciting franchise territories.
In addition to visiting our retail businesses, I've also met with a number of our OEM partners.
And I have to say, unfortunately, I haven't been able to get around all of them.
So for me, this is a big clear to do and finish list.
And I'm looking forward to meeting with our partners that I haven't met yet.
But I have to say the ones and have now been incredibly encouraged by our conversations.
We've had what I would consider very frank exchange of views.
And very importantly, I've been able to see the brand and the product plans for the future.
And for me, just makes representative fantastic brands even more exciting when you understand what's actually coming through the pipeline.
Now obviously, our franchise dealerships is an important core part of our group, and our scale gives us significant opportunities.
But it's also clear that we're also developing businesses and platforms that will significantly expand our reach, and I think give us the opportunity to take advantage of things as they unveil in the future.
As you know, we're building a strong focus used car brand with AutoNation USA.
And as Joe will tell you in a minute, all of the stores we have, including those added in 2021, are up and running.
They're profitable, ahead of our expectations, and adding happy customers to our growing family on a daily basis.
And finally, and I think this is really important, the one thing you really do get a true feel of once you're on the inside on a day-to-day basis is the quality and the passion of the AutoNation team.
It doesn't matter where I've been, either in our dealerships, our collision centers and our corporate office, I think there's really a clear will to win and a customer and community-focused culture.
So on this point, as a reality check, I do have to say I've never heard an incoming CEO say anything bad about the team he or she walked into.
Certainly, not at least on the first.
But and you know doubt probably expected me to complement our people.
But my comment actually goes well beyond platitudes.
Because you can imagine, our strong performance, how pleased I am with the team's delivery of the seventh consecutive record quarter.
And I think we have to remember, this is still delivered during very unusual times, with significant disruption from lack of supply, winter COVID spikes and competition everywhere.
And my comments actually go beyond that.
They're made as much for the performance the team delivered as they are for the less visible selfless work they do in our communities and the fight against cancer.
AutoNation's Drive Pink campaign was a true revelation to me.
Not in the center, an organization was involved in social and community projects or charity works, because actually, I think that's what organizations are supposed to do.
But I was amazed to see just how many of our associates get involved on their own time to support Drive Pink and drive out cancer.
Today, the people of AutoNation have raised over $30 million, which has been plowed into research, treatment and care.
Now that is a team that I can tell you, I'm already very proud of.
So just give you a brief flavor of my first three months, and now I'm going to turn to our results.
So you've seen from the numbers, we delivered another outstanding quarter and a very strong year.
And today, as I already mentioned, we report our seventh consecutive record quarterly results with adjusted earnings per share of $5.76, which is an increase of $137, and revenue increasing by $797 million or 14% compared to the prior year.
Now this was driven by robust growth in used vehicle sales, consumer finance services and aftersales.
Total units for the quarter declined by 1%.
And that was driven by new vehicle sales, down 20%, which was largely offset by an increase in 21% of used vehicle volume compared to the prior year.
And with strong consumer demand, we continue to focus on our sourcing capabilities to used vehicles, which further strengthened both our franchise dealerships and our AutoNation USA businesses.
When I look at that, nearly 90% of all pre-owned vehicles retailed in the quarter were self-sourced prior acquisition strategy, which obviously includes all of the trade-ins, but now increasingly, our we buy your car program, which processes directly from customers.
And as a result, used vehicle revenue increased 55% for the quarter.
Now as I previously mentioned, AutoNation USA is a successful part of our plan.
And in November, we opened AutoNation USA Avondale and Phoenix and recently entered the new market with our 10 AutoNation store, USA store in Charlotte.
Now each new store opened in 2021 has exceeded expectation, and as I said, profitable in the first four months of operation.
And we remain on target to open 12 additional new stores over the next 12 months.
I think our focus on margin expense control significantly contributed to our performance as strong new used finance and insurance margin per unit, up significantly year over year and in the quarter, and continued our improvement in our after sales business, which delivered an 11% increase in gross profit.
I know it's been discussed over, the ongoing expense control, something which, frankly, I consider structural in the business now helped contribute to an overall increase in total store profits by over 150%.
Now with that, I'm going to hand you over to Joe, who's going to take you through the detail of the financials.
Today, we reported fourth quarter total revenue of $6.6 billion, an increase of 14% year over year, driven by impressive growth in used vehicles of 55% as well as double-digit growth in both customer financial services and aftersales.
This was partially offset by a 7% decline in new vehicle revenue due to the continuing supply chain disruption to new vehicles production.
Strong consumer demand and tight new vehicle inventories continued to support new vehicle margins in the fourth quarter.
We expect demand to continue to achieve supply well into 2022.
In addition, many consumers have shifted to used vehicles due to limited availability of new, which has been very beneficial as we continue to demonstrate exceptional growth, supported by our self-sourcing capabilities and ongoing expansion of our AutoNation USA footprint.
For the quarter, total variable gross profit increased 49% year over year, driven primarily by an increased total variable PBR of $2,026 or 50% increase, with a slight decline in total units of 1%.
As Mike mentioned, 21% growth in used units year over year largely offset a 20% decline in new units over the same period.
We also demonstrated strong growth in aftersales gross profit, which increased 11% year over year.
Taken together, our total gross profit increased 34% compared to the fourth quarter of 2020.
Fourth quarter adjusted SG&A as a percentage of gross profit was 56.7%, a 710 basis point improvement compared to the year ago period.
As measured against gross profit on an adjusted basis, our metrics improved across all key categories, with overheads decreasing 370 basis points, compensation decreasing 230 basis points and advertising decreasing 110 basis points year over year.
Longer term, we expect normalized SG&A to gross profit to be in the mid-60% range, well below our pre-pandemic levels that were consistently above 70%.
This improvement is the result of structural changes that we have made to our business model.
Floor plan interest expense decreased to $5 million in the fourth quarter of 2021 due primarily to lower average floor plan balances.
Combined with the lower effective tax rate and fewer shares outstanding, we reported adjusted net income of $380 million or $5.76 per share, a 130% increase year over year.
This results our seventh consecutive all-time high full earnings per share result.
Our strong operating performance and cash flow generation continue to provide us a significant capacity to deploy capital.
During the fourth quarter, we closed on the previously announced acquisition of Priority 1 Automotive Group, adding $420 million in annual revenue.
We remain focused on identifying additional acquisitions that allow us to expand our current portfolio and offer attractive long-term financial returns.
As Mike discussed, we continue to see a tremendous opportunity to capture a larger share of the used vehicle market by leveraging our sourcing capabilities, rich data analytics and AutoNation USA growth strategy.
We recently opened our 10th AutoNation USA store in Chile, North Carolina and expect to open 12 more stores over the next 12 months.
Longer term, we continue to target over 130 stores by the end of 2026.
We also continued to repurchase our own shares.
During the fourth quarter, we repurchased 3.1 million shares for an aggregate purchase price of $382 million.
This represents a 5% in shares outstanding from the end of the third quarter.
The company has approximately $776 million available for additional share repurchase at this time.
As of February 15, there were approximately 62 million shares outstanding.
We ended the fourth quarter with total liquidity of approximately $1.5 billion.
And our covenant leverage ratio of debt-to-EBITDA of 1.5 times remains well below our historical range of two to three times.
Looking ahead, we will continue our disciplined capital allocation strategy, leveraging our strong balance sheet and cash flows to invest in our business and drive long-term shareholder value.
So strong results, as you can see.
And again, congratulations to all of the AutoNation team, and their delivery is fantastic.
So I do just want to add a couple of points I think are important.
When I step back and think about the business and our results, I look to understand which of the key profit drivers are, let's say, circumstantial to varying degrees and which are the drivers are now structurally embedded in the group.
And I think this is important because it's clear to me that some are mistakenly discounting all of the improvements in performance is totally temporary.
And they're preferring to rely on 2019 as a more reliable baseline.
And I think this is wrong.
Because now, you can see there are clearly structural improvements that should translate into long-term value.
So the business drivers that I consider in that category are improvements in F&I performance, which is more driven by a focus on product penetration rather than rate, by used volume, which is more related to sales effectiveness, operational focus as well as additional USA stores, and finally, the SG&A control that Joe just mentioned again.
And we can clearly see the benefits of that coming through in our net income margin.
And in my view, we should continue to translate into value and not be so quickly discounted as situational at this time.
So obviously, that leads one of the biggest variables, which is clearly new vehicle margin.
And naturally, there's a lot of debate where this may go in the future.
And I remember in my previous life, on quarterly discussions on calls like this, we spent a lot of time talking about breakeven points and what level of SAAR can you still make a profit or level of SAAR can't you make a profit.
And if you look at the fourth quarter, we delivered a SAAR around that $13 million from my estimate, well below anyone would have been able to forecast.
And the levels of profitability for both OEMs and dealers clearly show the benefits of selling vehicles at MSRP.
And what a concept, right, selling at MSRP.
So if that's the learning, I think, has got to do that.
By the way, while we're on the subject of retail price, we've seen a number of comments about vehicles being sold above MSRP, quoting the potential adverse impacts on brands and customers, which I understand.
And by the way, last year, less than 2% of all the new vehicles sold by AutoNation were above MSRP.
But this discussion on MSRP branded customers actually also adds to my optimism regarding new vehicle margins going forward.
Because I think it's equally clear that significant discounting and high incentives can also damage a brand, which is another reason for our industry to balance appropriately supply and demand, and another reason why we may expect higher new vehicle margins than we have historically seen pre-COVID.
So finally, let me briefly turn to the future.
I think everybody recognizes the industry will go through a significant transformation.
And that's not just in terms of product and powertrain, but in many other ways as well.
When COVID is behind us, we'll see the emergence of additional mobility models and choices.
We'll see changes in the way customers approach vehicle ownership and usage.
And we will progressively see changes in how dealers and OEMs are traditionally competed.
And for me, this is an exciting time and offers many more opportunities and downsides.
And now I'm more convinced than ever, having seen under the hood of AutoNation, that the group can be well placed and positioned to continue to grow and thrive.
AutoNation in the past has been known for its innovation and progressive approach.
And you can be certain we're going to be taking this approach to the next level.
As we see it today, we have over 11 million customers in our family already, and every year, an additional three million interactions.
So we have the opportunity not only to leverage our brand, our scale, our strong bricks and mortar footprint, but also to build on our growing digital capabilities and expand our business model to ensure we have greater autonomy and control in our future.
So obviously, a lot more to come in the coming months.
But I'd like to make one announcement that will help indicate some of what the future may hold for AutoNation.
And that is, I'm now creating a new executive role.
And I'm delighted to announce Gianluca Camplone will be joining the group from March 1 and assuming the position of EVP, head of mobility, business development and strategy, and COO of Precision Parts.
This role will report directly to me.
Gianluca will sit on our executive committee.
And I'm sure several of you will already know Gianluca Camplone.
But for those who do not know him, he joined AutoNation from McKinsey, where he was most recently serving as senior partner and leader of the advanced industry global practice and private equity industrial practice in North America.
Gianluca orchestrated a companywide $1 billion digital business building program.
And he spearheaded a global team on multiple billion-dollar mergers in the automotive sector.
He's led a major dealer performance transformation at a leading North American commercial vehicle manufacturer.
And in addition, very relevantly, he redesigned the multibillion dollar used car business and multichannel environment for a global auto manufacturer.
So as you can tell, I'm incredibly excited about the future.
I'm absolutely delighted that Gianluca has agreed to join our executive team.
And I think, as you can tell, it bodes well for some of the things that I'm certain AutoNation and we can do that not only will give us a great future, but as I said, give us a lot more autonomy and control over where we're going.
So let me close.
I think demand for vehicles continues to be strong.
Used vehicle growth is robust.
And the -- we are going to continue, as Joe said, AutoNation USA store expansion.
And obviously, we're going to look aggressively opportunities to expand our customer-centric personal transportation solutions. | compname reports qtrly adjusted earnings per share from cont ops $2.43.
qtrly adjusted shr from continuing operations $2.43.
board authorized repurchase of up to an additional $1 billion of co's common stock.
qtrly same store new vehicle gross profit per vehicle retailed was $2,775, up 50%.
qtrly revenue $5,785.1 million, up 4%.
on track to extend footprint with five new autonation usa stores by end of 2021, 10 additional new stores in 2022.
set long term goal of retailing over 1 million combined new and used vehicles units per year.
qtrly same store used vehicle gross profit per vehicle retailed was $1,565, up 9%.
plans to build over 100 autonation usa pre-owned vehicle stores, with over 50 completed by end of 2025.
autonation usa store expansion will include extending co's coast to coast footprint with new markets.
qtrly same store revenue $5,776.1 million, up 5%. | 0 |
Factors that could cause such material differences are outlined on Slide 25 and are more fully described in our SEC filings.
We appreciate you joining us and your interest in Atmos Energy.
Yesterday, we reported fiscal '22 first quarter net income of $249 million, a $1.86 per diluted share.
Our first quarter performance was in line with our expectations, reflecting the ongoing execution of our operating, financial and regulatory strategies.
Consolidated operating income decreased to $276 million in the first quarter, primarily due to a $39 million decrease in revenues associated with the refund of excess deferred tax liabilities.
As a reminder, beginning in the second quarter of fiscal '21 and through the end of last fiscal year, we reached an agreement with regulators in various states to begin refunding excess deferred tax liabilities.
Generally, over a three to five-year period, these refunds reduce revenues throughout the fiscal year when those revenues are billed.
The corresponding reduction in our interim annual effective income tax rate is recognized at the beginning of the fiscal year.
Therefore, period-over-period changes in revenues and income tax expense may not be offset with interim periods that will substantially offset by the end of the fiscal year.
Excluding the impact of these excess deferred tax liability refunds, operating income increased $16 million over the prior-year quarter.
Slide 5 summarizes the key performance drivers for each year operating segments.
Rate increases in both of our operating segments, driven by increased safety reliability capital spending totaled $47 million.
Continued robust customer growth and our distribution segment increase operating income by $4 million.
In the 12 months ended December 31st, we added 55,000 new customers, which represents a 1.7% increase.
These increases are partially offset by a $20 million increase in consolidated O&M expense.
As a reminder, in the prior-year quarter, we deferred non-compliant spending to fight in the fiscal year.
As we evaluated our customer load during that time period.
Therefore, the period-over-period variance partially reflects this time indifference.
The first quarter increase is primarily driven by increased pipeline maintenance activities.
Consolidated capital spending increased to $684 million, a $227 million period-over-period increase reflecting an increased system of modernization spending in our distribution segment.
Spending to close out Phase 1 of APT's Line X and Line X2 projects and project timing.
We remain on track to spend $2.4 billion to $2.5 billion of capital expenditures this fiscal year with more than 80% of the spending focused on modernizing the distribution and transmission network, which also reduces methane emissions.
We're also on track with our regulatory filings.
To date, we have implemented $73 million in annualized regulatory outcomes excluding refunds of excess deferred tax liabilities.
And currently, we have about $36 million in progress.
Slides 17 through 24 summarize these outcomes.
And Slide 16 outlines our planned filings for the remainder of this fiscal year.
To date, we have completed over $1 billion of long-term financing.
Following the completion of the $600 million 30-year senior note issuance in October, we executed four sales rates under our ATM program for approximately 2.7 million shares for $260 million, and we settled forward agreements on 2.7 million shares or approximately $262 million.
As of December 31st, we were probably $295 million in net proceeds available under existing forward sale agreements.
As a result of this activity, we've now priced a substantial portion of fiscal '22 equity needs and anticipate satisfying remaining equity needs through our ATM program.
As a result of this financing activity, direct recapitalization excluding the $2.2 billion of winter storm financing, was 59% as of December 31st.
Additionally, we finished the quarter with approximately $3.1 billion of liquidity.
In January, we completed the issuance of $200 million of long-term debt through [Inaudible] our existing 10-year 2.625% notes due September 2029.
The net proceeds were used to pay off or $200 million term loan that was scheduled to mature in April.
Following this offering, excluding the interim winter storm financing, a weighted average cost of debt decreased to 3.81% and our weighted average maturity increased 19.23 years, which further strengthens our financial profile.
Additional details for financing activities or equity forward arrangements, as well as our financial profile, can be found on Slides 7 through 10.
And we continue to make progress on securitization.
Yesterday, the Texas Railroad Commission unanimously issued a financing order authorizing the Texas Public Financing Authority to issue custom rate relief bonds to securitize costs associated with winter storm Uri over a period not to exceed 30 years.
We currently anticipate the securitization transaction will be completed by the end of our fiscal year.
Upon receipt of the securitization funds, we will repay the $2.2 billion of winter storm financing we issued last March.
And in Kansas, we started our securitization proceedings at the Kansas Corporation Commission in late January.
Based on the current procedural schedule, we are anticipating a financing order by the end of our fiscal third quarter.
Our first quarter performance was a solid start in the fiscal year, the execution of our operational, financial, regulatory plans is on track, which positions us well to achieve our fiscal '22 earnings per share guidance of $5.40 to $5.60.
Details around our guidance can be found in Slides 12 and 13.
It is through your dedication, your focus, and the effort that we safely provide natural gas sales to 3.2 million customers in 1,400 communities across our eight states.
And as you just heard, we're off to a great start.
The results, Chris summarized, reflect the commitment of all 4,700 Atmos Energy employees as we work together to continue modernizing our natural gas distribution, transmission, and storage systems on our journey to be the safest provider of natural gas services.
During the first quarter, we achieved several project milestones to further enhance the safety, reliability, versatility, and supply diversification of our system.
For example, at APT, we placed into service Phase 1 of a 2-phase pipeline integrity project that will replace 125 miles of Line X. As a reminder, Line X runs from Waha to Dallas and is key to providing reliable service to the local distribution companies behind the APT system.
Phase 1 replaced 63 miles of 36-inch pipeline.
Phase 2 includes an additional 62 miles of 36-inch pipeline and is anticipated to be completed late this calendar year.
Additionally, we completed the first of a 3-phase project to replace our existing Line S2.
This 91-mile 36-inch project will provide additional supply from the Haynesville and Conn Valley shale plays to the east side of the growing Dallas-Fort Worth Metroplex.
Phase 1 replaces 21 miles of this line and Phase 2 will replace an additional 18 miles and is expected to be completed late this calendar year.
Phase 3, which will replace the remaining 52 miles is expected to be in service in 2023.
During the completion of Phase 1 for Line X and Phase 1 for Line S2 our teams used recompression practices to avoid venting or flaring over 70,000 metric tons of carbon dioxide equivalent.
This is an excellent example of how Atmos Energy's environmental strategy is being integrated into our daily operations.
APT's third salt-dome cavern project at Bethel is now approximately 80% complete and remains on track to be placed in service late this calendar year.
As a reminder, this project is anticipated to provide an additional five to six Bcf of Cavern storage capacity.
As I mentioned during our November call, we have started work on a 22-mile 36-inch line that will connect the southern end of the APT system with a 42-inch Kinder Morgan Permian Highway line that runs from Waha to Katy.
This new line will support the forecasted growth and increased supply diversity to the north of Austin in both Williston and Travis County in Texas.
This line is expected to be in service in late December of this year.
In addition to those system modernization projects, we continue to make progress in advancing our comprehensive environmental strategy that is focused on reducing Scope 1, 2, and 3 emissions and reducing our environmental impact from our operations in the following five key areas, operations, fleet, facility, gas supply, and customers.
At APT storage fields, we are making progress with the installation of the remaining gas cloud imaging cameras for continuous methane monitoring and anticipate completion by the end of this fiscal year.
Our RNG strategy focuses on identifying opportunities to transport RNG for our customers.
We currently transport approximately eight Bcf a year and anticipate another four projects to come online within the next 12 to 18 months.
Those four projects are expected to provide an additional Bcf a year of RNG capacity.
Furthermore, we are evaluating approximately 20 opportunities that could further expand our RNG transportation.
Two, zero net energy homes are underway in Texas, one in Taylor and the other in Dallas.
The home in Taylor is being developed through our partnership with the Williamson County Habitat for humanity, and we estimate the home to be completed in late March.
And in Dallas, we are working with the Dallas habitat humanity and estimate construction of this zero net energy home to begin mid-March.
These homes use high-efficiency natural gas appliances doubled with rooftop solar panels and insulation to minimize the home's carbon footprint.
The zero net energy homes demonstrate the value and the vital role natural gas plays in helping customers reduce their carbon footprint in an affordable manner.
Providing these families with a natural gas home that is environmentally friendly and cost-efficient is just one-way Atmos Energy fuels safe and thriving communities.
And finally, over the next five years, we will invest $13 billion to $14 billion in capital support, the replacement of 5,000 to 6,000 miles of our distribution transmission pipe, or about 6% to 8% of our total system.
We will also replace 100 to 150 steel service lines, which is expected to reduce our inventory by approximately 20%.
This level of replacement work is expected to reduce methane emissions from our system by 15% to 20% over the next five years.
Our first quarter activities and initiatives reflect the continued successful execution of our strategy to modernize our natural gas distribution, transmission, and storage systems as we continue our journey to be the safest provider of natural gas services.
These efforts, along with the strength of our balance sheet, our strong liquidity, have atmos energy well-positioned to continue serving the vital role we play in every community that is delivering safe, reliable, efficient, and abundant natural gas to homes, businesses, and industries to fuel our energy needs now and in the future. | compname reports q1 earnings per share of $1.86.
q1 earnings per share $1.86. | 1 |
The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call today.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other company representatives available for a Q&A session after Lisa and Steve provide updates.
Slide four shows our quarterly financial results.
IDACORP's 2021 first quarter earnings per diluted share were $0.89, an increase of $0.15 per share from last year's first quarter.
Today, we also affirmed our full year 2021 IDACORP earnings guidance to be in the range of $4.60 to $4.80 per diluted share, with our expectation that Idaho Power will not need to utilize in 2021 any of the additional tax credits that are available to support earnings in Idaho under its regulatory settlement stipulation.
These are our estimates as of today, and those estimates assume normal weather conditions over the balance of the year and include customer usage returning closer to pre-COVID-19 levels as we progress through the year.
However, as you would expect, it is difficult to predict the full impact of evolving economic conditions on Idaho Power's customers and suppliers and how that could affect the upper end of the earnings guidance range or the use of tax credits.
We have had a great start to 2021.
As our customers and employees move closer to a more normal work environment, we are looking forward to reconnecting with many of you in person over the next year when possible.
Our company has begun to resume some normal work operations in a phased, carefully planned manner, and we are hopeful health trends will continue to allow our working conditions to normalize in the coming months.
For Idaho Power, as noted on Slide 5, the first quarter of this year saw a continuation of the strong customer growth.
In March alone, we saw an annualized customer growth rate of 3.5%.
This accelerated growth rate is challenging as we keep up with service connections, but our employees continue to prove that they are up for the task.
Looking ahead, we expect robust growth to continue as Idaho's quality of life and business-friendly environment remain attractive.
Other factors such as inquiries for large load projects suggests demand for our energy in our service area remains strong.
On Slide 6, you'll see highlighted a few publicly announced large load expansions and projects.
The economy within Idaho Power's overall service area continues to outperform national trends.
Unemployment within Idaho Power's service area is now down to 3.7%, remaining well below the 6% rate reported at the national level, and total employment in our service area declined a modest 0.3% since March of last year.
Moody's has strengthened its predictions for our service area, now projecting robust economic growth going forward even after our service area experienced a modest GDP decline in 2020 relative to the national average.
The Moody's forecast now calls for growth of 8% in 2021, 8.1% in 2022 and continued strong growth of 6.8% in 2023.
We expect that existing and sustained future customer growth will cause the need for Idaho Power to continue to enhance and expand its distribution and transmission system infrastructure, including the Boardman to Hemingway project.
That growth may also result in the need for Idaho Power to procure other new sources of energy and capacity to serve growing loads as well as to maintain system reliability.
We are in the process of analyzing options for the potential energy and capacity resource procurement while, at the same time, working on our 2021 integrated resource plan.
We are seeing early model results in our 2021 IRP planning process showing declining length in our system in the near term.
It's a little too early to tell us -- to tell what that will mean for the timing of early exit of Jim Bridger coal-fired plant unit, the timing of the exit for the second unit at North Valmy, high-voltage transmission line expansion project and for other general system upgrades.
While there are many factors that can impact the ultimate results, there is a possibility that the capital expenditures that we shared in February could grow beyond the estimate to meet the required projected energy and capacity needs.
You'll see some of the items I mentioned highlighted on Slide 7.
We have many exciting challenges ahead as we work hard to ensure there is sufficient energy and capacity supply for our customers while balancing the critical need for reliability, resilience and affordability with our clean energy goals.
Last quarter, we stated Idaho Power does not plan to file a general rate case in Idaho or Oregon in the next 12 months.
That remains true today as we look at the next 12 months.
Customer growth, constructive regulatory outcomes, major project completion dates such as the relicensing of Hells Canyon, the timing of resource acquisitions and effective cost management all play significant roles as we look at the need and timing of a future general rate case.
As part of our overall regulatory strategy, I'll briefly highlight an update that Idaho Power received in its case with the Idaho Public Utilities Commission.
We requested authorization to defer the Idaho portion of O&M expenses, including vegetation management, specified insurance costs and depreciation expense for certain capital investments expected to be necessary to implement its recently enhanced Wildfire Mitigation Plan or WMP.
The comments published earlier this month were generally supportive of our efforts to enhance and protect our infrastructure from some of the devastation that has been prevalent in other Western states in the past few years.
As a reminder, we expect to spend approximately $47 million in incremental O&M and $35 million in incremental capital expenses for wildfire-related infrastructure work over the next five years.
The case is still pending at the IPUC, and we are currently awaiting a commission order.
As you all know, weather is an important factor in wildfire risk as well as in other aspects of Idaho Power's overall operations.
We rely on a healthy snowpack to meet our customers' needs reliably and affordably.
This winter, our mountains accumulated below-average precipitation.
However, we entered the upcoming spring and summer seasons with strong reservoir storage so we expect relatively healthy water conditions for irrigation customers, though it is likely that hydropower generation will be lower than our 30-year average.
You will see on Slide eight that the most recent projections from the National Oceanic and Atmospheric Administration suggest dry and hot conditions from May through July.
Preparations for summer readiness, when our system is most stretched, are under way, and we expect to be able to balance the reliable system and to meet customer demands.
As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduce earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
And with that, I will hand things over to Steve for an overview of the first quarter's financial performance.
Let's now move to Slide 9, where you'll see our first quarter 2021 financial results as compared to the same period in 2020.
Overall, we had a strong start to the year with accelerating customer growth and positive impacts from transmission revenues.
Altogether, IDACORP's first quarter 2021 net income was higher by $7.3 million.
On the table of quarter-over-quarter changes, you'll see customer growth added $3.7 million to operating income.
Lower usage per commercial customer down 2%, partly due to COVID-19 impact, was largely offset by higher residential usage due to colder weather this year versus last.
The net result was a relatively modest $1.3 million decrease in overall usage per customer.
The next change on the table shows that transmission wheeling-related revenues increased $4.1 million.
This was partly due to a 20% increase in wheeling volumes as well as a 10% increase in Idaho Power's open access transmission tariff rate last October to reflect higher transmission costs.
Colder winter weather in the Southwest U.S. contributed to the increased wheeling volumes this quarter.
Next on the table, other operating and maintenance expenses decreased by $4.2 million.
This was primarily due to the timing of cloud-seeding activities and cost-saving initiatives at our jointly owned coal plant.
A portion of the savings also related to Idaho Power's exit from the Boardman plant in 2020 as both O&M costs and corresponding revenues were reduced due to the regulatory mechanism in place that's associated with its shutdown.
We continue to see decreases in employee travel and training costs related to COVID-19 while our allowance for bad debt remains above recent levels and will likely take longer to collect.
Our net deferral impact, however, remained nominal.
We will continue to monitor the impacts by state to determine whether we ultimately seek recovery for any net increased cost.
Finally, our higher pre-tax earnings led to an increase in income tax expense of $1.5 million this quarter.
The changes collectively resulted in an increase to Idaho Power's net income of $7.6 million.
IDACORP and Idaho Power continue to maintain strong balance sheets, including investment-grade credit ratings and sound liquidity, which enables us to fund ongoing capital expenditures and distribute dividends to share owners.
IDACORP's operating cash flows along with our liquidity positions as of the end of March are included on Slide 10.
Cash flows from operations were about $50 million higher than last year's first quarter.
The increase was mostly related to working capital fluctuations, the timing of pension contributions and the timing of net collections of regulatory assets and liabilities.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the middle of Slide 10.
At this time, we do not anticipate raising any equity capital in 2021.
While cash flows have been minimally affected by the pandemic thus far, our combined liquidity, along with expected regulatory support from our annual adjustment mechanisms, is a substantial backstop to our expected capital and operating needs.
Slide 11 shows our affirmed full year 2021 earnings guidance and our current year financial and operating metrics estimates.
We continue to expect IDACORP's 2021 earnings to be in the range of $4.60 to $4.80 per diluted share as we assume normal weather and operating conditions for the remaining nine months of the year.
We also assume pandemic impact continue to moderate as the year progresses.
Our guidance still assumes Idaho Power will use no additional tax credits in 2021.
Of course, our guidance could be negatively impacted if the economy or the pandemic worsens significantly or for other reason.
Our expected full year O&M expense guidance remains in the range of the $345 million to $355 million, so we're off to a good start.
It's fair to say that this goal to keep O&M relatively flat for the ninth straight year is being challenged by the level of growth we are expecting.
We also affirm our capital expenditures forecast for this year, which we increased a bit in February to the range of $320 million to $330 million.
Our expectation of hydro generation has softened somewhat given the conditions Lisa presented earlier and is now expected to be in the range of 5.5 million to 7.5 million megawatt hours. | compname reports q3 revenue of $1.8 billion.
q3 adjusted earnings per share $1.30.
q3 revenue $1.8 billion.
expect to resume share repurchases in q4.
q3 exchange net revenues were $959 million.
exchanges q4 2021 total recurring revenues are expected to be in a range of $330 million to $335 million.
fixed income & data services q4 2021 total recurring revenues are expected to be in a range of $415 million to $420 million.
mortgage technology q4 2021 total recurring revenues are expected to be in a range of $147 million to $152 million. | 0 |
I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations.
Dave will brief you on our operations and enterprise strategy, and Fay will cover the financials.
After their remarks, we will open the call to questions.
These risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission.
We encourage you to review those documents, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results.
Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items.
Our second quarter results reflected the overall business recovery we saw across our geographic markets despite widespread global supply chain constraints and commodity inflation that cut across a number of industries and which impacted our ability to fully meet the Q2 increase in customer demand.
While the demand increase exceeded our initial expectations for Q2, the impact of macro-level headwinds such as parts availability, material inflation, freight costs, and labor shortages was also greater than we had expected.
In response, we've taken steps wherever possible to help minimize the effects of these challenges to our customers.
In most cases, these actions build upon or otherwise benefit from the strategic improvements we have made to our operating model as part of our enterprise strategy.
I will now walk you through some of the actions our teams have and will continue to take to mitigate some of the macro challenges in the current environment while serving the needs of our customers.
To address the issue of parts availability, which is the result of our suppliers managing their own production, labor, and logistical challenges our supply chain teams are leveraging our strategic partnerships to manage component and material availability.
We are also developing design alternatives and identifying additional sources to keep our manufacturing lines running, all while maintaining strict product quality controls.
To ensure a smoother process in securing parts in the second half of the year, our teams have developed more robust sales and inventory operations plans to better align our supply and demand.
These plans not only help our manufacturing plants develop smarter strategies to meet increased customer demand but also allow us to provide longer-term demand forecast to our suppliers to secure the parts fully.
To address material inflation, our teams are working diligently to find additional partners and, where possible, consolidating vendors to drive leverage and scale.
At the same time, we continue to use value engineering to help reduce the parts and material that go into each machine.
Our R&D and operations teams are regularly finding ways to help address material inflation while maintaining our value proposition of quality and innovation.
Today's pressures in the steel, resin, and lead markets represent a significant challenge that is felt by industrial manufacturers around the world and one that we expect will persist for the foreseeable future.
To minimize the impact of higher freight costs, we are fortunate that as part of our enterprise strategy, we had already started to prioritize local-for-local supply chain and region-for-region manufacturing.
This allows us to manufacture our products closer to our customers, which helps to reduce freight costs.
This does not entirely offset current headwinds given the constrained transportation market, but we are making every effort to ensure that our manufacturing lines remain up and running and that we can deliver products with appropriate lead times.
Regarding labor shortages, specifically in our manufacturing areas, we are staying competitive in the market by adjusting wages and making every effort to attract new talent by providing a safe, rewarding and fulfilling work environment.
We are also investing in our equipment, processes, and systems to drive the increased productivity.
With respect to the overall challenges we're facing in our cost of goods sold, we are also carefully and thoughtfully managing our S&A to a level that allows us to invest in the business, serve the needs of our customers, and deliver on our enterprise strategy while also maintaining our ability to meet our full year financial targets.
At the same time, we are implementing price increases where appropriate that will benefit the fourth quarter of this year and help offset some of the costs that we're not able to absorb internally.
While a price increase at this time of the year is not a normal practice for Tennant, we are compelled to take this action in response to the current macro market challenges.
The key improvements we've made internally as part of our enterprise strategy have helped facilitate our response to current market dynamics.
These improvements include value engineering, plant optimization, simplifying our product portfolio, divesting non-core businesses, and adjusting our go-to-market approach in specific regions.
I continue to be extremely proud of our global teams for their efforts in addressing these various operational challenges as countries and markets navigate their post-pandemic recoveries.
We are taking decisive actions to safeguard the customer experience and deliver on our financial commitments while remaining focused on our longer-term business objectives.
As Fay will discuss, our full year guidance assumes our continued effective management of a challenging supply chain and operations environment and reflects our growing confidence that the long-term global recovery for commercial and industrial cleaning will continue.
While we remain vigilant in our overall cost management in the face of material inflation, parts availability issues, and higher freight costs, we will continue to execute against our enterprise strategy and stay focused on delivering the best possible customer experience.
For the second quarter of 2021, Tennant reported net sales of $279.1 million, up 30.4% year-over-year, including a favorable foreign currency effect of 5.4% and a divestiture impact related to the sale of the company's coatings business of negative 2.5%.
Organic sales, which exclude the impact of currency effects and divestitures, increased 27.5%.
Tennant Group sales into the three geographies: the Americas, which includes all of North American and Latin America; EMEA, which covers Europe, the Middle East, and Africa; and Asia-Pacific, which includes China, Japan, Australia, and other Asian markets.
In the first quarter, sales in the Americas increased 22.7% year-over-year with organic growth of 25.4%, including a foreign exchange effect of 1.1% and a divestiture impact of negative 3.8%.
Sales were strong, both in North America and Latin America, with growth across all channels and product categories despite a decline in the company's AMR robotics business, which lapped a large order in the year ago period.
Strong customer orders resulted in higher than normal backlog levels at the end of the quarter as the company managed parts availability related to global supply chain constraints and labor shortages.
Sales in EMEA increased 55.5% or 40.2% organically, including a foreign exchange effect of 15.3%, with growth across all countries and across all product categories as pandemic-related restrictions eased.
Sales in the Asia-Pacific region rose 16.6% or 9.6% organically, including a foreign exchange effect of 7%.
The results were driven primarily by strength in Australia across all product categories.
During the quarter, organic results in China were flat year-over-year, which was due to limited parts availability.
Reported and adjusted gross margin were both 41.2% compared with 41.8% in the year ago period, which included the impact of government credits received and cost-saving measures taken in response to the pandemic.
As previously discussed, the decline also reflects increased costs related to freight, materials, and labor, which were partially offset by favorable pricing and cost savings initiatives.
These headwinds are expected to continue for the foreseeable future, with added pressure in the third quarter.
Entering the fourth quarter of the year, we expect pricing and other actions to start driving a meaningful impact.
As for expenses during the second quarter, our adjusted S&A expenses were 30.3% of net sales compared with 28% in the year ago period.
The year-over-year deleverage is a direct result of the cost-saving actions taken in the second quarter of last year in response to the pandemic.
These actions include furloughs, reduced work schedules, adjusted to management incentives, government credits, and tighter project and travel spending.
Net income was $9.8 million or $0.51 per diluted share compared with $14.3 million or $0.77 per diluted share in the year ago period.
Adjusted diluted EPS, excluding non-operational items and amortization expense was $1.18 per share compared with $0.96 per share in the year ago period, which was primarily driven by lower interest expense.
Adjusted EBITDA in the second quarter of 2021 decreased slightly to $35.1 million or 12.6% of sales compared with $35.3 million or 16.5% of sales in the second quarter of 2020.
As mentioned in our Q2 2020 earnings call, we estimated that $15 million of savings occurred within the second quarter of 2020 due to the cost-saving measures and actions taken in response to the pandemic.
As for our tax rate in the second quarter, Tennant had an adjusted effective tax rate, excluding the amortization expense of 4% compared with 20.4% in the year ago period.
The decrease was primarily related to a discrete tax benefit for a valuation allowance release as a result of a recent law change impacting Dutch tax loss carryovers.
Turning to cash flow and balance sheet items.
Tennant generated $19.4 million in cash flow from operations in the second quarter of 2021, mainly due to strong business performance.
As of June 30, 2021, the company had $135.1 million in cash and cash equivalents while managing our leverage within the stated guidance of 1.5 to 2.5 times times.
In April, the company restructured its credit agreement to optimize the debt structure.
This change allows for greater flexibility with minimal covenants and no pre-payment penalties, while also reducing future interest expense by approximately $1 million per month, which was already reflected in our prior guidance.
Lastly, turning to guidance.
As Dave mentioned, our guidance reflects management's confidence in a broadening economic recovery, our ability to implement our long-term growth strategy, and our effective management of the current supply chain and operational challenges.
It also assumes there will be no significant pandemic-related restrictions in our major markets.
As included in today's earnings announcement, Tennant affirms its guidance for the full year 2021 as follows: net sales of $1.09 billion to $1.11 billion, with organic sales rising at 9% to 11%; GAAP earnings of $3.45 per share to $3.85 per share, adjusted earnings per share of $4.10 per share to $4.50 per diluted share, which excludes certain non-operational items and amortization expense, adjusted EBITDA in the range of $140 million to $150 million, capital expenditures of approximately $20 million and an adjusted effective tax rate of approximately 20%, which excludes the amortization expense adjustment.
With that, we will open the call to questions. | compname reports q1 earnings per share of $1.37.
q1 adjusted earnings per share $1.17.
q1 earnings per share $1.37.
q1 sales rose 3.1 percent to $263.3 million.
sees net sales of $1.090 billion to $1.110 billion, reflecting organic sales growth of 9 to 11 percent for 2021.
sees full-year reported gaap earnings in range of $3.45 to $3.85 per diluted share.
sees adjusted earnings per share of $4.10 to $4.50 per diluted share for 2021, which excludes certain non-operational items and amortization expense.
qtrly consolidated net sales up 4.4% on non-organic basis. | 0 |
These statements are subject to numerous risks and uncertainties as described in our SEC filings.
Future results could differ materially from those implied by our comments.
We'll discuss non-GAAP financial measures during today's call.
We provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.
So on to the highlights of the third quarter.
The third quarter marked another important milestone in our recovery from the pandemic.
We generated $21.4 million of adjusted funds from operations, which was the first quarter since the pandemic that we produced a positive FFO and represents considerable progress from Q2 when we had negative FFO of $15.6 million in Q1 with negative $55.7 million.
Third quarter hotel and adjusted EBITDA climbed robustly from the second quarter as well and were driven by significant increases in same-property RevPAR and same-property total revenues while at the same time, costs were well controlled.
Same-property hotel EBITDA rose by 136% to $66.6 million from Q2's $28.3 million.
The sequential growth was driven by robust leisure travel, improving group and transient business travel and an ability to push pricing higher, particularly at our resort properties.
Same-property room revenues rose a substantial 51% from the second quarter and same-property ADR rose 10% from Q2, and for the first time exceeded the comparable quarter in 2019, in this case, by 3.8%.
Same-property total revenues also rose an impressive 47.2% from the second quarter with healthy food and beverage and other ancillary spend growing faster than occupancy.
Total group room nights ADR and revenues also grew from Q2 to Q3 with room nights and revenues more than doubling, which is a very favorable sign for the return of corporate group demand.
The third quarter started strong to RevPAR improved to down just 31% compared with July 2019, clearly better than June's minus 51.6% comparison to 2019.
Lease demand throughout our portfolio at our resorts and urban hotels increased significantly from June.
It was robust and generally not price sensitive.
The strength in demand continues through mid-August until surge in COVID cases from the Delta variant cause a pause in the recovery.
From mid-August through mid-September, we experienced a rise in cancellations and near-term business travel, primarily group for August, September and October and softer near-term booking demand as well as well as higher attrition when many corporate groups who did hold our meetings over this period.
As a result of the seasonal slowdown in leisure travel and business demand that did not pick up the slack, same-property RevPAR weakened compared to 2019 for August, which was down 39.4% and also then September, which is also down 43.4%.
September was also negatively impacted by Jewish holidays, which both fell in the first half of September.
Fortunately, as the trend of new COVID cases began declining in mid-September and have been falling for six weeks now, booking trends began to reaccelerate in mid-September and this improving trend has continued into October.
Both transient and group business demand have picked up with volumes exceeding levels earlier in the year before the Delta variant and associated restrictions were imposed.
Corporate transient is returning led by small- and medium-sized businesses as well as larger companies, including those in banking, consulting, life sciences, medical, entertainment and music segments, among others.
Big Tech has also begun to travel but remains slower and it's recovered.
For us, the most significant improvements in business demand have been in Boston, Los Angeles, Philadelphia and San Diego.
Slower to recover markets continue to be San Francisco, Washington, D.C. and Chicago, which seems to be three to four months behind the faster recovering cities.
Leisure demand remains healthy heading into the fall and upcoming holiday season, which should be very good, and our positive expectations are consistent with the strong advanced holiday demand the airlines are reporting.
However, we do expect a normal seasonal slowdown in business travel levels in late November and December.
Because of these improving trends and business travel demand, in particular, October is performing better than September.
We're now forecasting RevPAR to be down between 37% and 38% to October 2019, and October occupancy for our portfolio should hit or come very close to the occupancy level achieved in July.
This is not something we would have expected a month ago, which really demonstrates how quickly demand trends can reaccelerate and improve when health concerns related to the pandemic decline or moderate.
Considering how strong October is traditionally for business travel, we find this performance a strong indicator of the reacceleration in the travel recovery, especially for business travel.
For the fourth quarter, we expect same-property RevPAR and total revenue to be down between 38% and 42% compared with the comparable period in 2019.
Now back to our third quarter performance.
Same property revenues of $239.2 million were off 36.3% versus the same period in 2019.
This is a significant improvement from the second quarter when same-property revenues were down 57.8% versus 2019 and continue the progress from the first quarter, which was 74.7% below Q1 2019.
Our strongest performance came from our resorts.
For our original eight resorts and Jaco Island Club Resort for August and September revenues exceeded Q3 '19 by 9.8%, driven by a whopping 57.1% ADR premium to Q3 2019, which was more than offset occupancy that was down just 22.5%.
Our resort occupancies would have been higher but for the rooms renovation at Southernmost Resort and the exterior work on the Gulf Tower building at LaPlaya.
At our urban hotels, same-property revenues were off 50.1% to Q3 2019, driven by same property revenue declines of 50.4%.
This illustrates convincing improvement at our urban hotels in the quarter compared with the second quarter when same-property revenues were down 68.6% from Q2 2019 and same-property RevPAR was down 69.7%.
ADR at our urban hotels also improved quarter-to-quarter from last quarter's minus 26.1% compared to Q3 '19, down just 10.8% in the third quarter of 2019.
Drawing down further on our hotel operating results, our same-property resorts generated $34.6 million of EBITDA, up 45.4% versus 2019.
Our hotel EBITDA margins were 41.5% compared with 31.4% in Q3 '19, over 1,000 basis points better.
While some of this is a result of some continuing unfilled position, much of it is due to the significant benefit of a 57.1% or $156 rate premium in ADR to 2019 as well as higher prices for non-room revenues and our new operating models at all of our properties, including our resorts.
Our urban hotels generated $29.9 million of EBITDA in Q3, down 7.2% versus Q3 '19.
This is substantially better in Q2 when our same-property EBITDA was just $2.7 million.
Operating expenses at the hotel level were well controlled.
And in addition to the room rate improvements versus last year, we took price increases throughout all nonroom revenue items.
Same-property hotel expenses were down in Q3 by 29.5%, representing 81% of the 36% rate of total same-property revenue declines.
Excluding fixed costs, hotel expenses were down by 32.7% or 90% of the rate of decline in same-property revenues.
While we continue to have many unfilled positions at our hotels, we made very significant progress in the quarter filling open positions and the cost savings to 2019 represent a superb effort by our property and asset management teams working together to follow up on our new property operating models that are delivering significant efficiencies and productivity gains.
At the corporate level, after corporate G&A, we generated $55.3 million of adjusted EBITDA in the third quarter.
This is a significant increase from the $17.1 million of adjusted EBITDA in Q2 and a negative $25 million of adjusted EBITDA for Q1.
Shifting to our capital improvement program.
Earlier this week, we completed a $15 million comprehensive guestroom renovation of our Southernmost Beach Resort in Key West.
The last of our resorts will be fully renovated or redeveloped and repositioned.
And we continue to make progress with our $25 million transformation of Hotel Vitality to One hotel in San Francisco.
We've experienced some delays due to the constraints of the supply chain in receiving FF&E items.
So we now expect this renovation to be completed in the first quarter compared to last quarter's expectation at the end of 2021.
For all of 2021, we anticipate investing -- reinvesting a total of $80 million to $90 million in the portfolio, which is in line with our prior annual estimate.
Moving to our investment activities.
We continue to be active reallocating capital in the portfolio.
On September 9, we sold Ville Floor in San Francisco Union Square for $87.5 million.
Since Q1 2020, we have sold seven assets generating $664 million of proceeds.
On September 23, we completed the acquisition of the 369 room Margaritaville Beach Resort for $270 million.
And just last week, we purchased the 19-room Avalon,and the 12 room Gardens in Key West for a combined $20 million.
We will be incorporating these two properties into the overall operations of our Southernmost Beach Resort, and we expect significant operating synergies as a result.
By providing guests of these two guest houses with access to the higher service levels and amenities of the existing B&Bs at Southernmost and our overall resort, we expect to be able to drive rates dramatically higher than the prior owner.
As a result, we anticipate generating an 8% to 12% cash and cash return on this investment after a 4% capital reserve on a forward 12-month basis.
We'll obviously narrow this range down as we get deeper into the operations of these properties as part of Southern most.
As a reminder, year-to-date, we have acquired two resorts as well as two Bed & Breakfast guest houses for a combined $384 million of proceeds.
Turning to our balance sheet and liquidity, we have approximately $807 million of liquidity after completing our recent property transactions including roughly $163 million of cash on hand and $644 million available on our unsecured credit facility.
We also currently have approximately $210 million of reinvestment proceeds available under our current bank arrangements.
We're proud of the tremendous progress we made fortifying our balance sheet, reducing near-term debt maturities and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity.
This positions us to take advantage of additional new investment opportunities as they become available.
So I thought I'd focus on what we're currently seeing in our business, how we think the rest of this year is likely to play out, our current expectations for 2022, will delve a little deeper into the performance of some of our existing properties and markets as well as discuss the capital reallocation decisions we've made in the last 18 months.
As Ray said, we're certainly very encouraged by the reacceleration of the recovery we've seen in the last six weeks, particularly as it relates to business travel and group demand.
While leisure demand recovery started early and has grown to robust levels, we all know that getting back to 2019 levels for us requires further recovery in business travel.
As we stated last quarter, we believe we should get back to 2019 EBITDA levels before we get to 2019 RevPAR, and we expect to consistently hit or exceed 2019 ADR levels before we get back to 2019 RevPAR.
We're very encouraged by the performance of rates in both the industry and our portfolio.
We, of course, are aided by our concentration in drive to resorts.
And as Ray said, we're achieving ADRs at our resorts that are dramatically higher than 2019 levels.
Some of this is due to a lack of competitive alternatives like cruises or traveling abroad or even vacationing in cities.
Some of this premium has to do with repositioning resort ADRs to higher levels and a willingness on the part of the consumer to buy up to suites and view rooms and the like.
And about 1/3 of the premium is due to the transformational redevelopment projects we undertook in the last few years at our resorts, where we substantially repositioned them higher in quality, and as a result, higher ADRs are being achieved, generating attractive returns on our redevelopment investments.
So we believe that a substantial portion of these higher rates at our resorts will be permanent.
Most of these higher rates will last at least for the next two or three years and some portion may turn out to be transitory.
In the third quarter, we estimate we gained over $50 alone just an ADR share versus the competitive market properties with that number accelerating substantially from the second quarter.
Some of the rate premium at our resorts that historically accommodated significant group will likely be reduced as that group returns.
However, that group will come with significant F&B and other profitable revenues that should more than offset any reduction in our rate premiums.
In the third quarter, our resorts achieved 9.8% higher total revenues in Q3 '19, even without that group.
Room revenues were up 21.9%, and EBITDA was higher by 45.4% or $10.8 million.
This rate -- with rate up so substantially 57.1% and occupancy down by 22.5%, EBITDA margin at 41.5% for our original eight resorts and Jekyll Island Club Resort, which was included in August and September.
This is an increase of 1,018 basis points from Q3 '19.
EBITDA per key for our resorts for the third quarter alone grew to $17,000.
On a run rate basis, including Jekyll and Margaritaville Hollywood Beach Resort for the entire quarter, same-property EBITDA for the 10 resorts of $40.5 million was $13.9 million higher than Q3 2019.
For all of 2021, we're now forecasting our eight original resorts to achieve $2.5 million more EBITDA than they earned in 2019 despite being $8 million lower in the first quarter of this year.
Including Jekyll Island and Margaritaville Hollywood, which are both now forecasted to end 2021 above 2019 levels, we're forecasting our run rate resort EBITDA to be $6 million to $7 million higher than 2019 at $115 million to $116 million in total or roughly $46,700 per key.
And that's despite the 10 resort portfolio being $10.8 million lower in Q1 versus 2019.
So that compares to $86.7 million in 2019 for the original eight resorts.
These numbers do not include the two B&Bs we just acquired in Key West.
Both Jekyll and Margaritaville are also running well above our initial underwriting when we price those properties for purchase with Jekyll ahead by over $2 million and Margaritaville ahead by over $5 million.
At these forecasts, Jekyll would be a 7.4% cap rate on 2021 NOI and Margaritaville would be a 6.25% cap rate on 2021 NOI.
And both properties look to be up substantially in Q1 2022 based upon business and rates already on the books.
We also saw a significant improvement in performance in the third quarter at our urban hotels with occupancies, rates and RevPAR all rising substantially as compared to the second quarter.
While some of this improvement can be attributed to meaningful growth in leisure travel, particularly in our urban markets that are drawing significant leisure travel, such as San Diego, Los Angeles and Boston.
Much of the improvement is clearly related to the slow but continuing recovery in business travel, both group and transient.
In the second quarter this year, group room nights achieved amounted to just 13% of comparable 2019 levels in our portfolio.
But that improved substantially to 34% in the third quarter.
And based on business on the books and current cancellation and attrition trends, we expect it to exceed 40% in the fourth quarter.
In the first quarter of 2022, group room nights on the books are currently at 62% of Q1 '19 rooms on the books at the same time in 2018 and ADRs currently ahead by 14%.
For the year, group revenue pace on the books for 2022 is at 69% of the same time in 2018 for 2019 with ADR ahead by 6%.
Of course, what shows up versus what gets canceled will all depend upon what is happening with the virus.
But we're very encouraged about where we are for 2022, especially the significant rate lift that is on the books.
While I mentioned the performances of both Jekyll Island and Margaritaville, I thought I'd provide a little bit more detail.
Both resorts had terrific third quarters.
We were able to influence the performance of Jekyll Island in the quarter due to our acquisition on July 22, but we can't take any credit for Margaritaville's performance in Q3 due to our late September acquisition.
In Q3, Jekyll Island grew RevPAR by 35% over Q3 2019 with ADR increasing by 23% or $58.
At Margaritaville, RevPAR climbed 47% in Q3 versus 2019 with ADR increasing a robust 60% or $136.
Margaritaville's EBITDA in Q3 increased 131% over Q3 '19, up from $2.1 million to $4.8 million, with EBITDA margin up 1,300 basis points.
Jekyll Island's third quarter EBITDA was up 125% over Q3 '19 or $2.5 million versus $1.1 million with EBITDA margin also up 1,300 basis points.
In both cases, these are extraordinary numbers, but ones we expect to substantially exceed as we implement all of our operational changes over the course of the next year, even before any of the capital improvements that we're planning.
We're confident that both of these acquisitions will turn out to be fantastic long-term investments in addition to them being a huge positive uplift to our EBITDA and cash flow in the short to intermediate term.
as we swapped properties in slower recovery markets for properties in faster recovery markets that also have significant upside from both operational improvements and capital investments.
With the third quarter sale of Villa Florence in San Francisco, since the pandemic began, we've sold two older properties in San Francisco and one in New York City, along with some rooftop antennas and the historic Union Station Nashville for a total of $333 million.
And we've acquired two resorts in the Southeast and two small B&Bs in Key West for a total of $384 million.
We're very excited about these swaps and the upside from the new acquisitions.
Not only did these transactions reduce our urban concentration and increase our resort concentration that these trades of San Francisco, New York and Nashville, for Hollywood, Florida, Key West and the Golden isles of Georgia increase our leisure mix and reduce our business customer mix.
While it might look like we're focused on increasing our resort exposure, as discussed many times in the past, we remain opportunistic investors overall, utilizing risk-adjusted return forecasts and underwriting to determine both sales and acquisitions.
And how others value properties and what others are willing to pay definitely impacts where and what we ultimately acquire since value is a key component of our risk-adjusted return investing approach.
In that vein, over the last few months, we spent significant time evaluating the current values of our existing hotels and total portfolio.
As a reminder, the value ranges we determined for each hotel are based upon the transaction market for similar properties in similar condition with similar opportunities and similar locations in the same markets.
They're also based upon whether management and flag are available or if the property is encumbered by those contractual arrangements.
With a more active transaction market in the last three to four months, we feel there's enough real market transaction information to now establish true tradable market values.
And while these values will potentially move significantly and quickly in the next couple of years, we feel comfortable, again, publishing our overall gross and net asset values for our portfolio.
We believe that our current net asset value is in the range of $30 per share at the low end to $35 per share at the high end and $32.50 at the midpoint, and we're happy to discuss this in more detail in the Q&A or in separate conversations over the next few weeks.
I thought I'd also touch on the current labor situation and update you on our current assessment of the ongoing margin opportunity in our portfolio as a result of the implementation of new operating models at all of our properties.
In the last six to eight weeks, we believe the labor situation throughout our portfolio has improved significantly.
As expected, as kids went back to school, more people got vaccinated, child care became more available and enhanced federal unemployment benefits expired, we've seen more of our prior hotel associates coming back to work.
And with lots of hard work, our property teams have also found more qualified candidates interested and willing to fill open positions.
As a result, our properties have made significant progress in filling critical open positions and many of our properties are in good shape now with a more active pipeline for further hiring.
In addition, it seems the H2B visa program is back up and running, and we expect significant numbers of H2B qualified workers to aid our seasonal properties like LaPlaya that have historically utilized this program and Jekyll Island, where we'll be using the program for the first time beginning later this year or early next year.
We also believe those current labor pressures we're still experiencing will lessen over time as more workers come back to the labor force as the spread of the virus and cases decreased over time.
In general, we've not had to increase wages but we have made some adjustments here and there.
This has been mostly at our resorts that are in markets where either we're no longer where we wanted or needed to be in the market competitively or where we've repositioned our properties higher through renovations and redevelopments.
And we want to attract the best of the talent in the market to provide the highest level of service to match our higher rates.
Fortunately, our properties are generally at the higher end of their markets and are in a position to not only pay more as necessary but attract high-quality talent more easily because of the quality of our properties and the ability for associates to earn more money through not just wages and benefits, but higher tips and other gratuities.
As you well know, we've all been experiencing increasing levels of supply chain disruptions, including higher costs for many commodities like food and beverages, but also operating supplies in some of our services.
We've been able to successfully implement some very significant price increases throughout our portfolio for items such as food and beverage offerings, both in our outlets and through banquets and caving as well as charges for parking, event venues, audio visual equipment and services, resort and urban amenity fees, spot treatments, club dues and for other recreational activities.
These increases have ranged from 5% at the low end to as high as 25% at the high end and 15% is about average throughout the portfolio.
We've experienced little to no pushback on pricing increases so far.
It seems both the leisure customer and the business customer are in great financial shape with plenty of discretionary income or high profits.
And with prices increasing for all sorts of goods and services, our customers have been accepting of the increases.
This pricing flexibility and customer acceptance should allow us to continue to be able to grow our pre-pandemic margins by 100 to 200 basis points based upon the restructured operating models developed during the pandemic, which utilize more cross-training, more efficient labor scheduling tools and more technology, among many efforts to continue our never-ending effort to increase productivity and become a more efficient and profitable business.
In addition, curator has now completed over 60 preferred vendor arrangements with a preferred group of individual product and service providers in our industry.
As we continue to implement these arrangements throughout our portfolio, we're further reducing our overall cost of operations as we take advantage of the economies of scale being achieved by curator.
And we expect this number of arrangements to increase over 80 before the end of the year with further opportunities for savings as a result.
And as we get much closer to 2022, we're focused strategically on the year being a very strong recovery year overall.
Group should be very healthy as we believe there's a great deal of pent-up demand.
We also think leisure will continue to be robust with pent-up demand for vacations and getaways, while outbound international travel probably remains more limited.
And we're very encouraged by the decision to reopen our country in the next couple of weeks to international travelers and visitors.
We believe there is significant pent-up inbound demand that will aid both our resorts and our urban markets.
Certainly, the reports from the airlines about ticket sales to international inbound customers are very encouraging.
Taken together, this means we don't expect rate discounting in 2022.
Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year, and it remains relatively normal next year.
As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on the few remaining projects as soon as the approvals are complete, and it's the right time of year to commence them.
All of our redevelopments and transformations, including the large number in the last few years and all of the current and upcoming projects will provide very significant upside for our portfolio over the next few years as the recovery rolls forward.
We're already achieving these returns at our repositioned resorts where demand is, in many cases, already recovered.
Importantly, the vast majority of the dollars for these projects has already been invested, but the benefits have, for the most part, not yet been achieved, but should be as demand recovers.
And finally, as demonstrated by our acquisitions to date, we believe we have significant competitive advantages in pursuing new investment opportunities as they arise.
These include our ability to operate our properties more efficiently than the vast majority of buyers.
The additional cost savings from the economies of scale generated by curator, our unique strength in redevelopments transformations and independent or small brand lifestyle hotels.
Our vast number of operator relationships and our high profile and very positive reputation in the industry, and we look forward to many more opportunities to come.
So with that, we'd now like to move to the Q&A portion of our call.
Hey, Donna, you may now proceed. | pebblebrook hotel trust - unable to provide an outlook for 2021.
pebblebrook hotel trust - for q4 2021, expects both same-property room revenues and total revenues to be down between 38% and 42% versus q4 2019. | 1 |
I want to highlight that we will be discussing our reported fourth-quarter numbers as well as our results adjusted to exclude the impact of certain reserve adjustments and tax benefits recorded in the period.
We encourage you to review these tables to assist in your analysis of our business performance.
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.
I appreciate everyone joining today's call.
I hope that your new year has started well and that you are -- and that you remain healthy and safe.
It goes without saying that Covid19 and the resulting challenges made 2020 a year unlike any that we've experienced before.
Let me just say right upfront that I'm extremely proud of how our entire team responded and how our organization remain engaged and focused during some very difficult times.
We also ended the quarter with $2.6 billion of cash and a net debt to capital ratio below 2%.
Reflecting a lot of hard work by an amazing team, PulteGroup realized a 6% increase in full-year closings to 24,624 homes and a corresponding 7% increase in full-year home sale revenues to $10.6 billion.
Benefiting from our ability to expand Homebuilding gross and operating margins along with dramatic gains in our financial services business, we converted the 7% topline growth into a 29% increase in pre-tax income of $1.7 billion.
Our outstanding results extend beyond our income statement as we generated $1.8 billion in operating cash flow in 2020 after investing $2.9 billion in land and development during the year.
Beyond investing in land, we increased our dividend by 17%, effective with the payment we made this month and repurchased a $171 million of our common shares in 2020, despite having suspended the program for six months because of the pandemic.
I am also extraordinarily proud to note that consistent with our focus on generating high returns over the housing cycle, we realized a 23.7% return on equity for the year.
With 2020 complete, we enter 2021 in a strong financial position and with numerous opportunities to drive further business gains.
Obviously, we can't control how the pandemic plays out but we are optimistic that the multiple vaccines getting distributed, mean that we can see a light at the end of this long tunnel.
Bob will provide specific guidance as part of his comments, but let me offer a view of how we are looking at the business and how we plan to operate in the year ahead.
We expect a strong demand environment, which the housing industry experienced for much of 2020 and in reality for many quarters prior to Covid can continue well into 2021.
We said for years that we thought housing starts needed to be around 1.5 million to meet the natural demand created by growth in population and household formations.
We finally reached 1.5 million starts in 2020, but we have under built relative to this number for years.
Given this unmet need and the potential mix shift in demand toward more single-family and away-from-apartment living, we believe demand can remain strong going forward for our business.
Beyond the demographic tailwind, we also believe that the pandemic has caused a permanent increase in the number of people who will be working from home full or at least part-time.
Such a shift has profound implications in terms of what people need from their homes as well as where their homes can be located.
For example, we believe a remote working dynamic expands the buyer pool because it can allow people to purchase more affordable homes in further out locations.
At the same time, working from home has the potential to increase the intent to buy new homes, which offer floor plans and technology features to better meet the needs of today's homebuyers.
With such a strong demand environment, it works to our advantage to be among the nation's largest builders with access to land, labor, and material resources.
We enter 2021 with more than 15,000 houses in backlog, 180,000 lots under control, of which half are controlled via option and long-standing relationships with suppliers and trade partners.
The combination of these factors should allow us to increase 2021 deliveries by more than 20% over the last year.
Labor remains tight, although the change in administration may allow for some relief assuming immigration policies are eased.
At the same time, product manufacturers are battling supply chain issues and the occasional Covid-related disruption within their plants.
Although, I must say, our suppliers have been tremendous partners, going above and beyond in many instances to provide the materials we need.
Given high expectations for the Company's operating performance and our balance sheet strength at year-end, I believe we are exceptionally well-positioned to execute on all of our capital allocation priorities, more specifically, we are targeting land acquisition and development spend of $3.7 billion in 2021.
This is an increase of roughly $800 million over our 2020 investment, but we think appropriate given the growth in our operations.
Beyond our expected land investment, we have made great progress in planning for and selecting the location of our next offsite manufacturing plant.
We still have a few details to work out with the owners of the sites under consideration, but we hope to finalize a plant agreement within the next couple of months and then begin installing the requisite production equipment later this year.
Our ICG operation in Jacksonville has exceeded our expectations, so we are excited to get this new plant up and running sometime during the first quarter of next year.
And finally, we will continue to return excess funds to shareholders through our share repurchase program.
In response to the uncertainties caused by the pandemic, we had suspended share repurchase activities during the second and third quarters of last year.
We have repurchased more than one-third of the Company's share since initiating the program and we expect to remain an active buyer of our shares going forward.
Housing demand was outstanding in the back half of 2020, with strength across all geographies and buyer segments.
And I'm certainly pleased to report that this strength has continued unabated through the first few weeks of January.
The housing industry has been extremely fortunate in being an economic engine, but we do not take this for granted nor would we forget how devastating Covid19 has been for thousands of businesses and millions of people.
It is certainly our hope that we are rapidly approaching the end of this pandemic.
everyone, and let me add my best wishes and express my hope that we can all navigate the coming year in health and safety.
Where appropriate, I'll reference the impact of these items during my review of the quarter.
For our fourth quarter, home sale revenues increased 5% over last year to $3.1 billion.
The increase in revenues for the period was driven primarily by a 4% increase in average sales price to $446,000 as closings were up 1% to 6,860 homes.
The increase in average sales price for the period reflects a strong pricing environment for all buyer groups.
We're pleased to report that on a year-over-year basis.
Our average sales price was higher for our first time move-up and active adult buyer groups.
The demographic mix of our closings grew [Phonetic] slightly in the quarter and reflects changes caused both by the pandemic and by our strategic investment to serve more first-time buyers.
Consistent with these dynamics, our fourth-quarter closings in 2020 consisted of 32% first-time, 46% move-up, and 22% active adult.
In the fourth quarter of 2019, closings were comprised of 31% first-time, 45% move up, and 24% active adult.
Our net new orders for the fourth quarter increased 24% over last year to 7,056 homes, while our average community count for the period was down 2% from last year to 846.
The decrease in community count reflects the slowing of our land activities earlier this year in response to the pandemic as well as the faster close out of communities due to the strong demand environment and related elevated absorption paces.
Demand was strong across the entire period and actually accelerated toward quarter-end as December orders were higher than November and essentially flat with October.
Given the strength of ongoing demand, our divisions are taking specific actions to manage sales pace and production so our backlog does not get over extended.
We are also being thoughtful about adjusting priced to help cover rising house costs, especially the cost of lumber, which moved significantly higher in the quarter.
Consistent with what we experienced during the third quarter, demand was strong across all of our brands, including the ongoing acceleration in demand among active adult buyers.
In the fourth quarter, first-time orders increased 27% to 2,084 homes, move-up orders increased 17% in 2,994 homes, while active adult orders increased 33% to 1,978 homes.
In fact, our Q4 active adult orders were less than 100 units below the all-time quarterly high we reported in the third quarter of this year.
After a pause in the first half of 2020, active adult buyers have clearly gotten off the fence.
Our fourth quarter cancellation rate was 12% which is down from 14% last year.
Based on the strength of our sales, our year-end backlog increased 44% over last year to 15,158 homes.
Backlog value at year-end was $6.8 billion compared with $4.5 billion last year.
We believe our large backlog and continued strong demand for new homes has the company extremely well-positioned to realize significant year-over-year growth in closings in 2021.
At the end of the fourth quarter, we had a total of 12,370 homes under construction, of which 1,949 or 16% were spec.
In the fourth quarter, we focused on closing sold inventory, but we are actively working to increase production of sold and spec homes throughout our markets.
Our large backlog makes this process a little easier, and we're working closely with our trades and product suppliers to ensure the needed capacity to deliver more homes going forward.
With 12,000 -- 12,370 homes under construction at year-end, we expect deliveries in the first quarter of 2021 to be between 6,300 and 6,600 homes.
At the midpoint, this would be a 20% increase in closings over last year.
This growth rate is in line with what we expect for the full year as we are targeting deliveries to increase approximately 22% to 30,000 homes for all of 2021.
Given the strength of our move up and active adult sales along with price increases realized across all buyer groups, our average sales price and backlog was up 4% over last year to $448,000.
Based on the prices in backlog, we expect our average sales price on closings to be in the range of $430,000 to $435,000 both for the first quarter and for the full year 2021.
As we've said in the past, the final mix in deliveries can influence the average sales price we deliver in any given quarter.
Reflecting the benefits of the favorable pricing environment and our ongoing work to run a more efficient Homebuilding operation, our fourth quarter gross margin of 25% was up 220 basis points over last year and 50 basis points from the third quarter of this year.
Driven primarily by increases in lumber and labor, our house costs will be higher in 2021, however, given strong demand conditions, we expect to pass through most of these costs through increased sales prices.
As a result, we expect gross margins to remain high and be approximately 24.5% for both the first quarter and the full year.
Our reported SG&A expense for the fourth quarter was $280 million 9.1% of home sale revenues.
Excluding the $16 million net pre-tax benefit from adjustments to insurance-related reserves recorded in the fourth quarter, our adjusted SG&A expense was $296 million or 9.7% of home sale revenues.
Last year, our reported fourth quarter SG&A expense was $262 million or 8.9% of home sale revenues.
Excluding insurance reserve adjustment of $31 million last year, our adjusted SG&A expense was $293 million or 10% of home sale revenues.
At the outset of the pandemic, we took action to adjust our overheads in anticipation of a more difficult operating environment.
Although nearly all furloughed employees have rejoined the company and we've hired back many of the employees we released, we still expect to realize improved overhead leverage in 2021.
At present, we expect SG&A expense in the first quarter of 2021 to be in the range of 10.5% to 10.9%, which is down from 11.9% last year.
For the full year, we are targeting an SG&A expense of 10% of home sale revenues down from 10.2% on an adjusted basis last year.
Our financial services operations continued to deliver strong results as we reported fourth quarter pre-tax income of $43 million, which is up from $34 million last year.
It's worth noting that our fourth quarter 2020 results include the $22 million pre-tax charge from adjustments to our mortgage origination reserves as we settled claims tied to mortgages issued prior to the housing collapse.
The increase in pre-tax income in the quarter from our financial services business reflects continued favorable rate and competitive market conditions along with higher loan volumes resulting from an increase in mortgage capture rate.
Our mortgage capture rate for the quarter was 86%, up from 84% last year.
Our reported tax expense for the fourth quarter was $86 million, which represents an effective tax rate of 16.4%, and which reflects the tax benefit of $38 million resulting from energy tax credits and deferred tax valuation allowance adjustments recorded in the period.
In 2021, we expect our tax rate to be approximately 23.5%, including the benefit of energy tax credits we expect to realize this year.
Finishing up my review of the income statement, we reported net income for the fourth quarter of $438 million or $1.62 per share.
Our adjusted net income for the period was $404 million or $1.49 per share.
In the comparable prior-year period, the Company reported net income of $336 million or $1.22 per share and adjusted net income of $312 million or $1.14 per share.
Benefiting from the outstanding financial performance and resulting cash flows generated by our Homebuilding and Financial Services operations, we ended the quarter with $2.6 billion of cash.
In addition, at the end of the year, our gross debt to capital ratio was 29.5% which is down from 33.6% last year, and our net-debt-to-capital ratio was 1.8%.
In the fourth quarter, we repurchased 1.7 million common shares at a cost of $75 million or an average price of $43.69 per share.
For the full year, the company returned $171 million to shareholders through the repurchase of 4.5 million common shares at a cost of $37.58 per share.
First, we will exercise the early redemption feature effective February 1, on $426 million of senior notes originally scheduled to mature on March 1 of this year.
Assuming full execution of the tender, the retirement of the $726 million will save the company approximately $34 million in annual interest charges and on a pro forma basis, lower our gross debt-to-capital ratio to 23.7%.
In the fourth quarter, we invested $942 million in land acquisition and development, which brings our full-year 2020 spend to $2.9 billion.
As Ryan mentioned, given our positive view of the market and the expected strong cash flow generation of the business, we currently expect to increase our investment in land acquisition and development to $3.7 billion in 2021.
And finally, we ended the year with slightly more than 180,000 lots under control, of which 91,000 were owned and 89,000 were controlled through auctions.
I want to highlight that based on these numbers, we've effectively reached our stated goals of having 50% of our land pipeline controlled through options, and given our guidance targeting 30,000 closings in '21, we've also reached our goal of having three years of owned lots.
Land acquisition could be lumpy, so the numbers could move around, but we remain disciplined in our investment practices and focused on enhancing returns and reducing risks through the use of options.
When I took over as CEO in 2016, there were several areas where I saw an opportunity to enhance our long-term business performance.
Among the targets we put in place were: to expand first time to be one-third of our business, to lower our lot position to three years of owned lots, to control 50% of our land pipeline via options, and increase our growth rates while continuing to deliver high returns for our shareholders.
Given our 2020 performance and our expectations for 2021, it is gratifying to see that we've achieved these initial goals.
With this foundational work in place, we can now continue developing an even more successful business as we expand our operations, advance innovative customer-centric technologies, and integrate new construction processes.
Our outstanding 2020 results in combination with continued strength in housing demand also has PulteGroup entering '21 with tremendous momentum.
We begin the year with our largest backlog in well over a decade, along with great operating metrics and a strong balance sheet that gives us the flexibility to capitalize on market opportunities.
These opportunities include the expansion of our offsite manufacturing capabilities that I spoke about earlier, as well as the geographic expansion of our Homebuilding operations.
We have our initial land positions in place and we're working quickly to increase our lot pipeline in these new areas.
We are excited about the opportunities we see in both markets, as well as several other cities we are currently evaluating.
With our goal to increase closings by more than 20% this year, along with investing $3.7 billion in land and our expansion into new markets, we believe we are well-positioned to grow our operations while continuing to deliver high returns.
In closing, I'm extremely proud of what our organization accomplished in 2020.
We enter 2021 with high expectations, but I know the pandemic continues to rage and so we will continue to operate our business, thoughtfully and safely.
We ask that you limit yourself to one question and one follow-up. | compname reports q3 earnings per share $1.82.
q3 earnings per share $1.82.
qtrly home sale revenues increased 18% to $3.3 billion.
quarter-end unit backlog of 19,845 homes up 33%.
quarter-end total value of homes in backlog up 56% to $10.3 billion. | 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 solid first-quarter results as our portfolio of mission-critical products continues to perform.
While our end markets are not fully back to pre-pandemic levels, strong orders performance in the quarter gives us the confidence to raise our 2021 earnings guidance.
Starting with some financial highlights on Slide 2.
We booked orders of $227 million in the quarter, which were up 34% sequentially and 7% versus prior year on an organic basis.
We saw strong sequential increases in demand in both businesses, with industrial up 25% and A&D up 55%.
We ended the quarter with $421 million of backlog, up 11% versus prior quarter.
Revenue in the quarter was $181 million, down 8% organically, driven by lower industrial backlog entering 2021, the timing of large defense order shipments and slowly recovering demand in commercial aerospace.
Adjusted operating income was $12 million, representing a margin of 6.9%, up 110 basis points from prior year.
We expect strong margin expansion as we progress through 2021, driven by higher volume in virtually all regions and end markets, our continued actions on pricing, ongoing simplification across the company, and productivity.
The company delivered $0.24 of adjusted earnings per share and generated free cash flow of negative $21 million, both in line with our expectations.
Our cash performance in the quarter is consistent with typical seasonality due to the concentration of annual disbursements in the first quarter.
Starting with industrial on Slide 3.
Industrial organic orders were up 11% versus last year and 25% sequentially.
We're seeing recovery in virtually all of our end markets.
Regionally, we saw particular strength in EMEA, China and rest of Asia.
Notably, we booked two large international downstream orders in the quarter, which we will deliver over the next 12 months.
We delivered a strong book-to-bill ratio of 1.3 in the quarter.
Industrial revenue was $121 million, down 6% versus last year and 9% from prior quarter.
The year-over-year decline was a result of starting the year with a lower backlog and some COVID-related customer issues.
The sequential decline was largely driven by normal seasonality.
Adjusted operating margin was 8.1%, an improvement of 380 basis points versus last year.
The margin improvement was driven by the non-repeat of the COVID-related write-off from Q1 2020, partially offset by lower sales volume.
Adjusting for the impact of this receivable write off, organic decrementals in the quarter were 32%.
We expect industrial margins to expand through the year as volume increases and our price and productivity initiatives cut in.
Turning to Slide 4.
Our aerospace and defense segment booked orders of $73 million in the quarter, flat versus last year and up 55% sequentially.
Versus prior year, favorable defense orders offset the ongoing COVID-19 impact on our commercial business.
The sequential improvement was driven by the timing of large defense program orders for the Joint Strike Fighter, as well as the CVN-80 and 81 aircraft carriers.
Revenue in the quarter was $60 million, down 10% year over year and 23% from prior quarter.
Versus prior year, sales were down due to lower commercial revenue.
Sequential sales were lower due to seasonality and the timing of defense shipments for the Joint Strike Fighter, Dreadnought submarines and F-16 spares.
Orders and revenue in our defense business will continue to be lumpy, but we have a strong backlog, and we are well-positioned on growing platforms.
We're excited about the growth trajectory of the business.
Finally, operating margin was 18% in the quarter, down 130 basis points year over year.
The margin decline was driven by lower sales volume and unfavorable mix.
Organic decremental margins in the quarter were 29%.
We remain confident in our ability to expand operating margins throughout the year with higher volume, ongoing price actions and productivity.
Turning to Slide 5.
Our free cash flow was negative $21 million in the quarter.
As Scott mentioned, this was in line with the typical seasonality of our cash flow and timing of annual disbursements.
While capex was relatively flat, our cash flow from operations improved versus prior year as a result of our exit from upstream oil and gas.
We ended the quarter with $461 million of net debt, up slightly, driven by our cash flow in the quarter.
In 2021, we will continue to use free cash flow generated from operations to further pay down debt.
We expect to improve net debt to adjusted EBITDA leverage by greater than one turn by end of the year.
Now I'd like to share our expectations for second quarter and update our outlook for the full year.
In the second quarter, we expect revenue to be down 2% to 4% organically.
Scott will cover this in more detail in the upcoming slides, but let me provide the key highlights.
While we are seeing industrial demand recover across virtually all of our end markets, we expect deliveries to be heavily weighted to Q3 and Q4.
Similarly, in aerospace and defense, we expect a large portion of our recent orders in backlog to ship in the second half of the year.
Commercial aerospace will continue to recover slowly, as aircraft production rates and fleet utilization improves throughout the year.
We're expecting adjusted earnings per share of $0.30 to $0.35 in the second quarter, which implies approximately 75% of our full-year earnings that are expected in the second half.
This earnings profile was directionally in line with last year and was driven by the natural seasonality in our businesses.
Markets recovering from COVID-19 through the year and project shipment timing in aerospace and defense and industrial.
Finally, 2Q free cash flow is expected to be breakeven to slightly negative, driven by the timing of milestone payments on large projects.
Based on our first-quarter performance and expectations for second quarter, we have high confidence in delivering our 2021 commitments.
We now expect organic revenue growth at the high end of our original guidance and higher adjusted earnings per share of $2.10 to $2.30.
The increase is mostly driven by industrial, which is now expected to grow low to mid-single digits and increase confidence in our aerospace and defense outlook.
Free cash flow generation remains a top priority.
And we still expect to convert 85% to 95% of adjusted net income into free cash flow for the year.
Now I'll hand it back to Scott.
Let's start with our industrial outlook on Slide 7.
As Abhi mentioned, we saw recovery in the first quarter across virtually all industrial end markets with orders back to pre-COVID levels.
Geographically, we saw sequential improvement in North America and EMEA, while orders growth in China, India and rest of Asia remains strong.
We saw strong sequential and year-over-year orders growth in our short-cycle end markets.
In addition, we saw strength in our long-cycle businesses, with activity increasing overall and several large project orders across the portfolio.
So far in Q2, we continue to see momentum in our end markets with quoting activities at high levels and strong orders so far in the quarter.
For Q2 industrial revenue, we expect a moderate improvement year over year, with growth ranging between 1% and 4%.
We continue to see improvement across our short-cycle end markets as consumer demand increases.
In addition, the aftermarket remains strong with a mid-single-digit increase expected in the second quarter.
Our longer cycle end markets, including downstream, commercial marine and midstream oil and gas, are showing positive momentum, and we're encouraged by our deal pipeline and quoting activity.
Finally, pricing is expected to be a benefit of roughly 1%, consistent with prior quarters.
Moving to aerospace and defense.
Orders in Q1 were up sequentially and flat versus prior year, driven by timing of large defense program orders, which are inherently lumpy.
For the aftermarket, we expect improvements in defense spares and MRO activity through the year.
In our commercial aerospace business, we saw a modest improvement sequentially and expect a slow recovery to continue.
Revenue in the second quarter is expected to be flat to down 5% versus prior year.
Defense revenue is expected to be up 0% to 5% with strong volume on our top OEM programs.
Revenue from our other OEM programs and defense spares is expected to be relatively flat in the quarter.
Based on customer orders and timing of requirements, we expect stronger shipments in all major defense categories in the second half of the year.
Commercial revenue is expected to be down between 10% and 15%.
Our market position with Boeing and Airbus remains strong, and we expect revenue to improve through the year, in line with aircraft production rates and fleet utilization.
Finally, pricing is expected to be a benefit of 3% in the quarter with additional price increases coming in the second half.
We expect full-year pricing to be in line with last year.
Before we get into Q&A, I'd like to close by providing an update on the strategic priorities that I've shared for 2021, investing in people, accelerating growth, expanding margins and allocating capital effectively.
These strategic priorities guide what our team works on every day, and I wanted to take a moment to highlight some actions we've taken in the first quarter.
We remain focused on investing in growth.
Air Force T-X trainer jet and a high-speed impact kinetic switch module for a next-generation missile system for the U.S. Navy.
On the industrial side, we launched the CIRCORSmart app, our first mobile application and the start of a significant digital solution offering for our customers.
The mobile app allows a customer to scan a QR code affixed to the product, pull up performance data, user guides and contact information for technical support and aftermarket orders.
Over time, we'll add more capabilities to the app.
We expect more than 50% of industrial's product shipments to have a QR code attached by the end of the second quarter.
This enhances the customer experience and provides an opportunity for incremental high-margin aftermarket growth.
We're expecting to launch 45 new products in 2021, with revenue generated from new products launched in the last three years accounting for approximately 10% of our total 2021 revenue.
We're also expanding our aftermarket presence in aerospace and defense.
We're in the process of opening a Waterfront Service Center in Virginia.
This will improve customer support and increase our operational efficiency.
Finally, the CIRCOR operating system is driving operational improvements across the company.
For example, I recently visited one of our aerospace and defense sites, which produces components for the Joint Strike Fighter.
By implementing the CIRCOR operating system, the team has improved on-time delivery to 95%, improved product quality and cost and significantly lowered working capital as a percentage of sales.
Over the last three years, the business has grown 55% and expanded operating margins by 670 basis points.
This is just one example of the power of the CIRCOR operating system and our efforts to enhance operations.
Continued execution on our strategic priorities will deliver long-term value to our customers, employees, suppliers and shareholders. | compname reports q1 loss per share of $0.35.
q1 adjusted earnings per share $0.24.
q1 gaap loss per share $0.35.
q1 revenue $181 million versus refinitiv ibes estimate of $187.9 million.
sees q2 adjusted earnings per share $0.30 to $0.35.
sees fy adjusted earnings per share $2.10 to $2.30.
expects q2 reported revenue to increase from 0%-2% and q2 organic revenue to decline 2%-4%.
now expects 2021 organic revenue growth in range of 2 to 4%. | 1 |
Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A.
I will provide an overview of our third quarter results, our initial operational outlook for 2022, apartment market conditions and then conclude with the regulatory environment.
Our third quarter results exceeded expectations, reflecting substantial improvement in West Coast economic conditions and housing demand.
Net effective market rents are now 6.4% above pre-COVID levels and it's notable that we've exceeded pre-COVID market rents despite having recovered only about 63% of the jobs lost during the pandemic.
As a result of improving market conditions, we reported quarterly core FFO of $3.12 per share, $0.08 per share above both our sequential results and guidance provided last quarter.
This is the first of likely many quarterly sequential improvements in core FFO.
Southern California continues to deliver the strongest growth with net effective rents up 17.2% compared to pre-COVID while Northern California is still down 5.2%.
Return to office delays at many tech companies and slower job growth compared to other West Coast areas were factors in the pace of recovery for Northern California.
Overall, September job growth in the Essex markets was 5.2%, substantially above the U.S. average of 4%.
Turning to our outlook for 2022.
We published our initial market rent estimates on page S-17 of our supplemental package.
We are expecting 7.7% net effective rent growth on average in 2022 with Northern California the notable laggard in 2021 forecasted to lead the portfolio average in market rent growth next year.
A key assumption driving our outlook for 2022 is the return to a predominantly hybrid office environment occurring over the first half of the year, supporting our 2022 job growth outlook and our expectation that the West Coast markets will resume their long-term outperformance versus U.S. averages.
Our confidence in the Bay Area recovery next year is partially driven by rental affordability following a year of solid income growth, lower effective rents and exceptional growth in single-family home prices.
Median for-sale home prices are up 17% in California and almost 16% in Seattle, making for-sale housing more costly relative to rental housing and often impeding the transition from renter to homeowner.
Finally, despite large increases in for-sale housing prices, our expectation for the production of for-sale housing in 2022 remains very muted at only 0.4% of the single-family housing stock.
We previously noted that many large tech companies in our markets have delayed their office reopenings as a result of the Delta variant this fall, which we believe is the primary factor in the slow recovery of Northern California compared to other Essex markets.
Nevertheless, recent tech company announcements regarding office expansion, open positions in the Essex markets and new commitments to office space all support our belief that the leading employers remain fully committed to a hybrid office-centric environment on the West Coast.
Page S-17.1 of our supplemental highlights recent investments by large tech companies which have continued throughout the pandemic and include Apple's 550,000 square foot recent expansion in Culver City, their new 490,000 square foot tech campus that will soon begin construction in North San Jose and a recent acquisition of five office buildings with a total of 458,000 square feet in Cupertino.
Google last quarter received needed approvals for its planned 80-acre campus near Downtown San Jose and YouTube's 2.5 million square foot campus in San Bruno was just approved by the city last week.
We continue to track the large tech companies hiring in terms of open positions and job locations, giving us confidence that we continue to grow alongside the most dynamic sector of the U.S. economy.
Our most recent survey of open positions indicates 38,000 job openings in the Essex markets for the 10 largest tech companies, up 9,000 jobs or 26% as compared to the first quarter of 2020.
Strong economic growth on the West Coast is further supported by venture capital investments which achieved new highs in Q3 '21 of $72 billion, of which 44% was directed to organizations in the Essex markets.
Turning to our supply outlook for 2022, we are expecting 0.6% housing supply growth for the full year, including 0.9% growth for the multifamily stock which is manageable relative to our expectations for job growth of 4.1% in 2022.
Overall, our West Coast markets will remain well below the national rate of new housing supply growth and especially compared to the rapid accelerating pace of housing deliveries across many low-barrier markets next year.
Longer term, residential building permits in Essex markets saw a modest 3.5% increase on a trailing 12-month basis, which is favorable compared to the U.S. where permits have increased 13.6% compared to one year ago.
While our markets often temporarily underperform the national averages during recessions, we remain disciplined in our approach to capital allocation, including the cadence of housing supply deliveries with permitting data supporting our West Coast thesis.
Turning to the apartment transaction market.
We continue to see strong demand from institutional capital to invest in the multifamily sector along the West Coast as evidenced by increasing transaction volume and cap rates in the mid-3% range.
Apartment values across our markets are up approximately 15% on average compared to pre-COVID valuations.
The company has recently seen more development opportunities, and we were able to purchase two commercial properties in the third quarter, one located in South San Francisco that we expect to become a near-term apartment development opportunity and another in Seattle that we will begin to entitle for apartments while earning an attractive 6% going-in yield with a high-quality tenant.
Barb will discuss a new co-investment program in a moment, which is strategically important given our preference not to issue common stock at the current market price.
Finally, the California statewide eviction moratorium ended September 30.
However, a few meaningful local jurisdictions have extended their separate eviction prohibitions.
The net result is that a significant portion of our portfolio remains subject to eviction moratoria and other regulations that will slow the pace of scheduled rent growth in 2022.
Fortunately, the Federal tenant relief program has come to the aid of many of our residents, although the reimbursement process continues to be slow and requires a significant coordination and support from the Essex team.
I am grateful for this extensive team effort.
First, I'll start by expressing my appreciation for our operations team as we are in the midst of a strong recovery, our team has been busier and working harder than ever.
Our third quarter results reflect a combination of the operating strategy implemented early in the pandemic and a healthy recovery in net effective rents that began in the second quarter as California and Washington finally reopened from the pandemic shutdowns.
As you may recall, in the second quarter of 2020 when the pandemic-mandated shutdowns halted our economy, Essex quickly pivoted to a strategy that focused on maintaining high occupancy and coupon rents with the use of significant concessions.
Now over a year later, as our markets recover, we are starting to see the benefits of this strategy flow through our financial results.
In the third quarter, same-property revenue -- same-property revenues grew by 2.7%, which is primarily attributable to a reduction in concessions compared to the previous period.
By primarily utilizing concessions last year, we were able to limit the in-place rent decline to only 1.1% in the third quarter.
The benefit of this strategy is also coming through our sequential revenue growth, which increased 3.2% this quarter from the second quarter.
With the market volatility we experienced over the past year, this is an extraordinary result and positions the company well going forward.
From a portfoliowide perspective, market conditions remain strong compared to a year ago as demonstrated by the 12.6% blended net effective rent growth in the quarter.
In addition, rents relative to pre-COVID levels have continued to improve, further enhanced by a delay to the typical seasonal slowdown in all our markets.
Turning to some market-specific commentary from north to south.
Rents and jobs in the Seattle region have had a strong recovery with net effective rents up 8.3% compared to pre-COVID levels and year-over-year job growth of 5.5% in September.
New supply continues to be largely concentrated in the CBD, which is less impactful to Essex because 85% of our Seattle portfolio is located outside of CBD.
Looking forward to 2022, as outlined in our S-17 of the supplemental, total housing supply deliveries for the region is expected to decline compared to 2021, and we anticipate job recovery to continue, led by Amazon, which recently announced plans to hire over 12,000 corporate and tech employees in Seattle.
As such, we are forecasting market rent growth of 7.2% in 2022.
Moving down to Northern California, which is our only region where net effective rents remain below pre-COVID levels.
Greater job loss and apartment supply deliveries caused net effective rents to fall further in Northern California since the onset of the pandemic.
In addition, the job recovery in Northern California has been at a slower pace than our other regions, with only 4.4% year-over-year improvement compared to a 5.2% for the entire Essex portfolio as of September.
We believe this is partly driven by the more owner mandates delaying normal business activities.
Apartment supply, particularly in San Mateo and Oakland CBD are also presenting challenges for nearby properties, leading to financial concessions for stabilized properties for -- of over a week in these markets in September.
On the other hand, we anticipate that Northern California will be our best-performing region in 2022, with market rent growth forecast of 8.7% on our S-17.
As Mike discussed, we expect hybrid office reopenings to continue, which will drive additional job growth and healthy demand for apartment units.
With similar level of supply delivery expected in 2022 as this year, we are optimistic that Northern California is in its early stages of its recovery.
Lastly, on Southern California.
Rent growth has continued to improve in the third quarter, and net effective rents in September are 17.2% above pre-COVID levels.
As we have mentioned in the past, Southern California is a tale of two markets, the urban areas in the downtown L.A. versus the more suburban communities, which have generally outperformed.
In June, L.A. rents were still below pre-COVID levels, but as of September, they are now 6.8% above.
While Orange County, San Diego and Ventura have achieved rents between 17% to 30% above pre-COVID levels.
Job growth in Southern California continues to progress well, up 5.9% in September as the region's economy continues to reopen and recover.
With the exception of the Downtown L.A. area where concessions averaged one week in September, the rest of our Southern California market has demonstrated solid fundamentals with no concessions recognized in September.
We expect Southern California strong rent growth to continue in 2022, led by Los Angeles, which has just begun to recover the jobs lost during the COVID recession.
Apartment supply in the region is forecasted to increase next year compared to this year and could present pockets of interim softness counterbalanced by a continued favorable job to supply ratio across the region.
As you can see on our S-17 market rent growth for Southern California of 7.1%, we anticipate this region to perform at a comparable level as Seattle.
With this backdrop of stable occupancy amid a favorable supply demand relationship, our portfolio is well positioned for the continued growth.
I'll start with a few comments on our third quarter results, discuss changes to our full year guidance, followed by an update on investments and the balance sheet.
I'm pleased to report core FFO for the third quarter exceeded the midpoint of our guidance range by $0.08 per share.
The favorable outcome was due to stronger operating results at both our consolidated and co-investment properties, higher commercial income and lower G&A expense.
During the quarter, we saw an improvement in our delinquency rate, which declined to 1.4% of scheduled rent on a cash basis compared to 2.6% in the second quarter.
The decline is attributable to an increase in income from the Federal tenant relief programs that were established to repay landlords for past due rents.
Year-to-date through September, we have received $11.6 million from the various tenant relief programs, of which $9.5 million was received in the third quarter.
Given the increased pace of reimbursement, we began to reduce our net accounts receivable balance in order to maintain our conservative approach to delinquencies and collections.
As a result of the strong third quarter results, we are raising the full year midpoint for same-property revenues by 20 basis points to minus 1.2%.
As should be noted, this was the prior high end of our range.
There are two factors I want to highlight as it relates to our fourth quarter guidance.
First, as Angela discussed, we are seeing strong rent growth in our markets.
While there will be a small benefit to the fourth quarter, the vast majority of the benefit from higher rent growth won't be felt until 2022 when we have the opportunity to turn more leases.
Second, our fourth quarter guidance assumes we continue to receive additional government reimbursements for past due rents and contemplates a continued reduction in our net accounts receivable balance.
Thus, we expect our reported delinquencies as a percent of scheduled rent to be above our cash delinquencies, which is consistent with the third quarter reported results.
As it relates to full year core FFO, we are raising our midpoint by $0.11 per share to $12.44.
This reflects the better-than-expected third quarter results and changes to our full year outlook.
Year-to-date, we have raised core FFO by $0.28 or 2.3% at the midpoint.
Turning to the investment markets.
During the quarter, we raised a new institutional joint venture to fund acquisitions as we believe this is the most attractive source of capital today to maximize shareholder value.
The new venture will have approximately $660 million of buying power, a portion of which is expected to be invested by year-end.
As I discussed on our last call, we are seeing an elevated level of early redemptions of our preferred equity investments due to strong demand for West Coast apartments and inexpensive debt financing, which is leading to sales and recapitalization.
For the year, we expect redemptions to be around $290 million.
Roughly 40% of these redemptions are expected to occur in the fourth quarter.
Given the current environment, we could see continued elevated levels of early redemptions in 2022.
In terms of new preferred equity and structured finance commitment, we are on track to achieve our 2021 objectives as outlined at the start of the year.
Year-to-date, we have closed on approximately $110 million of new commitments.
As a reminder, it typically takes three to six months post closing to fund our commitments given they tend to be tied to development projects.
Moving to the balance sheet.
As we expected, we are starting to see an improvement in our financial metrics, driven by a recovery in our operating results.
In the third quarter, our net debt-to-EBITDA ratio declined from 6.6 times last quarter to 6.4 times.
We believe this ratio will continue to decline through growth in EBITDA over the next several quarters.
With limited near-term debt maturities and ample liquidity, we remain in a strong financial position. | q3 core ffo per share $3.12. | 1 |
Before we get started, I want to let you know that we have slides to accompany our discussion.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are posted on our website as well.
So turning to the agenda on Slide three.
I'll start with some highlights of the second quarter before handing it over to John, who will go into more detail on our performance.
Let's start with an overview of the quarter, turning to Slide four.
We're very pleased with how we've managed our operations as well as our earnings at risk with the appropriate level of discipline.
We also helped our customers navigate and manage through the volatility of this quarter that came from weather issues, domestic and international supply chain challenges and other complexities in the current environment.
Turning now to our segment performance.
Results in Agribusiness were down versus a very strong quarter last year but exceeded our expectations as the team effectively managed trade flows and capacity utilization.
We set quarterly and year-to-date records in soy crush volume, capacity utilization and lower unplanned downtime.
Additionally, we reduced power consumption to an all-time low in our European rapeseed crush operations.
While we faced complexities in the quarter related to freight, transportation and other areas that affected many other companies and industries, our results clearly demonstrate that with our commercial and industrial teams working closely together, we have built resilient supply chains that allow us to be successful through a range of macro environments.
Results in Refined and Specialty Oils improved in most regions, with particular strength in North America.
In the U.S., we saw foodservice demand come back stronger and faster than and anticipated, and we're experiencing a greater impact from renewable diesel demand than we expected.
In response to the higher demand for Refined and Specialty Oils, we've been working to find greater efficiencies to increase supply.
We've also worked with our food customers to help them manage their risk as well as reformulate products where it makes sense.
The multiple drivers behind the strength in edible oils gives us confidence there are significant growth opportunities ahead of us.
I also want to highlight that this was a strong quarter for our noncore Sugar JV.
As we've noted in the past, we continue to assess our strategic options regarding this business, but we're very pleased with the improvement over the last year.
Taking into account our year-to-date results and based on what we can see now in the forward curves, we are increasing our outlook for the year and expect to deliver adjusted earnings per share of at least $8.50 for the full year 2021.
Despite the global volatility, we have confidence in our ability to deliver in the back half of the year, based on the business already committed, the crush outlook and the demand for Refined and Specialty Oils.
As we look ahead, we're confident that the performance of our operating model and market trends provide support for a higher mid-cycle earnings.
So in our June 2020 business update, we outlined our earnings baseline of $5 per share.
With the changes we've made in our business as well as the fundamental shifts in the marketplace, we're taking that baseline earnings per share up to $7, and that's a $2 increase.
And consistent with last time, this reflects our existing portfolio only and does not include any future growth investments.
I'll now hand the call over to John to walk through the financial results, the 2021 outlook and additional detail on the updated earnings baseline.
I'll then close with additional thoughts on some of the trends we're seeing.
Let's turn to the earnings highlights on Slide five.
Our reported second quarter earnings per share was $2.37 compared to $3.47 in the second quarter of 2020.
Our reported results include a negative mark-to-market timing difference of $0.24 per share.
Adjusted earnings per share was $2.61 in the second quarter versus $1.88 in the prior year.
Adjusted Core segment earnings before interest and taxes for EBIT was $550 million in the quarter versus $564 million last year, reflecting lower results in Agribusiness partially offset by improved performances in Refined Specialty Oils and Milling.
In processing, higher results in North America and Argentina were more than offset by lower results in Europe and to a greater extent in Brazil, which reflected a decreased contribution from soybean origination due to an accelerated pace of farmer selling last year.
In merchandising, improved performance was primarily driven by higher results in ocean freight due to strong execution and positioning in our global corn and wheat value chains, which benefited from increased volumes and margins.
In Refined and Specialty Oils, the outstanding performance in the quarter was largely driven by higher margins and record capacity utilization in North American refining, which benefited from strong foodservice demand and increased demand from the growing renewable diesel sector.
Improved results in South America were due to the combination of higher margins and lower costs, more than offsetting lower volumes.
Europe benefited from increased volumes and margins from higher capacity utilization and product mix.
In Milling, higher volumes, lower costs and good supply chain execution in South America were the primary drivers of improved performance in the quarter.
Results in North America were comparable with the last year.
The increase in corporate expenses during the quarter was primarily related to performance-based compensation accruals, a portion of which was not allocated out to the segments as was done in previous years.
The increase in Other was related to our captive insurance program.
Improved results in our noncore Sugar and Bioenergy joint venture were primarily driven by higher ethanol volume and margins.
Prior year results were negatively impacted by approximately $70 million in foreign exchange translation losses on U.S. dollar-denominated debt of the joint venture due to significant depreciation of the Brazilian real.
For the six months ended Q2, income tax expense was $242 million compared to an income tax expense of $113 million in the prior year.
The increase in income tax expense is due to higher year-to-date pre-tax income, partially offset by a lower estimated effective tax rate for 2021.
Net interest expense of $48 million was below last year, primarily driven by lower average variable interest rates, partially offset by higher average debt levels due to increased working capital.
Here, you can see our continued positive earnings trend adjusted for notable items and timing differences over the past four fiscal years, along with the most recent trailing 12-month period.
This improved performance not only reflects a better operating environment, but also the increased coordination and alignment of our global commercial, industrial and risk management teams due to our new operating model.
Slide seven compares our year-to-date SG&A to the prior year.
We have achieved underlying addressable SG&A savings of $20 million, of which approximately 80% is related to indirect costs.
Through our team's disciplined focus on costs, we were able to continue to achieve savings even when compared to last year, which was already lower as a result of the pandemic and the actions we took to reduce spending.
Looking ahead, we are monitoring cost inflation in many markets, especially in Brazil, and we'll be working to offset this impact where we can while still making the necessary investments in our people, processes and technology.
Moving to Slide eight.
For the most recent trailing 12-month period, our cash generation, excluding notable items and mark-to-market timing differences, was strong with approximately $2 billion of adjusted funds from operations.
This cash flow generation was well in excess of our cash obligations over the past 12 months, allowing us to strengthen our balance sheet.
Shortly after quarter end, we closed on the sale of our U.S. grain interior elevators, receiving additional cash proceeds of approximately $300 million and another $160 million for net working capital.
Slide nine details our year-to-date capital allocation of adjusted funds from operations.
After allocating $76 million to sustaining capex, which includes maintenance, environmental, health and safety and $17 million to preferred dividends, we had approximately $800 million of discretionary cash flow available.
Of this amount, we paid $141 million in common dividends and invested $57 million in growth and productivity capex, leaving over $600 million of retained cash flow.
As you can see on Slide 10, readily marketable inventories now exceed our net debt with the balance of RMI being funded with equity.
For the trailing 12 months, adjusted ROIC was 18.4%, 11.8 percentage points over our RMI adjusted weighted average cost of capital of 6.6%.
ROIC was 13%, seven percentage points over our weighted average cost of capital of 6% and well above our stated target of 9%.
The spread between these return metrics reflects how we use RMI in our operations as a tool to generate incremental profit.
Moving to Slide 12.
For the trailing 12 months, we produced discretionary cash flow of approximately $1.7 billion and a cash flow yield of nearly 24%.
As Greg mentioned in his remarks, taking into account our strong Q2 results and our outlook, we have increased our full year adjusted earnings per share from $7.50 to at least $8.50, above last year's record of $8.30.
Our outlook is based on the following expectations.
In Agribusiness, full year results are expected to be up modestly from the previous expectations but still down from a very strong 2020.
In Refining and Specialty Oils, we expect full year results to be up from our previous outlook and significantly higher compared to last year due to our strong first half results and positive demand trends in North America.
We continue to expect results in Milling and Corporate and Other to be generally in line with last year.
In noncore, full year results in our Sugar and Bioenergy joint venture are expected to be a positive contributor.
Additionally, the company expects the following for 2021: an adjusted annual effective tax rate in the range of 17% to 19%, which is down from our previous outlook of 20% to 22%; net interest expense in the range of $220 million to $230 million, which is down $10 million from our previous expectation; and capital expenditures in the range of $450 million to $500 million, which is up $25 million from our previous forecast; and depreciation and amortization of approximately $420 million.
Shifting to our updated mid-cycle baseline.
The waterfall chart on Slide 14 shows the areas and magnitude of increased earnings being primarily driven by what we see as a structural improvement in the oilseed market fundamentals.
This is due to increased vegetable oil demand by the renewable diesel industry and greater benefits as a result of the change in our operating model to a global value chain approach.
Turning to Slide 15 and the drivers behind these increases.
Consistent with our approach in June 2020, we introduced -- when we introduced our $5 baseline, we were defining our long-term average oilseed crush margin range by using the weighted average of our footprint over the past four years plus the trailing 12 months.
This increases our average soy crush margin by $1 a metric ton to a range of $34 to $36 per metric ton and, more significantly, it increases our average softseed crush margin, which is more sensitive to oil demand, by about $10 a metric ton to a range of $48 to $52 per metric ton.
We feel these ranges reflect more reasonable normalized numbers in the go-forward structural market environment.
We have also increased the normalized earnings of our oilseed origination and distribution businesses and our merchandising subsegment, reflecting the more coordinated and aligned approach within the value chains from our new operating model.
The approximate 30% increase in Refined and Specialty Oils earnings is driven by a higher capacity utilization in North American refining and increased contribution from specialty oils due to improvement initiatives that are underway.
Importantly, we assume that margins in North American refining normalize back to historical averages as we expect in time that the renewable diesel industry will add pretreatment capabilities to their facilities.
There are no changes from our prior baseline in Milling.
Corporate and Other are down primarily due to higher performance-based compensation from the increase in our baseline.
There is no change in the assumed contribution from our Sugar and Bioenergy JV.
Net interest expense is reduced by approximately $25 million compared to the $5 baseline, reflecting debt paydown from strong cash flow in 2021 and normalized working capital.
Given potential tax policy changes in the future, we are increasing our estimated effective tax rate by two percentage points.
It's important to note that our earnings baseline of $7 is not earnings powered.
Aside from upside that may come from higher-margin environment, we have a number of opportunities that we are pursuing that can drive earnings upside as summarized on Slide 16.
Strengthening our Oilseeds platform with targeted acquisitions is a top priority.
Expanding our industry-leading Refined and Specialty Oils position to serve new and existing customers with differentiated products and services is an area of opportunity.
We're also excited about the growth and demand for renewable feedstocks and plant-based proteins.
And finally, we're continuing to invest in technology that will drive increased efficiency throughout our global operations.
Turning to Slide 17.
At a $7 per share baseline, we should generate approximately $1.4 billion of adjusted funds from operations.
After allocating capital to sustaining capex and preferred and common dividends to shareholders, we should have about $800 million of discretionary cash available annually for reinvestment in the business or returns to shareholders.
This is an increase of approximately $200 million of cash per year from our $5 baseline.
With that, I'll turn things back over to Greg for some closing comments.
Before opening the call to Q&A, I want to offer a few closing thoughts.
From where we sit, it's clear there's a structural shift underway in the consumer demand for sustainable food, feed and fuel.
The conversations we've been having with existing and new customers are significantly different than they were even just six months ago.
We're pleased with our position to help support meaningful change.
And with our global platform, we have the ability to do so at scale.
Consumers have demonstrated they will pay more to get what they care about, and it's our job to provide these alternatives to our customers.
To meet this demand, we work with customers on sourcing sustainable alternatives under -- or helping them reformulate.
We help food and feed customers source ingredients to minimize the carbon impact of moving them, and we work with fuel customers to source and transport feedstock for renewable fuels.
Importantly, we do all of this with the goal of driving value back to farmers to allow them to invest in stewardship, to support regenerative agriculture and to encourage production in optimal locations, which means getting the highest production per acre using the least amount of inputs.
We're really excited about the role we can play in this accelerating shift. | compname reports q1 adjusted earnings per share $0.52.
q1 adjusted earnings per share $0.52.
q1 sales $505.1 million versus refinitiv ibes estimate of $526.4 million.
net sales guidance reaffirmed at a range of $2.05 billion to $2.10 billion.
expect our base business net sales for q2 to trend much closer to our 2019 net sales than our 2020 net sales. | 0 |
I ll begin with consolidated revenues on slide nine.
Record quarterly net revenues of $2.47 billion, grew 35% year-over-year and 4% sequentially.
Record asset management fees grew 8% sequentially, commensurate with a sequential increase of fee-based assets in the preceding quarter.
Private Client Group assets and fee-based accounts were up 9% during the fiscal third quarter, providing a tailwind for this line item for the fourth quarter.
Consolidated brokerage revenue is $552 million, grew 14% over the prior year, but declined 7% from the record set and the preceding quarter.
Institutional fixed income brokerage revenues remain solid, albeit down from the record set in the preceding quarter.
Brokerage revenues and PCG were up 22% on a year-over-year basis, but down 6% sequentially due to lower trading volumes, as well as the large placement fee in the preceding quarter.
Account and service fees of $161 million increased 20% year-over-year and 1% sequentially, largely due to higher average mutual fund balances.
Record consolidated investment banking revenues of $276 million, grew 99% year-over-year and 14% sequentially, driven by record M&A revenues, and strong debt and equity underwriting results.
Our investment banking pipelines remain strong.
So we would be pleased if fourth quarter revenues came in around the average of the quarterly revenues generated over the first three quarters of the fiscal year, that would have been about $260 million on average.
But of course, this line item is inherently difficult to predict.
Other revenues of $55 million were up 25% sequentially, primarily due to $24 million of private equity valuation gains during the quarter, of which approximately $10 million were attributable to non-controlling interest, which are reflected in the other expenses.
Moving to slide 10.
Clients domestic cash sweep balances ended the quarter at $62.9 billion, essentially flat compared to the preceding quarter and representing 6.1% of domestic PCG client assets.
As we continue to experience growing cash balances and less demand from third-party banks during fiscal 2021, $8.6 billion of the client cash is being held in the client interest program at the broker dealer.
Over time, that cash could be redeployed to our bank or third-party banks as capacity becomes available, which would hopefully earn a higher spread than we currently earn on short-term treasuries.
On slide 11, the top chart displays our firmwide net interest income and RJBDP fees from third-party banks on a combined basis, as these two items are directly impacted by changes in short-term interest rates.
The combined net interest income and BDPs from third-party banks of $183 million were up slightly compared to the preceding quarter, as modest NIM compression was offset by growth in client cash balances and higher asset balances in Raymond James Bank.
However, it s still down significantly from the peak of $329 million in the second quarter of fiscal 2019, really highlighting the remarkable results we have been able to generate despite near zero short-term interest rates.
In the lower left portion of the slide, we show net interest margin or NIM for both RJ Bank and the firm overall.
We continue to expect the bank s NIM to decline to just around or just below 1.9% over the next quarter or two.
The average yield on RJBDP balances with third-party banks declined 1 basis point to 29 basis points in the quarter.
We believe this average yield will remain around this level for the rest of the fiscal year, but there will likely be downward pressure in this yield in fiscal 2022, especially in the back half of the fiscal year if banks demand for deposits, don t improve from current levels.
Moving to consolidated expenses on slide 12.
First, our largest expense compensation; the compensation ratio decreased sequentially from 69.5% to 67.2% largely due to record revenues in the capital markets segment, which had a 57% comp ratio during the quarter.
And the benefit from the private equity valuation gains, which do not have direct compensation associated with them.
Given our current revenue mix and disciplined manage of expenses, we remain confident, we can maintain a compensation ratio lower than 70% in this near zero short-term interest rate environment.
And as I ve said over the past few quarters, we could outperform that just as we did in the fiscal third quarter with capital markets revenues at or near these levels.
Non-compensation expenses of $425 million, increased 18% compared to last year s third quarter and 53% sequentially, primarily driven by the $98 million loss on extinguishment of debt, acquisition-related expenses, the non-controlling interest of $10 million and other expenses related to our private equity valuation gains and higher business development expenses.
As we discussed last quarter, we successfully executed a debt offering in the fiscal third quarter to take advantage of the low rate environment and significantly extend the maturities of our existing balances.
We raised $750 million of 30-year senior note at 3.75% and utilize the proceeds and cash on hand to early redeem our next two senior notes that we re maturing in 2024 and 2026, effectively, resulting in the same amount of senior notes outstanding.
This resulted in $98 million in losses associated with the early extinguishment of those nodes, but in doing so locked in very low rates for 30 years, while significantly extending the duration and stability of our funding profile.
Overall, our results show, we have remained focused on managing controllable expenses, while still investing in growth across all of our businesses and ensuring high service levels for advisors and their clients.
Excluding the debt extinguishment expense, we do expect non-compensation expense to continue picking up over the next few quarters as hopefully, travel, recognition trips and conferences continue to resume, and we continue to increase our investments in technology and high quality service levels for our growing business.
We would eventually expect loan loss provisions associated with net loan growth as well.
Slide 13 shows the pre-tax margin trend over the past five quarters.
Pretax margin was 15.6% in fiscal third quarter of 2021 and adjusted pre-tax margin was 19.8%, which was boosted by record revenues, the loan loss reserve release and still relatively subdued business development expenses.
At our Analyst and Investor Day in June, we outlined a pre-tax margin target of 15% to 16% in this near zero interest rate environment.
But as we experienced during the first nine months of the fiscal year, there s meaningful upside to our margins, when capital markets results are strong and improving macroeconomic trends lead to releases of our allowances for credit losses.
On slide 14, at the end of the quarter, total assets were approximately $57.2 billion, a 2% sequential increasing increase, reflecting solid growth of securities-based loans at Raymond James Bank.
Liquidity and capital levels are very strong, with cash at the parent of approximately $1.56 billion, a total capital ratio of 25.5% and a Tier 1 leverage ratio of 12.6%.
We have substantial amount of flexibility to be both defensive and opportunistic.
The third quarter effective tax rate of 20.3% benefited from non-taxable gains in the corporate life insurance portfolio, we would expect that tax rate to be around 21% in the fiscal fourth quarter, assuming a flat equity market.
Slide 15 provides a summary of our capital actions over the past five quarters.
In the third quarter, we repurchased 375,000 shares for $48 million.
As of July 28, $632 million remains available under the current share repurchase authorization.
But as Paul Reilly will discuss our priority continues to be deploying capital to grow our businesses.
Lastly, on slide 16, we provide key credit metrics for Raymond James Bank.
The credit quality of the bank s loan portfolio remains healthy with most trends continuing to improve.
Non-performing assets remained low at just 12 basis points of total assets and criticized loans declined sequentially.
The bank loan loss benefit of $19 million reflects an improved outlook for economic conditions and higher credit ratings on average within the corporate loan portfolio.
Due to reserve releases and loan growth during the quarter, the bank loan allowance for credit losses as a percent of total loans declined from 1.5% to 1.34% of the quarter end.
For the corporate portfolio, these allowances are higher at around 2.4%.
We believe, we re adequately reserved, but that could change if economic conditions deteriorate.
So overall I m very pleased with our strong results for this quarter, which top many records, and did so in spite of the persistent challenges of the global health pandemic and near zero short-term rates.
As for the outlook, we remain well positioned entering the fourth fiscal quarter with records of many of our key business metrics, strong pipelines for financial advisor recruiting and investment banking.
In the Private Client Group results will benefit by starting the fourth quarter with 9% increase of assets and fee-based accounts.
With the strong recruiting pipeline, we are on track for record fiscal year recruiting as prospective advisors across all of the affiliation options have continued to be attracted to our platform, including the leading technology solution, our advisor and client centric culture.
These recruiting results are primarily strong given the very competitive market for experienced advisors.
In Capital Markets segment, the investment banking pipeline remains strong and we expect solid fixed income brokerage results, driven by demand from depository client segment.
However, keep in mind, these there is still an economic uncertainty due to the ongoing pandemic that could impact these results.
In the Asset Management segment, if equity markets remain resilient, we expect results to be positively impacted by higher financial assets under management.
Active asset managers continue to face structural headwinds.
However, we are pleased to see positive net flows on a fiscal year to date basis for Carillon Tower Associates.
We hope that the one benefit of increased market volatility is that it reinforces the value of our high quality asset active managers.
And Raymond James bank should continue to grow as we have ample funding and capital to grow the balance sheet.
We ll continue to focus on lending to PCG clients through securities-based loans and mortgages.
And we will continue to be selective and deliberate in growing our corporate loan and agency backed securities portfolio.
As we look further ahead, we remain focused on the long-term growth.
And as we ve outlined at our recent Analyst and Investor Day, those key growth initiatives, include driving organic growth across all of our core businesses, continue to expand our investments in technology and sharpening our focus on strategic M&A.
Today s announcement of our firm s intention to make an offer for Charles Stanley Group demonstrates our focus on these initiatives in our commitment to deploy excess capital over time.
We believe this acquisition stays true to our long-standing criteria for acquisitions.
So first, being a good cultural fit, a good strategic fit, it makes financial sense for shareholders and something we can integrate.
They ve been amazing at being able to provide excellent service to their clients, to these difficult times.
I m very proud to be a part of this special Raymond James family. | raymond james financial inc - quarterly net revenue $2.47 billion, up 35% over prior year’s q3.
quarterly net revenue $2.47 billion, up 35% over prior year’s q3. | 1 |
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
I'll start with a brief discussion about current market trends and provide an overview of our significant accomplishments in 2021.
Demand in the fourth quarter continued to demonstrate the strength we have seen all year.
Mortgage remained very affordable and home buying demand continued to outpace housing inventory, driven by favorable homeland activity from millennials and baby boomers.
As such, Meritage again broke several company records in the fourth quarter of 2021.
In the face of a prolonged supply chain constraints and a tightening labor market, we achieved our highest fourth-quarter sales orders and our second highest quarterly home closings while accelerating our spec starts.
Our fourth-quarter results include the highest quarterly home closing revenue, home closing gross profit, and diluted EPS, as well as the lowest quarterly SG&A as a percentage of home closing revenue in our company's history.
From a full year 2021 perspective, I couldn't be more proud of what our team has accomplished.
We achieved our highest annual sales orders of 13,808 homes and closing of 12,801 homes.
Our 2021 annual home closing revenue was also a record at $5.1 billion as was our full-year home closing gross margin of 27.8%.
Price increases due to sustained strong demand, coupled with our operational efficiency and the leveraging of our fixed cost over higher home closing revenue drove our lowest full-year SG&A rate of 9.2%, translating to our next full-year diluted earnings per share of $19.29.
Our community count grew 33% year over year.
We're earning the spring selling season with 259 active selling communities and forecasting continued double-digit community growth into '22.
We expect that our strategy capitalizing on the solid demand for the entry-level and first move of homes will produce increased volume coming from digital communities and will enable us to gain market share in all of our geographies.
In addition to delivering impressive financial results, we achieved numerous milestones related to our corporate social stewardship in the fourth quarter.
As the team organized around an ambition to Start with Heart, Meritage employees donated countless hours to deliver a new mortgage-free home to a deserving military veteran and his family on Veterans Day in Florida through Operation Homefront.
We also donated to various nonprofit organizations to further strengthen diversity, equity, and inclusion missions and to help families during the holiday season and the communities in which we do business, and to support tree planting programs to share our ongoing approach to long-term sustainability practices.
DE&I commitments and our ESG milestones, we issued our inaugural ESG report during the quarter.
We also joined more than 2,100 other companies by signing the CEO Action for diversity and inclusion pledge.
We'll have more to share about our ESG efforts with you throughout 2022.
We're excited about our employees, executive, and board-level commitments to these important issues.
I want to start by focusing on affordability, which with favorable pricing environment and the anticipated rate hikes coming this year is top of mind for everyone.
Affordability is at the heart of our business strategy that is centered around entry-level and first move-up home.
When we first shifted to this market segment more than five years ago, we did so knowing, eventually, interest rates would go up.
Continue to buy land for even lower ASP products has been our focus over the past two years to act as a counterbalance to the pricing strength all markets have experienced since mid-2020.
Although we have taken increases in line with the market conditions, we expect our new communities to come online at still attractive and affordable ASPs, especially in light of increased FHA limits in all of our markets.
To ensure our product remains affordable, we constantly evaluate the credit metrics of our buyers.
Our customers' FICO scores and DTIs remained stable in the fourth quarter and consistent with historical averages, demonstrating that they are not streaming financially to purchase our homes.
Given the recent interest rate increases, we will continue to monitor the overall affordability of our homes.
During the fourth quarter, we continued to meet our order base in most of our communities to manage margins through supply chain challenges and the tightening labor market and ensure we provide our customers a quality home buying experience.
By focusing on our construction and simplified product strategy, we still achieved record orders and closings in 2021, demonstrating our ability to navigate delays associated with supply materials, labor, entitlement and permitting.
In today's rising rate environment, we believe selling homes later in the construction cycle offers more favorable options to our buyers as they look to lock in their mortgage rate and close escrow, LIBOR rate lock expirations.
With these quarterly results in 2021, we also displayed our ability to achieve industry-leading gross margins.
This was a function of the favorable pricing environment first and foremost, but also our disciplined production approach to managing our construction costs.
As we have mentioned before, spec building typically provide us the opportunity to lock in costs before determining ASP.
However, in a rising cost environment riddled with supply chain issues, we went one step further to avoid cost risk and to better manage our margins.
In cases where cost increases such as lumber, continued path to start of construction, our delayed sales releases allowed us to manage this additional cost exposure.
Managing our order-pay helped generate the meaningful list we have experienced in our gross margins.
Although we are not forecasting any improvement in supply chain challenges, once they do unwind, we expect to remove our sales meeting -- metering and fully allow our community to capture true market demand while maintaining our margin profile.
Now, turning to Slide 5.
Given the long-range cycle times, our fourth quarter closings totaled 3,526 homes, which was down 6% over the challenging comps of prior year.
Entry-level comprised 81% of closings, up from 72% in the prior year.
Total orders of 3,367 for the fourth quarter of 2021 reflected an increase of 6% year over year, driven by a 24% increase in average active community count, which was partially offset by the decrease in average absorptions.
The decline from 5.3 per month in Q4 2020 to 4.5 per month in this current quarter was driven by the tightly metered order pace across most of our footprint, as well as our new community openings occurring late in the quarter.
We continue to reiterate that our sales metering is an intentional choice in order to maximize both our margins and the customer home buying process as we manage through the current supply chain issues in the market today.
Looking at our growing interest lift and the early month sellouts in our communities, we know that actual demand for our home is much greater than what we were seeing in our absorption pace.
Entry-level provided 80% of total orders up from 72% in the fourth quarter last year.
Entry-level also represented 79% of our average active communities, compared to 67% a year ago.
Moving to Slide 6.
The regional level trends we continue to experience strong demand in all of our regions.
Our Central region, comprised of Texas, led in terms of regional average absorption pace with 5.3 per month this quarter.
This 5% year-over-year decline was offset by 17% greater average asset communities, which together contributed to an 11% increase in order volume.
With the state's favorable economic development and growth environment, sustained home buying demand generated a 20% year-over-year increase in ASP orders, the highest increase in all three regions.
To address affordability challenges in the market, our East region continued to shift its product mix toward entry-level, which made up 81% of its average asset communities.
Out of our three regions, the East Region average community count increased the most by 34% year over year, which generated order volume growth of 6%.
The East region increase in community count was offset by a 21% decrease in average absorption pace.
The West Region's fourth quarter 2021 order volume increased 2% year over year mainly due to 19% more average communities, which was partially offset by 14% lower average absorption pace.
Overall, we had a solid performance from all our regions despite ongoing challenges with the supply chain.
As we accelerate spec protection in all of our regions, we expect total order volume to increase throughout 2022.
Turning to Slide 7.
Of our home closings this quarter, 77% came from previously started spec inventory, which increased from 71% a year ago.
We ended the period with nearly 3,200 spec home in inventory or an average of 12.3 per community as we push to get homes on the ground.
This compared to approximately 2,500 specs or an average of 12.9 in the fourth quarter of 2020.
At December 31, 2021, less than 5% of total stacks were completed versus our typical run rate of one-third due to sustained demand and supply constraints.
We accelerate starts to over 3,700 homes in the fourth quarter from approximately 3,400 homes in the third quarter and in line with approximately 3,800 homes in the second quarter, and we expect to continue ramping up-spec parts in 2022 as our community count increases.
Having available spec is not necessary for our 100% spec building strategy.
Despite improving our total spec home inventory year over year, maintaining a four- to six-month supply of entry-level spec has been challenging given the surge in demand and supply chain constraints, and we expect that trend to continue at least in the near term.
We ended the quarter with a backlog of over 5,600 units as our conversion rate declined from 71% last year to 60% this year, resulting from elongated cycle times.
However, it was a slight improvement from 57% in the third quarter.
As we look ahead into 2022, we aren't expecting any improvement in our backlog conversion since we do not anticipate any near-term improvements in the current supply chain.
Once the supply chain stabilizes, we expect our cycle times will shorten and backlog conversion rate will pick up again, while order growth will also reaccelerate as we unwind sales metering.
During the fourth quarter, ongoing supply chain disruptions lengthened construction time by about two weeks sequentially from Q3 to Q4 this year.
Despite these expanded timelines, we still believe our streamlined operations and 100% spec building strategy for entry-level homes has given us a competitive advantage in today's supply chain and labor market conditions by locking in volume and providing workable consistency to our traders.
Coupling these with our reduced SKU counts and streamlined product library has allowed us with some incremental cost advantages.
The benefits of pre-starting homes with simpler products to build up and our steady predictable and repeatable construction work make us a preferred builder of choice.
These strong vendor relationships helped us deliver over 12,800 homes in 2021 and are key to accelerating starts in 2022.
Since we have our facility processes dialed in, we've been able to give our partners more visibility into our business than ever before, so they can plan for what we need.
We provide our schedules to them well in advance to our dealers are preorder.
Our strong partnerships with our suppliers and our limited build-to-order options also allow us to pivot our product selections based on availability, if necessary, as we continue to stay nimble in these unusual times.
Our executive team has been meeting with our top vendors to short capacity commitments for 2022.
Given our significant increase in its big starts as we grow our community count this year, we have also backed up our supplier group with secondary alternative sources to help us with incremental needs should that become necessary.
The 6% year-over-year home closing revenue growth to $1.5 billion in the fourth quarter of 2021 was a result of a 13% increase in ASP due to strong market demand, even as we shifted our product mix toward entry-level homes.
This was partially offset by a 6% decline in home closing volume due to closing time being impacted by supply chain issues.
The 500-bps improvement in fourth quarter 2021 home closing gross margin to 29% from 24% a year ago was primarily driven by a full year of pricing power, which outweighed accelerated cost pressures in almost all cost categories.
We believe that despite volatility in lumber and generally higher commodity costs, we can sustain strong margins into 2022.
SG&A as a percentage of home closing revenue was 8.5% for the current quarter, an 80-bps improvement over prior year.
The higher revenue, lower broker commissions, and the benefits of technology on our sales and marketing efforts allowed us to better leverage our SG&A.
One-time items, including payments to our general counsel, who retired in December of 2021 and a change in the company's retirement vesting eligibility for equity awards totaled $5 million and impacted SG&A expenses by 30 bps in the third quarter of 2021.
We continue to pursue back-office automation and greater technological strides to drive incremental leverage of our SG&A.
The fourth quarter 2021 effective income tax rate was 23.8%, compared to 21.9% in the prior years.
Both years reflected reduced rates primarily from the eligible tax credit when qualifying energy-efficient home closed under the 2019 Taxpayer Certainty and Disaster Tax Release Act.
Increased profit in states with higher tax rates and the reduced benefit of the energy tax credit due to the greater overall profitability of the company, both contributed to the higher tax rate this year.
Since the energy tax rate has not yet been enacted for future periods, we're not assuming any such benefit beyond 2021 at this time.
Pricing power expanded gross margin and improved overhead leverage, combined with lower outstanding share count, all led to the 57% year-over-year increase in fourth-quarter diluted earnings per share to $6.25.
To highlight a few full year 2021 results on a year-over-year basis, we generated a 74% increase in net earnings order unit held steady at about 13,800 for both years.
Closings were up 8%.
We had a 580-bps expansion of our home closing gross margin to 27.8% in 2021, and SG&A as a percentage of home closing revenue improved 80 bps to 9.2%.
Diluted earnings per share was $19.29, a 75% increase from 2020.
Turning to Slide 9.
Our balance sheet remains strong even as we continued investing in land acquisition and development.
At December 31, 2021, our cash balance was $618 million, compared to $746 million at December 31, 2020, reflecting increased investments in real estate and development and inventory rose $956 million during the year, as well as for share repurchases.
During full year 2021, we repurchased about 640,000 shares of stock for $61 million, of which by 244,000 shares totaling $24 million were repurchased during the fourth quarter.
Our net debt-to-cap ratio was 15.1% at December 31, 2021, compared with 10.5% at December 31, 2020.
Our current maximum target for net debt-to-cap is still in the high 20s, which gives us the flexibility to manage liquidity and changing economic conditions.
In December, we extended the maturity date of our $780 million unsecured revolving credit facility to December 2026.
Given our strong balance sheet, we continue to focus our capital spend primarily on growth, concentrating on community counts and increased specs, both of which we expect will drive profitability and help us gain market share.
We also plan to continue routine share buybacks to offset new grants and keep our dilution neutral and they opportunistically repurchase incremental shares.
On to Slide 10.
At December 31, 2021, with over 75,000 total lots under control, our land book increased 35% from year-end 2020, and we had nearly 60 years supply of lots, based on trailing 12-month closing.
While this is slightly above our goal of four- to five-year supply of lots, since we're in growth mode, the calculation on prior year's closings is a bit misleading, based on our forward closing projection of about 15,000 homes for 2022, we have a five-year supply of lots.
We secured 9,000 net new lots this quarter compared to approximately 11,200 in the prior Q4.
This new loss will translate to an estimated 45 net new communities, of which 93% are entry-level.
To address the higher orders pace of entry-level product, the average community size we contracted for this quarter was nearly 200 lots, up from the fourth quarter of 2020 where the average lot size was about 150 lots.
During the fourth quarter of 2021, we navigated around municipal delays and supply and labor constructions to open 48 new communities.
We grew our community count by 23 net communities from 236 at the start of the quarter to 259 at year-end 2021.
On a year-over-year basis, we were up 33% or 64 net community.
During the full year, we opened 163 communities, up 55% from 105 in 2020.
We are already seeing increased volume from our higher community count and expect to continue to benefit from incremental orders and closings in 2022 and beyond.
We spent about $507 million unlaid acquisition and development this quarter, in line with last year's Q4 spend and our targeted quarterly run rate.
We expect land spend to be around $2 billion annually in 2022 and beyond as we get to and maintain our 300 communities.
To finance plan, we use options or staggered purchasing terms to preserve liquidity were financially feasible.
About 65% of our total lot inventory at December 31, 2021, was owned and 35% was optioned compared to prior year with 69% owned inventory and 41% options.
With over 80% of our own land currently actively under development and ready to open as a new community over the next several quarters, we believe we are nearing an inflection point on our owned versus option percentages due to our community ramp up stabilizing over the next several quarters.
At Meritage, we're dialed into our land playbook and our growth strategy.
We are disciplined in our approach to refilling our land pipeline, even with strong competition and land price appreciation.
We underwrite to normalized incentives and absorption.
Although we haven't changed our underwriting gross margin hurdle, most deals are penciling above that, giving us some breathing room to absorb cost increases in future incentives while still exceeding our minimum margin threshold.
We do not target an arbitrary percentage of option land, instead, we focus on managing our capital through balance sheet metrics and margin goals.
We believe the current market demand trends, particularly at the entry-level, will be sustainable at least for the midterm.
Once the supply chain stabilizes, the more communities we have, the great incremental market share we can gain in all of our geographies.
Additionally, our focus on affordability starts with our land strategy as Phillippe already covered.
Our future communities opening later 2022 and into 2023 are expected to have lower ASPs than what we're seeing in our existing active communities today.
Our land strategy focuses on larger parcels, which limit some competition to land lowers the per lot cost by spreading community-level overheads across more lot and reduces the churn of new community openings and closings.
Finally, turning to Slide 11.
2022 is off to a great start, pointing to a strong spring selling season, and we expect home buying demand to remain robust.
At the same time, we will continue to manage our orders pace to preserve margin and maintain a high level of customer experience.
We expect gross margins to remain elevated and SG&A rates to be at all-time lows.
For the full year 2022, we're projecting total closings to be between 14,500 and 15,500 units, home closing revenue of $6.1 billion to $6.5 billion, home closing gross margin around 27.75%, an effective tax rate of about 25%, and diluted earnings per share in the range of $23.15 to $24.65.
We expect full-year community count year-over-year growth of 15% to 20%.
As for Q1 2022, we're projecting total closings to be between 2,800 and 3,000 units home closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 28.25% to 28.5%, and diluted earnings per share in the range of $4.45 to $4.85.
To summarize on Slide 12, we enter 2022 with momentum and optimism.
We believe Meritage is poised to capitalize on market demand and drive sustainable long-term growth with our proven strategy and operating model, our healthy land position, and flexible balance sheet continued with solid execution.
We have already demonstrated our ability to grow community count.
I would like to extend our deepest gratitude hardworking employees and trade partners who contribute to Meritage's remarkable 2021.
Their leadership grow our significant order volume closing, as well as a 33% year-over-year ramp-up in community count growth while navigating challenging conditions. | compname reports q4 earnings per share $3.97.
compname reports record fourth quarter 2020 results including a 420 bps increase in home closing gross margin, 50% increase in diluted earnings per share and 52% increase in orders over prior year.
q4 earnings per share $3.97.
sales orders of 3,174 homes for quarter were 52% higher than q4 of 2019.
quarterly closings of 3,744 homes represented 914 additional units versus same quarter prior year.
for 2021, projecting 11,500 to 12,500 home closings with home closing revenue between $4.2 - 4.6 billion.
expect to close out 2021 with about 235-245 communities & to realize diluted earnings per share in range of $10.50 - 11.50. | 0 |
Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.
Today's discussions may include statements about future events, financial projections, and expectations about the company's products, markets and growth.
We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.
Our results discussed today include references to non-GAAP financial measures.
Earlier today, we reported the highest adjusted first quarter earnings in company history at $5.89 per share, a 193% increase over last year and record revenues of $4.3 billion.
These results were driven by strong operational performance across all business lines and channels, an acceleration of acquisitions and the strengthening retail environment.
During the quarter, total revenue grew 55% over last year and 52% over 2019, while total gross profit increased 55% over last year and 58% compared to 2019.
As a reminder, the pandemic only impacted our first quarter 2020 results for the last two weeks of March.
New vehicle revenue increased 60%; Used vehicle increased 55%; F&I increased 63%; and service, body, and parts increased 30% compared to the first quarter of 2020.
Total vehicle gross profit per unit for the quarter increased to $4,392 per unit, a $692 increase over last year, driven largely by a 24% increase in new vehicle gross profit per unit.
Chris will be giving our same-store sales results and further color on inventory levels and their respective impact on vehicle margins in just a few moments.
Earlier this month, we announced one of the largest acquisitions in the history of the automotive industry.
The Suburban Collection adds $2.4 billion in annual revenues, over 2,000 team members, 34 locations and is a key pillar of the Lithia & Driveway footprint in our most sparse North Central Region 3.
With nearly $6.5 billion in expected annualized revenues purchased since the launch of our five-year plan in July 2020, we are considerably ahead of our expectations.
The combination of elevated gross profit levels in the new and used vehicles, rapid integration of high-performing acquisitions, incremental lift from the new Driveway channel, significant improvements in all business lines, and strategic cost savings measures instituted last year led us to earning over $250 million of adjusted EBITDA in the quarter.
Entering our 75th year in operations, we reflect on how our history of exponential growth, coupled with our team's ability to execute, has positioned us to pragmatically and profitably disrupt the status quo of the industry.
Our multifaceted strategy for disruption begins by combining our proprietary technology with the scale of our people, inventory, and network to modernize the industry.
As we continue to develop and enhance our digital home solutions, our Lithia & Driveway teams are ready to serve not only our traditional customers, but incremental e-commerce customers as well.
Our focus on the most expansive addressable market of any retailer in the automotive space allows us to leverage our massive competitive advantages to demonstrate that e-commerce can be highly profitable and ultimately yield the highest possible EBITDA returns in this space.
The used car business lacks barriers to entry.
However, success requires infrastructure, financing solutions for all customers, reconditioning expertise and the procurement of high-demand scarce vehicles to quickly achieve scale with smooth execution, all of which Lithia & Driveway have established and have proven to be effective at executing on since 1946.
Hopefully, Dick Heimann, our former COO is listening in today, as the 1946 comment was especially made for him.
Building on the broadest nationwide network and multi-year design and technology development of Driveway, we are excited by our initial success and continue to enhance the most comprehensive e-commerce home solution in the automotive retail space.
Our proprietary consumer applications are maturing and now ready to quickly scale across our existing network that is the broadest in the country.
Now entering our second quarter with a full spectrum of offerings, Driveway is empowering consumers to simply and transparently shop, sell, and service their vehicles from the convenience of their homes.
The Driveway brand was designed to attract a different and incrementally new consumer than the Lithia channel.
This is the first time in our history that we've been able to market and deliver our 77,000-vehicle inventory to the entire country under a single brand name and experience.
We knew our used inventory was broader and more scarce than our competitors and we are now realizing these advantages as evidenced in our same-store and margin results.
While Driveway's full spectrum offerings have only been live for a few months, our early learnings and data are showing a clear pathway for Driveway to become the brand of choice for online buying, selling, and servicing, both domestically and internationally.
We are on target to achieve a run rate of 15,000 Driveway shop and sell transactions by year-end.
Important to note that this target does not include Driveway finance and service transactions.
On our pathway toward this first volume milestone that took other e-commerce use-only competitors two to three years to reach, we are finding several interesting early trends we'd like to share with you today.
First, 97.8% of our Driveway customers during our first quarter were incremental and had never done business with a Lithia dealership before.
Second, we are seeing that it is taking 19 minutes on average for a customer to complete a full vehicle purchase transaction online with financing included.
We are also seeing that about 15% of all credit decisions are auto-approved.
An overwhelming majority of our consumers still need help from our Driveway Care Center to structure their purchase, balance their credit with their desires, and get through the financing process.
43% of our sales are out of region and our average shipping distance is 732 miles with an average shipping fee of $477.
Lastly, we continue to build our online reputation, with an average Google Reviews Score of 4.98 stars out of 5.
During the first quarter, Driveway also became the first e-commerce retailer in the country to offer negotiation-free new vehicles with free in-home delivery and a 7-day money back guarantee at a national level.
Driveway's financing solutions with new vehicle leasing and captive manufacturer financing now totals 29 lenders and are available to consumers with auto approvals in a matter of seconds.
This lease and finance auto approval optionality was released two quarters ahead of our previously shared plans.
Driveway now offers the largest selection of negotiation-free, new and used vehicles of any retailer in the country.
Our new vehicle inventory represents all major brands and our selection of used vehicles spans the entire spectrum from certified used vehicles to 20-year-old value autos.
Today, consumers can purchase any vehicle accompanied with our full brand guarantees, subscribe to full ownership, repair and maintenance options, and receive in-home delivery anywhere in the country.
In addition, our marketing dollars have recently expanded outside the original Portland and Pittsburgh markets.
As such, our Driveway brand marketing is now live in Tampa Bay, Dallas, Houston, Metro New York and New Jersey, Los Angeles, Riverside, Oxnard, Des Moines and the surrounding markets.
With these recent market launches, the Driveway brand message is now reaching over 67 million individuals or 21% of the population, a 16-fold increase over our two initial launch markets.
As we continue to perfect our execution in these markets, our innovation and product teams are working relentlessly on improving the Driveway experience.
Driveway receives continuous enhancements that will be released every two weeks throughout the year and is on its way to becoming the e-commerce leader of automotive retail.
During the quarter, LAD's fintech arm, Driveway Finance Corporation, originated over 1,000 loans per month across the channels.
We continue to see Driveway's fintech platform elevating the experience for consumers with the ability to capture up to 20% of all vehicle sales transactions, further differentiating LAD in profitability.
Today, our team of 110 Driveway engineers and data scientists have developed a suite of consumer solutions and functionality that provides the first complete end-to-end digital ownership experience spanning the full vehicle ownership lifecycle.
In addition, our exclusive Driveway Care Center and inventory procurement teams are growing rapidly to mirror the exponential growth in consumer demand.
The foundation to our omni-channel plan is the growth and expansion of our physical network.
Having the ability for consumers to conveniently access all of our business lines and for us to store and recondition vehicles closer to them ensures a highly profitable digital experience across the United States.
The opportunities for rapid consolidation within our industry remain plentiful and our acquisition pipeline remains full.
For more than a decade, we have successfully purchased and integrated acquisitions that have yielded an after-tax return of over 25% annually.
During the quarter, we completed the acquisition of the Fields Auto Group in the Greater Orlando market, the Fink Auto Group in Tampa, Florida area, and Avondale Nissan in Phoenix, Arizona.
We also opened a previously awarded Infiniti location in downtown Los Angeles.
As mentioned earlier, we completed the acquisition of The Suburban Collection in the Detroit, Michigan area earlier this month, adding a massive platform of 34 locations to our North Central Region.
Combined, these acquisitions strengthened our strategic network density in regions 2, 3, and 6 and are anticipated to generate nearly $3.1 billion in annualized steady state revenues.
Since launching our five-year plan nine months ago, this brings our total network expansion to over $6.5 billion, adding more than $4 in future annualized EPS.
Important to note that the consolidation of the largest retail segment in the country can be accomplished in a highly accretive way and these cash flow positive businesses further add to our massive capital engine.
We are in the most active consolidation environment that we have seen in the last two decades.
Even with the pace being well ahead of schedule, we continue to replenish the more than $3 billion in revenue still under LOI and the more than $15 billion pipeline of potential acquisitions that we believe are priced to meet our disciplined hurdle rates.
As such, we are expecting our network expansion in 2021 to far exceed our record levels achieved last year as we seek to continue improving our network density, especially in the Central and Southeastern regions.
As our top priority for allocating capital continues to be to accretively expand our network with new locate -- new vehicle locations, it is important to highlight the competitive advantages and points of differentiation for Lithia & Driveway's network growth strategy.
First, new vehicle franchises create an accretive growth model with the self-generating profit engine of nearly $1 billion of EBITDA annually.
Second, network costs are considerably lower investment when compared to any new entrants into the industry.
High ticket new vehicle margins are quite strong at 10% and the carrying costs are subsidized by our manufacturer partners.
Upstream procurement from new and certified vehicle trade-ins have more attractive valuations than direct from consumer or auction purchases.
Fifth, affordable offerings at all levels allows the customers to remain in the Lithia & Driveway ecosystem their entire lives with vehicles and services that match a full spectrum of income and credit levels that change over time.
A sophisticated reconditioning network with specialized diagnostic equipment located closest to the customer to eliminate any logistics costs.
These reconditioning centers are also utilized for the industry's highest or 50% margin service, body, and parts businesses.
These businesses bring 10 times the consumer lifecycle touch points as compared to used-vehicle-only retailers and allow for substantially lower marketing cost per vehicle sold.
Captive leasing through our OEM-affiliated partners provides new vehicles with attractive competitively priced monthly payments when compared to one- to three-year-old used vehicles.
Additional financing support from our manufacturer partners through rate subvention with their captive financing arm and new vehicle incentives or rebates that allow for the highest level of financibility, and absorption of negative equity, plus lower down payments for our consumers.
Tenth, a diverse upstream offering of zero-emission products and supporting repair and maintenance services through manufacturer partners' product lines.
Also, leading advocacy for lower and zero-emission vehicle, ownership with a comprehensive resource center, providing education on vehicles, incentives, charging infrastructure, ownership, affordability guides, and a sustainable vehicle marketplace through green cars.
Lastly, new vehicle franchises create loaner and fleet management opportunities to build a factory-like used vehicle inventory pipeline.
As our nationwide network continues to grow in each of our six regions, we continue to target a 100-mile reach to allow for convenient, affordable, and timely consumer servicing experiences during and after the purchase of their vehicle.
As a reminder, infrastructure costs for delivering the Driveway e-commerce experience are zero as it resides in the underutilized capacity of our growing network.
Key to our design three years ago was allowing the flexibility to adjust our investments between channels and multiple business lines to align with consumer demand, whether any economic cycle compete with any future competitor and expand our cash engines to expand into further adjacencies.
These combined with our many competitive advantages strongly position us to achieve our five-year plan and pave the way to even greater aspirations.
In closing, our first quarter results doubled the previous highest first quarter earnings in our history as we live our mission of Growth Powered by People.
We continue to seek new ways to improve and remain tenaciously committed to growing and finding new opportunities.
The advantages of a responsive and adaptable team with a multi-decade track record of executing together is the driving force behind our ability to outperform and compete in any environment.
With our technology poised for rapid scalability across our existing and future network, we are positioned to as quickly as possible lead Lithia & Driveway's progress toward $50 billion in revenue and $50 of earnings per share the first leg of our journey.
We continued the momentum from last year and delivered another record performance in the quarter.
The demand from consumers remained strong for both in-home and in-network solutions and we accelerated the rollout of Driveway through our key strategic markets and our platform.
Each day, our leaders are rising to the challenge of achieving our 50/50 plan, evolving to meet consumer demand, developing our talent and living our mission of Growth Powered by People.
Our team remains humble and never satisfied as they look to continue record performance levels throughout 2021 and beyond.
Following is a discussion about our quarterly results and is on a same-store basis.
And as Bryan mentioned earlier, the pandemic impacted only the last two weeks of our first quarter 2020 results.
For the three months ended March 31, 2021, total same-store sales increased 28% over last year.
These increases were driven by a 29% increase in new vehicle sales, a 32% increase in used vehicle sales, a 30% increase in F&I revenue, and a slight increase in service, body, and parts revenues.
Comparing our 2021 results to a 2019 baseline, first quarter same-store sales increased 28% with new vehicle revenue up 23%, used vehicle revenue up 43%, F&I increased 32%, and service, body and parts increasing 6%.
For the quarter, our new vehicle business line increased 29% over last year.
Our average selling price increased 6% and unit sales increased 22%.
Gross profit per unit increased to $2,979 compared to $2,188, a $791 increase or up 36%.
Total new vehicle gross profit per unit, including F&I, was $4,778, an increase of $897 per unit or 23%.
At approximately $4,800 of gross profit per unit, new vehicles remain highly profitable with a 12% margin, similar selling cost per unit as used vehicles, and inventory carrying costs that are subsidized by our manufacturer partners.
As of the end of the quarter, we had a 41-day supply of new vehicle inventory, excluding in-transit orders, indicating we have well over a month's supply of vehicles on the ground and an adequate supply of in-transit that are replenishing our on-ground inventory every day.
However, new vehicle margins may remain elevated in the near term due to continued microchip and other supply chain shortages, coupled with elevated consumer demand levels driven by additional stimulus funds.
While select OEMs are experiencing reduced level of inventory, we currently have sufficient inventory to balance the current supply and demand trends expected over the coming months.
For used vehicles, we saw a 32% increase in revenues for the quarter.
Gross profit per unit for the quarter was $2,426, an increase of 14% or $295 over last year.
Total used vehicle gross profit per unit, including F&I, was $3,994, an increase of $421 or up 12%.
Total used vehicle gross profit per unit began to normalize early in the quarter, but accelerated again in March finishing at $4,384 per unit.
Our used vehicle sales mix in the quarter was 20% certified, 59% core are vehicles three to seven years old and 21% value auto or vehicles older than eight years.
With over 60% of the annual 40 million used vehicles sold in the US being nine years or older, our continued strategy of selling deeper into the used vehicle age spectrum and our ability to procure the right scarce vehicles from multiple channels remains the catalyst for the future success and growth of Lithia & Driveway.
As of March 31, we had a 42-day supply of used vehicles and our 800 used vehicles procurement specialists are working diligently to ensure we are meeting the current demand environment with our focus on procuring scarce high demand used vehicles through the most profitable channels.
As a top of funnel new car dealer, 80% of our inventory comes from non-auction sources, which allows us to meet consumer demand in a low supply environment.
New and used vehicle sales are supported by our 1,500 experienced finance specialists that help match the complexity of consumers' financial position with lending options at over 150 financial institutions, including Driveway Financial.
In the quarter, our finance and insurance business line continued to show substantial improvement averaging $1,674 per retail unit compared to $1,557 the prior year, an increase of $117 per unit.
New and used vehicle sales create incremental profit opportunities through the resale of trade-in vehicles, greater manufacturer incentives, F&I sales, and future parts and service work.
We continue to monitor this through the growth of our total gross profit per unit, which was $4,388 this quarter, an increase of $664 per unit or 18% over last year.
Our stores remain focused on the highest margin business lines, service, body, and parts, which decreased 1% for the quarter.
Adjusting for one less day of production compared to last year, service, body, and parts saw a slight increase for the quarter.
This was driven by a 7% increase in customer pay, a 12% decrease in warranty, a 6% decrease in wholesale parts, and a 14% decrease in body shop revenues.
But in March, we saw double-digit increases in service, body, and parts driven by a 32% increase in our highest margin customer pay work.
We expect these trends to continue into the second quarter, as the economy reopens further and consumers look to get back on the road and return to the normal routines.
As a reminder, our service, body, and parts business see over 5 million paying consumers and brand impressions annually, which generate over 50% margins and remain a huge competitive advantage for Lithia & Driveway.
Same-store adjusted SG&A to gross profit was 64% in the quarter, an improvement of 990 basis points over the prior year, driven largely by the gross profit expansion in our new and used vehicles segment and recovery in service, body, and parts.
We expect to see the normalization of SG&A to gross profit as supply constraints are alleviated later in the year and gross margins return to normalized levels.
With our highest performing stores consistently maintaining an SG&A to gross profit metric in the mid 50s, our five-year plan continues to target an SG&A to gross profit level in the low 60% range.
As we continue to profitably modernize the consumer experience, the opportunity to leverage our cost structure will continue as we maximize the utilization and the integration of our existing location and as our digital home solution, Driveway, adds meaningful additional incremental sales.
In summary, our teams continue to be responsive to the changing environment and the opportunities available to continuously improve in the evolving personal transportation industry.
We are innovating and meeting consumers increasing digital and in-home expectations and are focused on meeting the preferences of our consumers wherever, whenever, and however they desire.
With the integration of several regional platforms that come with performing teams, including strong operational leaders and customer-focused associates, we remain humble and confident that we continue to deliver industry-leading results, while pragmatically modernizing automotive retail.
For the quarter, we generated nearly $265 million of adjusted EBITDA, an increase of 154% compared to 2020 and $189 million of free cash flows, defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash, interest, income taxes, dividends, and capital expenditures.
As a result, we ended the quarter with $1.4 billion in cash and available credit.
In addition, our unfinanced real estate could provide additional liquidity of approximately $552 million for a combined nearly $2 billion of liquidity.
As of March 31, we had $4 billion outstanding of debt, of which $1.8 billion was floor plan, used vehicle, and service loaner financing.
The remaining portion of our debt is primarily related to senior notes and the financing of real estate as we own over 85% of our physical network.
A unique aspect of debt in our industry is the financing of vehicle inventory with floor plan debt.
The financing is integral to our operations and collateralized by these assets.
The industry treats the associated interest expense as an operating expense in EBITDA and excludes this debt from balance sheet leverage calculations.
On adjusted, our total debt to EBITDA is overstated at 4.3 times.
Adjusted to treat these items as an operating expense, our net debt to adjusted EBITDA is 1.7 times.
This means we could add over $1.2 billion in additional debt, which equals acquiring $4.8 billion in annualized revenues at our 25% purchase price to revenue metric, while remaining within our targeted range.
If our network growth and associated planned capital deployment would increase our leverage beyond 3 times for a sustained period, we would look to deleverage quickly through the equity capital market.
As a reminder, our disciplined approach is to maintain leverage between 2 and 3 times, as we continue to progress toward another sizable competitive cost advantage of achieving an investment-grade credit rating.
Our capital allocation priorities for deployment of our annual free cash flows generated remain unchanged.
We target 65% investment in acquisitions, 25% in internal investment, including capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share repurchases.
Even with the acquisition of The Suburban Collection announced earlier this month, we continue to have the capacity to grow and are well positioned for accelerated disciplined growth.
We continue to make strong progress in modernizing the consumer experience through Driveway and building a robust balance sheet, positioning us to be the leader in consolidating this massive industry, all while progressing toward our five-year plan of achieving $50 billion in revenue and $50 of earnings per share. | compname says q1 adjusted earnings per share $5.89.
compname reports highest first quarter earnings in company history; increases revenue 55% and earnings per share 195%.
q1 adjusted earnings per share $5.89.
q1 2021 revenue increased 55% to $4.3 billion from $2.8 billion in q1 of 2020. | 1 |
I'm Jason Feldman, Vice President of Investor Relations.
craneco.com in the Investor Relations section.
Another exceptional quarter with solid results across the board.
Even in this environment of persistent inflationary pressures, random supply and logistics issues and continued various COVID recovery conditions globally.
We finished the third quarter with record adjusted earnings per share from continuing operations of $1.89 up 103% compared to last year along with extremely strong adjusted operating margins of 16.8%.
We delivered adjusted core sales growth of 19% with a number of strong leading indicators reflected in core order growth of 31% and core backlog growth of 13% compared to last year.
Based on this performance, we are raising our adjusted earnings per share from continuing operations guidance by $0.35 to a range of $6.35 to $6.45, which is effectively our 5th guidance increase this year.
Remember that our original guidance for 2021 was $4.90 to $5.10 and that guidance included $0.44 of earnings contribution from Engineered Materials.
That means we have effectively raised guidance more than $1.80 on a comparable basis since January.
Compared to 2020 on a like-for-like basis excluding Engineered Materials in both periods, our current guidance midpoint of $6.40 compares to 2020 earnings per share of approximately $3.52 reflecting more than 80% year-over-year earnings per share growth.
Absolutely stellar performance by any measure.
While uncertainty will continue related to COVID variance, sporadic supply chain constraints, inflation and overall global resource challenges, we have a high level of confidence in our revised guidance based on our team's outstanding performance driving customer satisfaction and proactively and effectively managing inflation and the supply chain.
For context, we were approximately price cost neutral in the third quarter.
Let me put our performance in perspective another way.
The midpoint of the updated guidance at $6.40 is well above our prior peak pre-COVID adjusted earnings per share of $6.02 in 2019, but with some notable differences this year compared to 2019.
Again, the $6.02 in 2019 included earnings contribution from Engineered Materials, which is now classified as discontinued operations and excluded from our '21 guidance.
Second, many of our end markets are also still in the early stages of recovery and still remain well below the pre-COVID peak levels with the exception of Crane Currency and our defense business.
And thinking about 2022 and beyond, it is worth noting that the commercial side of our Aerospace Electronics business in 2021 will still be approximately $150 million in sales and approximately $80 million in operating profit below 2019 levels this year, and the recovery to pre-COVID levels in this business alone will add about $1 per share to EPS.
At Payment & Merchandising Technologies, Crane Payment Innovations will be $200 million below pre-COVID levels in 2021 with more than half of that amount in our very high margin Payment Solutions business.
This business continues to benefit from very favorable long-term macro drivers that are accelerating given Global Human Resource and constraints, labor shortages, and wage inflation helping our customers drive productivity and security by automating their payment and transaction processes.
In the Process Flow Technologies, we saw the inflection to positive core growth in the second quarter on the process side of the business with sustainable and improving demand across our strongest end-markets including chemical.
So let me reiterate the message that we have been consistently communicating.
We are innovating and developing new products and solutions to provide value for our customers.
We are executing on numerous growth initiatives across our businesses and we operate with a consistent cadence and discipline of the Crane Business System to drive growth, productivity, and cost savings.
We have demonstrated an ability to balance those objectives extremely well, delivering on margins and free cash flow while maintaining 100% of our investments in strategic growth initiatives throughout the entirety of the pandemic.
We are and we will continue to drive above market growth.
Paired with the market recovery in our consistent execution, we're very excited about our growth prospects, strong top line growth and solid operating leverage driving substantial growth in free cash flow incredibly delivering on expectations.
I discussed at our February Investor Day event how Crane was at an inflection point for accelerating growth after years of organic investments and consistently excellent execution.
In the first quarter you saw substantial evidence of that inflection and the related themes from Investor Day reading through.
At our May Aerospace & Electronics Investor Event we showed you numerous examples of how we continue to effectively drive above market growth and our expectation of a 7% to 9% sales compound average growth rate over the next ten years.
Also in May, we announced the sale of Engineered Materials as part of our strategic portfolio management process to improve our overall growth profile while continuing our simplification journey, and today you can see even more evidence of that inflection in our core sales growth as well as in our orders and backlog.
Consistently executing on our investor thesis, that being we are well positioned for accelerating organic growth as our end markets continue to recover.
We are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development, and commercial excellence.
Solid execution continues to leverage that growth into earnings and strong free cash generation, which creates substantial flexibility for capital deployment.
A continued evidence of the value we create through acquisitions with stellar performance at Crane Currency, Cummins Allison, and instrumentation and sampling.
Inflection, we have clear momentum with increasing traction from our growth initiatives.
We will continue to generate substantial and sustainable value for all of our stakeholders.
Despite our impressive track record of the results, we believe there is unrecognized value in our stock and the strength of our medium and long-term outlook.
And that was one of the key factors behind our newly announced $300 million share repurchase authorization.
You should view this as both a return of cash to shareholders following consistently outstanding operational performance and strong free cash generation, as well as a sign of management and the Board's conviction that we have a lot of runway for growth ahead of us.
I have an easy job today because I think our results speak for themselves.
Even in these challenging times, we have continued to execute.
At Aerospace & Electronics, sales of $169 million increased 7% compared to last year.
Segment margins improved 370 basis points to 19.3%.
In the quarter, total aftermarket sales continued to gain momentum and increased 24% compared to last year after 3% of growth last quarter.
The strength was driven by commercial aftermarket with spares, repair, and modernization and upgrade sales all up substantially.
On the military side, spares and repair both improved in the 10% range but military modernization and upgrade sales were lower.
Commercial OE sales increased 31% in the quarter following 4% growth last quarter.
As expected, defense OE sales declined in the teens.
On a year-to-date basis, defense OE sales are down 6% after three years of double-digit growth.
Given our strong position in major project -- projects that we have already won that will be ramping up over the next few years we remain confident in our ability to grow our defense business at a high single-digit CAGR from 2021 through 2030.
The fourth quarter of last year marked the trough for both sales and margins at Aerospace & Electronics.
While the delta variant had some short-term impact on demand, the overall momentum in the industry continues.
Specifically, we expect near-term relaxation of international air travel rules and rising global vaccination rates to drive higher levels of air travel in the months and quarters ahead.
Looking ahead to next quarter we expect segment sales to be similar to the third quarter with margins in the low teens.
The sequential margin decline in the fourth quarter is primarily related to shipment timing and mix with very high commercial aftermarket sales in the third quarter relative to the fourth quarter.
On a full-year basis at Aerospace & Electronics, we should close the year with sales just down very slightly compared to last year and with margins above 7.16% both well ahead of our original guidance for this year.
As we enter 2022, we expect sales will continue to improve as air travel recovery progresses and the expected timing of a recovery to pre-COVID levels continues to get pulled forward.
And remember that our confidence in our outlook for this business is about more than just a market recovery.
We are seeing continued accelerating growth resulting from years of consistent investment in technology.
For example, during the third quarter we were selected for a $60 million program over a 15 year life with our advanced high accuracy, high performance, pressure sensing technology for a newly targeted adjacent multiplatform turbofan engine application.
In this particular case, we replaced an incumbent supplier who had the business for many years.
Another example of winning because of the strength of our technology and capabilities, just as we described at our May Aerospace & Electronics Investor Day, which by the way, that is still available to stream on our website today.
This is a new targeted application of our historic Sensing technology, a huge win for our team, and just the beginning.
And our investments will continue to take us beyond our historical core markets, expanding our addressable market and aligning our business with accelerating secular trends.
For example, within the last month we were awarded a $20 million contract for a low Earth orbit satellite constellation using a version of our multi-mix microwave technology with most production sales expected in 2023.
We also remain extremely excited about our positioning in investments related to the long-term trends in this industry, most notably electrification.
That gave us the confidence to share our 7% to 9% sales CAGR target at last May's Investor Day event.
We continue to make substantial progress advancing the technology that will be the critical enabler for a more electric world for more electric and hybrid electric military ground vehicles to electric propulsion aircraft, electric urban air mobility vehicles, and advanced radar and guidance systems.
All of these applications require greater levels of electrification and a greater need for integration of power conversion, sensing, and thermal management systems, all that are core technology competencies in our business.
We continue to work closely with nearly every major participant in this emerging space and have already been selected for numerous prototyping demonstrator programs.
We are seeing the tangible benefit from our investments materialize in these awards.
Process Flow Technologies, sales of $299 million increased 19% driven by a 16% increase in core sales and a 3% benefit from favorable foreign exchange.
Process Flow Technologies operating profit increased by 60% to $46 million.
Operating margins increased 410 basis points to $15.5%, primarily reflecting higher volumes, favorable price cost dynamics and strong execution and productivity.
Sequentially, FX-neutral backlog increased 3% and with FX-neutral orders down 5%.
Compared to the prior year, FX-neutral backlog increased 14% and FX-neutral core orders increased 20%.
During the first quarter, order growth was strongest in our shorter cycle commercial business.
Then in March, orders at our core process business inflected positive on a year-over-year basis, and that trend has continued for the last six months.
We continue to see clear evidence of improving end demand and in some cases ongoing release of pent-up demand.
Through the third quarter, order growth is still a little stronger in our commercial business, but process orders are not far behind with growth in the mid-teens range.
As orders convert to sales in these core process markets later into 2022, we continue to expect strong operating leverage.
Trends in activity in the process markets are similar to last quarter.
Broadly, we are seeing signs of new capital projects moving through the pipeline and we expect to see more projects converting to orders in 2022.
By vertical, chemical remains strong driven heavily by continued consumer demand, and general industrial markets also improved further along with industrial activity and production.
For pharmaceuticals we are seeing a number of projects we started after being put on hold, given the intense focus on vaccine production over the last 18 months.
Many of these restarted projects are related to diabetes treatment, oncology drugs and biologics.
Refinery and power markets remain fairly flat.
From a geographic perspective, year-to-date orders have been strongest in North America.
MRO orders are stable at approximately pre-COVID levels.
Project related orders are up substantially compared to last year, and based on our project funnel we expect further pickup next year.
In Europe, MRO activity slowed in the third quarter consistent with normal seasonality and summer shutdowns.
Adjusted for seasonality, MRO activity is close to normal pre-COVID levels and project activity has progressively improved over the last several months with project orders above 2019 levels.
In China, we are seeing some new project delays related to government requirements for new energy assessment approvals.
No cancellations, but project progress has slowed given these new requirements.
While the markets continue to improve, we are also very excited about progress with our growth initiatives in Process Flow Technologies.
In February we discussed a breakthrough innovation to our triple offset valve line, the FK-TrieX.
This product just launched a few months ago, but we are already seeing great momentum with chemical and petrochemical customers that quickly recognize the value this new valve design offers.
Bidirectional shut off, superior fugitive emissions control, high flow, a self-cleaning design and lower weight.
We installed our first valve during the third quarter at a US chemical plant in a polymer application.
Typically it takes years after launch to get customer approvals for a new valve design, but we believe we are on track for $5 million of sales next year, growing to $30 million within five years.
Also on the process side, our tough seat metal seated ball valve launched earlier this year focused on slurry and high cycle applications with a superior design that gives a valve a 50% longer life.
We are on track for about $3 million of sales this year, which should double in 2022.
We also have exciting developments in our municipal pump business, our chopper pump which we introduced in 2018 reduces clogging and cut -- cuts maintenance costs by 75%.
That value proposition is driving 30% growth this year, and we are adding about 10 new customers each month to our existing base of approximately 250 municipalities.
Taken together, these growth initiatives and many others across the segment are driving above market growth.
For Process Flow Technologies overall, our full year outlook continues to improve with full-year margins in the mid 14% range, full year core sales growth in the low double digits, a 4% FX benefit, and the $5 million of contribution from acquisitions that we saw in the first quarter.
For the fourth quarter, that implies a modest sequential decline in sales and margins given typical and expected seasonality and associated mix.
At Payment & Merchandising Technologies, sales of $366 million in the quarter increased 31% compared to the prior year, driven by 29% core sales growth and a 2% benefit from favorable foreign exchange.
Sales increased substantially across both Crane Currency and Crane Payment Innovations, although Payment Innovation sales are still well below pre-COVID run rates.
Segment operating profit increased 87% to $83 million.
Operating margins increased 680 basis points to 2.26%.
Continued impressive performance again at Crane Currency and with Crane Payment Innovations now recovering and contributing meaningfully.
For Crane Payment Innovations, similar trends to the last quarter and across the business we are seeing accelerating results from growth initiatives.
Starting with retail, our solutions provide productivity through automation, security and hygiene, and that value proposition is resonating now more than ever.
Retailers in the service industry in general are struggling with labor availability and inflationary wage pressure and they are investing in productivity.
Our solutions provide immediate value and have high proven ROIs and those returns are even more attractive in the current environment.
We continue to see broad based strength across the space including traditional self checkout systems from the large OEMs and we are also seeing momentum with some retailers partnering directly with us on customized self checkout and kiosk based solutions.
For customized self checkout solutions, our current funnel of opportunities is now approximately $185 million, double the size it was at the end of 2020.
Our semi-attended system solutions like Paypod and Pay Tower are also getting traction with an increasingly wide range of retailers including categories that have not historically been active with automation such as convenience stores.
To put this higher demand into perspective, our funnel of Paypod opportunities today is approximately $13 million, more than four times the size it was at the end of 2019 and more than twice the size it was at the end of last year.
In gaming, the North American and Australian Casino markets are nearly back to pre-COVID levels of activity.
We are now seeing the European and Latin American casinos beginning to recover lagging about 9 to 12 months behind North America.
This is good news for 2022.
We continue to gain share in this market given the strength of our technology as customers realize the benefits of our easy tracks connectivity solution.
The combination of our traditional bill and coin products along with easy tracks and now with the back office and service offerings from the Cummins Allison acquisition give us the most comprehensive cash management solution in the gaming world.
This combination of products and services is also helping our customers substantially improve efficiency and driving incremental revenue by enhancing communication and coordination between the back office and front of the house environments.
The Cummins Allison business has also benefited from customer labor shortages as CITs, casinos and retailers continue to invest in advanced larger scale back office coin and bill counting and sorting units.
Cummins Allison has products with differentiated technology as well as a service offering, which most of our competitors in North America do not have.
At Crane Currency, we continue to see strength in both domestic and international markets and we continue to gain share both with our technology and banknote offerings.
In the United States, we expect continued elevated levels of demand for currency for another few years and we continue working to secure our position on the new series of banknotes that will be rolled out over the next several years.
In our international business, our expanding portfolio of micro optic security products has helped us double the rate of new denominations secured compared to prior years with 15 new denominations won to date this year from a wide range of countries across the Caribbean, Northern and Eastern Europe, Asia, Africa and the Middle East.
When our technology is specified in a new denomination it typically drives recurring revenue from reprints from more than ten years.
We are winning as central banks realize that our technology is more secure and difficult to counterfeit and because it is completely customizable and can be integrated into innovative and stunning banknote designs, such as the new Bahamas $100 banknote.
With our latest products, we also have successfully demonstrated that our technology can be used on any substrate including polymer expanding our addressable market.
We are also very excited about the progress we have made with our Product Authentication and brand protection business.
We believe that our micro-optic technology is the best solution for a high-end authentication applications and far superior to the foils and holograms typically used to prevent counterfeiting for consumer goods.
We recently signed a long-term agreement with Octane5, one of the leaders in the high growth brand licensing management software and security solutions market.
Today, Octane5 supplies some of the world's most iconic and valuable brands with product security and licensing solutions, and with our partnership we have already won a few blue-chip customers with well-known global consumer brands that we hope to share with you more next year.
This is an extremely exciting potential opportunity that opens a new $800 million addressable market to us.
As we have explained all year, we do expect margins to moderate further in the fourth quarter for Payment & Merchandising Technologies given both timing and mix.
We now expect full year margins in the 22% range at or above the high end of our long-term target range of 18% to 22%.
Full year core sales growth is now expected to be in the high teens with a 3% favorable FX benefit.
For the fourth quarter sales should still increase on a year-over-year basis in the mid-single digit range on tough comparisons, but with a substantial sequential decline given the currency shipment timing that we have discussed and explained consistently over the last several quarters.
No surprises here, fully expected.
Given the sequential decline in sales, margins are likely to moderate to the high-teens range in the fourth quarter before rebounding to the 20s again next year.
Turning now to more detail on our total company results and guidance.
We have had extremely strong cash flow performance year-to-date with free cash flow of $286 million compared to $177 million last year.
As a reminder, on May 24th we announced that we had signed an agreement to sell our Engineered Materials segment for $360 million.
That process is ongoing and we continue to work on obtaining regulatory approvals.
When the transaction closes we expect proceeds net of tax to be approximately $320 million.
Our balance sheet is in extremely good shape.
We currently have no short-term or pre-payable debt remaining.
And at the end of the third quarter, we had approximately $450 million of cash on hand.
By the end of the year we expect adjusted gross leverage toward the bottom end of the two to three times range target for our current credit rating, and we estimate that by year-end we will have approximately $1 billion of additional capacity.
While we continue to be active in pursuit of acquisitions across both Process Flow Technologies in Aerospace & Electronics as all -- you all know, valuations today are quite lofty and we will remain both financially and strategically disciplined.
Over the long term, we continue to believe that we will be able to add the most value through acquisitions.
However, we will also maintain discipline about our balance sheet efficiency.
As I mentioned last quarter, during periods where our acquisition capacity exceeds the size of our likely an actionable M&A pipeline, we will consider returning excess cash to shareholders rather than maintaining an inefficient balance sheet.
As Max mentioned, we announced Board authorization for $300 million share repurchase program.
We believe this program properly balances two objectives, maintaining balance sheet efficiency while preserving ample financial flexibility for the volume of M&A activity we believe is actionable, while also providing an attractive return of cash to shareholders.
We believe that share repurchases are advantageous at this time given our very high confidence in our medium and long-term outlook, paired with our current stocks -- current discount to both trading peers and fully synergized acquisition multiples.
We will continue to evaluate all capital deployment and strategic portfolio options to drive shareholder return with strict financial discipline and a focus on long-term sustainable value creation.
Turning to guidance, as Max explained we are raising our adjusted earnings per share guidance by $0.35 to a range of $6.35 to $6.45 reflecting continued excellent execution and stronger end markets.
There are four major moving pieces in the higher and narrower guidance range.
First, we now expect a tax rate of approximately 17.5% compared to our prior guidance of 20.5%.
The lower tax rate is a roughly 23% -- $0.23 per share benefit compared to prior guidance.
The lower tax rate primarily reflects discrete items related to the expiration of the statute of limitations on audits in certain jurisdictions.
We continue to expect a tax rate of approximately 21% on a normalized basis.
Second, we now expect corporate cost of approximately $90 million, $10 million or $0.13 per share higher than our prior guidance.
The higher corporate costs reflect a number of factors including a charge related to a foreign pension plan that we are restructuring and a higher professional service cost level particularly legal costs related to M&A due diligence and other matters.
Third, the core operational improvement reflected in the guidance is approximately $0.25 per share compared to the prior guidance.
This improvement reflects strong leverage on sales now forecast at $50 million higher, with full year core sales guidance up 300 basis points to a range of 10% to 12%, partially offset by FX translation down 100 basis points to an approximate 2.5% benefit.
Fourth, in addition to raising the midpoint of our guidance range we narrowed the range from $0.20 per share to $0.10 per share, reflecting both how close we are to the end of the year as well as ongoing supply constraints that are likely to cap further upside this year.
Our revised guidance continues to reflect the same cadence of earnings progression that we have discussed since the beginning of the year.
Specifically, we continue to expect a step down on earnings per share next quarter given order and shipment timing particularly at currency and with the fourth quarter following its usual pattern of seasonality -- seasonally weakest quarter across most of our businesses.
Overall, there is little change to our fourth quarter expectations after adjusting for the changes in assumptions related to corporate expense and our tax rate, but the third quarter was certainly better than we expected given extremely strong operational performance and robust demand.
We also increased free cash flow guidance to a range of $340 million to $365 million, up 17.5 million from prior guidance at the midpoint, reflecting higher earnings and lower capex now forecast at $60 million.
Overall, an excellent year continuing to unfold with outstanding execution from all of our teams driving exceptional results, growth margins, free cash flow, and we remain excited about continued tailwinds in 2022 and 2023 as end markets continue to recover.
Before we turn to Q&A, a quick note about our 2022 Investor Day.
We typically host our Annual Investor Day event the last week of February.
For 2022 we are moving this event given certain scheduling issues and our desire to maximize the likelihood that we can host the event in person.
We are targeting the week of March 28, and we will provide more details as our plans solidify over the next few months.
Operator, we are now ready to take our first question. | compname reports q3 non-gaap earnings per share of $1.89 from continuing operations excluding items.
compname reports third quarter 2021 results; raises and narrows 2021 earnings per share guidance; announces new $300 million share repurchase authorization.
q3 non-gaap earnings per share $1.89 from continuing operations excluding items.
raises fy earnings per share view to $6.35 to $6.45 from continuing operations excluding items.
q3 sales rose 21 percent to $834 million.
announced new $300 million share repurchase authorization. | 1 |
We are also joined here in the room by our Vice President of Finance, Brian Hammonds.
The call today will focus on our financial results for the third quarter and provide you with other general business updates.
Going to our agenda for the call, we will provide you with a breakdown of our third quarter financial performance, discuss business development opportunities, and the latest developments with our government partners.
We will also provide you with an update on our capital allocation strategy and our continued response to the COVID-19 pandemic.
Our third quarter revenue of $471.2 million represented a 1% increase over the prior year quarter despite the sale of 47 non-core real estate assets within our property segment in multiple transactions between December 2020 and June 2021 and our decision to exit two managed-only contracts with local governments in the state of Tennessee during the fourth quarter of 2020.
And in the five quarters since we announced the change in our capital allocation strategy, we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges.
We remain committed to reaching and maintaining a total leverage ratio or net debt to adjusted EBITDA of 2.25 times to 2.75 times.
Using the trailing 12-months ended September 30 of 2021, our total leverage ratio was 2.7 times.
Just one year ago, our total leverage ratio was at 4.0 time.
So, we have made significant progress.
And the last time our total leverage ratio was below 3 times was in 2012, nine years ago.
While we have touched the high end of our targeted leverage range, we remain committed to continuing to reduce debt to ensure we remain comfortably within the range.
Our EBITDA has shown to be durable since the beginning of the pandemic, but there are many other factors that could cause our net leverage ratio to fluctuate quarter-to-quarter such as changes in our net cash balance due to semi-annual interest payments on our debt, capital expenditures or changes in working capital.
We continue to believe our capital allocation strategy is the most prudent approach to positioning the Company to generate long-term value through a stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside partners.
I believe this is evidenced by our recent $225 million unsecured bond issuance which price nearly a 100 basis points lower than the bonds we issued back in April of this year.
However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returned a portion of our cash flows to our shareholders and less aggressively de-levers.
We believe the valuation of our equity remains well below its fair value and we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares.
In 2009, one of my first acts as CEO was to seek authorization from our Board of Directors for an equity repurchase program.
So I have a full appreciation of the potential value creation that the current stock presents.
Fully appreciating the potential opportunity, we have further progress to make with our current debt reduction strategy.
We continue to see criminal justice related populations meaningfully below their pre-pandemic levels.
The declines have mostly been due to reduction in new intakes rather than early releases.
Governments have acted faster to transfer certain residents assigned to our reentry facilities to non-residential statuses such as furloughs, home confinement or early releases, to create additional space for enhanced social distancing within our facilities.
However, during the third quarter, we did see many of our state customers increase their utilization of our facilities, which contributed to modest increases in our occupancy compared with the prior year quarter.
Our Safety segment's occupancy was 73.2% in the quarter, an increase of 110 basis points compared with the prior year quarter and our Community segment's occupancy was 56.4%, up 180 basis points.
As court room operations gradually reopen and operations normalize, we anticipate this trend in utilization to continue.
And with that we are leaning way forward on increasing our staffing levels in anticipation of higher utilization rates of our partners.
This of course will likely have a material impact on margins as we go into 2022.
Normalized funds from operations or FFO for the third quarter was $0.48 per share, a decline of 8% compared with the third quarter of 2020.
However, this decline was primarily driven by our decision to convert to a taxable C corporation effective January 1st of 2021 from a REIT.
We have added disclosures in our third quarter supplemental financial information document available now on our website, which provides our pro forma results for 2020 reflecting income tax expense, by applying our estimated tax rate to pre-tax income in the prior year.
When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share, normalized FFO per share and AFFO per share increased 33%, 9% and 15% respectively.
Our adjusted EBITDA of $100.9 million increased 7% compared to the third quarter of 2020, and again, this is after the sale of 47 non-core assets since the end of the third quarter of 2020.
Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results following the remainder of my comments.
We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response.
While the rate of positive cases around the nation was significantly increasing due to the Delta variant during the third quarter, we only experienced a small temporary increase in positive cases at some of our facilities.
The most substantial impact of the emergence of the Delta variant was that it temporarily slowed the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic.
As we move toward normalizing operations, the most substantial challenge in today's environment is attracting and retaining qualified employees.
No different from our government partner's own correctional systems, the current employment market has caused staffing challenges for us at many locations across the country.
We have responded to the challenge by aggressively developing new and creative hiring and retention strategies.
And being in the private sector and a multi-state national employer, we have a lot of tools we can deploy in this environment.
These include increasing wages, sign on and retention bonuses and multiple other programs that can increase engagement, a sense of a shared mission, and overall job satisfaction.
Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above average wage inflation in current market.
Across the company this year, we have provided the large -- largest wage increases in my 12 years as CEO and we are committed to utilizing all necessary resources to address this challenge.
We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 9, 2021 executive order on ensuring adequate COVID safety protocols for federal contractors.
We are working diligently, evaluating the new guides being received from our government partners and ensure we are positioned to fully comply.
For our inmate, detainee and resident populations, we do not have the ability to mandate vaccinations.
Just as we've seen in our communities, there has been some hesitancy for many to accept the vaccine, so it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public.
We continue to provide educational resources to all our residents in order to encourage more to get vaccinated.
I will move next to discuss some recent federal and state level business development updates.
We're continuing to evaluate the impact of the executive order signed by President Biden, issued in January that directed Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities.
As a reminder, the BOP takes custody of inmates who have been convicted for federal crimes and the USMS is responsible for prisoners who are awaiting trial in Federal Court.
The BOP has experienced a significant decline in inmate population since 2013 and simply does not have as much of a need for prison capacity from the private sector.
The decline in BOP population has intensified by COVID-19.
We currently have one prison contract with the BOP, accounting for approximately 2% of our total revenue.
Marshal Service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged.
In fact, nationwide Marshal population has increased over the past year.
We continue to believe that the Marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide.
We began the year with four contracts with the Marshals that expire in 2021.
In the first half of the year, we are able to enter into new contractual arrangements for our Northeast Ohio Correctional Center and Crossroads Correctional Center in Montana to remain operational and serve various government partners, where both facilities previously had direct contracts with the Marshals.
At the end of September 2021 our contract with the Marshals at our 600-bed West Tennessee Detention Facility expired and the federal detainee populations were transferred to alternative locations, including approximately 200 to our Tallahatchie County Correctional Facility in Mississippi.
We have elected to retain our staff from the West Tennessee Detention Facility as we pursue an active procurement for the facility with an existing government partner.
The only remaining Marshals contract I have yet to discuss is at our 1,033 bed Leavenworth Detention Center expiring in December of 2021.
Of note, we are currently in discussions with other potential government partners to utilize the Leavenworth Facility in the event that we are unable to reach a solution that enables the Marshals Service to fulfill its mission at this facility.
Our third federal partner is Immigration and Customs Enforcement or ICE, which is not impacted by the previously mentioned executive order.
They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization.
However, recent activity along the Southwest border has caused significant volatility in their utilization levels.
Nationwide, ICE detainee populations doubled during the first half of 2021 and we experienced a similar utilization increase at our facilities under contract with ICE.
During the third quarter of 2021, ICE detainee populations remained relatively flat.
As a result, our facility utilization levels continue to remain materially below historical averages.
The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, which prevents nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19.
Instead, Title 42 allows individuals apprehended at the Southwest border to immediately be expelled to Mexico or the individual's country of origin.
Administrative changes and court decisions have occurred since the enactment of Title 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States, while their immigration cases are adjudicated.
As I discussed last quarter, these changes essentially no impact on the demand for our services by ICE, because we do not house unaccompanied minors in any of our facilities and our one facility with family admission is provide to ICE on a fixed price basis.
We primarily provide ICE with detention capacity for adult populations and it is unclear when Title 42 will no longer be applied to adults.
Certain factors such as criminal histories or previous deportations may compel the government to keep individuals in custody instead of applying Title 42.
These situations appear to be the primary driver of the increase in ICE utilization we have experienced this year.
Whenever Title 42 is rescinded, we believe there will be a significant surge in the need for detention capacity.
Our facility support ICE for providing safe, appropriate housing and care for individuals as the agency works through the various processes associated with an individual's immigration case, deportation order or initial processing.
While we have no involvement or influence on anyone's immigration-related case, we know these matters are often quite complex and typically they take days or weeks to be adjudicated.
This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while they're in ICE custody.
Our facility serve as a critical component of the real estate infrastructure needed by ICE to help them carry out their mission.
Finally, we know there has been a great deal of coverage of a minimum wage ICE detainee lawsuit faced by our largest competitor in Washington State.
We don't have a facility in Washington and so we aren't subject to litigation related to the Washington minimum wage statute.
We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the Ninth Circuit.
We don't have trial date scheduled for those and the timing of any future litigation activity is uncertain.
But as our competitor has pointed out, very similar litigation has been dismissed and that dismissal has been upheld on appeal by the Fourth Circuit Court of Appeals.
We also have other litigation around the U.S. related to the ICE voluntary work program or also known as VWP, but those lawsuits don't raise minimum wage claims.
The VWP is an ICE contract requirement and as the VWP's name suggests, it's voluntary.
Detainees aren't forced or coerced to participate in the VWP.
VWP assignments provide an opportunity to avoid idleness, improve morale, learn new skills, and earn money at or above the ICE prescribed minimum daily rate.
Moving now to state and local developments and opportunities, I'll first mention our new lease agreement with the state of New Mexico for our 596 bed Northwest New Mexico Correctional Center that we announced in September.
The new lease has an initial term of three years, but includes automatic extension options that could extend the lease term through 2041.
The new lease commenced on November 1 and we successfully transition operations at the facility to the state.
So you will see that property reclassified from our Safety segment to the Property segment during the fourth quarter.
We continue to pursue an opportunity with the state of Arizona, which adds an active procurement for up to 2,700 beds for medium and close security inmates.
The state intends to close its oldest prison facility in Florence due to its outdated condition, operational and maintenance cost concerns.
Instead of deploying taxpayer funds to build new capacity, the outstanding request for proposal will allow the state to evaluate alternative capacity available from the private sector.
We have responded to the procurement and believe the state's Department of Corrections, Rehabilitation and Re-entry is poised to move quickly on the procurement.
The only other opportunity I will mention is in Hawaii.
The state continues to determine the best approach to replace the Oahu Community Correctional Center, the largest jail facility in the state.
The existing facility has exceeded its useful life and the state is in need of a new, modern facility to meet its current and future needs.
We remain actively engaged with the state regarding various solutions we could deliver and we anticipate a competitive procurement in 2022 to replace the current facility.
First, Newsweek recently released their list of America's most responsible companies for 2021 and we were so very honored to learn of our placement on this list.
At the beginning of their report, they note and I quote "as this difficult year comes to an end, it's good to remember that we're all part of a community, neighbors, family, friends, first responders, we depend on, appreciate and hope to be helpful to each other.
Many corporations also step up, they care about being good citizens and give back to the communities they operate in".
Their ranking goes through a rigorous four-step process, starting with a review of the top 2,000 public companies based on revenue, then afterwards a detailed review of company ESG reports and the relevant KPIs along with a reputational survey to 7,500 U.S. resident.
This list is a who's who of companies I have long observed, admired, and have inspired to emulate and I am deeply grateful and proud of every single CoreCivic team member for their tireless passion for our mission that has allowed us to achieve this well-deserved recognition.
Finally, we shared last month that CoreCivic Co-founder in Industry Visionary T. Don Hutto passed away on October 22, 2021.
Known as a fierce advocate for correctional professionals and for the safety and well-being of Justice involved individuals, Don was instrumental in the creation and implementation of industry-recognized standards that greatly improved conditions for incarcerated people and those who care for them.
He will be missed by everyone who knew him and remembered truly as a hero in the field.
Prior to co-founding CoreCivic, then known as Corrections Corporation of America, with businessman Tom Beasley in 1983, Don had a long and prestigious career in the corrections industry, including as Commissioner of Corrections for the State of Arkansas and later the Director of Corrections for the Commonwealth of Virginia.
Don's rise to industry leader came through a time of uncertainty in America.
Not long before he began serving as the Commissioner of Corrections in Arkansas, the landmark hold for versus solver [Phonetic] decision declared the entire State of Arkansas' prison system unconstitutional.
At that time, there were over 40 states that had some level of control or oversight by the federal government due to inhumane conditions.
This need for higher standards is what sparked the birth of CoreCivic and assured an improved conditions across the country.
Don's experience gave him extensive insight into modernizing the systems to emphasize rehabilitation and education and he used that experience at CoreCivic.
Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era.
And CoreCivic is so very grateful for his leadership, for our wonderful company.
But I am also personally grateful for his mentoring and friendship with me.
In the third quarter of 2021, we reported net income of $0.25 per share or $0.28 of adjusted earnings per share, $0.48 of normalized FFO per share and AFFO per share of $0.47.
Adjusted and normalized per share amounts exclude an impairment charge of $5.2 million for pre-development activities associated with the Alabama project that we are no longer pursuing, as disclosed last quarter.
Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT.
For illustration purposes, in the supplemental disclosure report posted on our website, we present the calculations of adjusted net income, normalized funds from operations and AFFO for each quarter and full year of 2020 on a pro forma basis to reflect such metrics, applying an estimated effective tax rate of 27.5%.
Adjusted net income per share in the third quarter of 2021 of $0.28 compares to $0.21 on a pro forma basis, applying this estimated effective tax rate for the third quarter of 2020 while normalized FFO per share of $0.48 compares to $0.44 on a pro forma basis for the prior year quarter and AFFO per share of $0.47 compares to $0.41 on a pro forma basis for the prior year quarter.
Adjusted EBITDA, which is obviously before income taxes was $100.9 million in the third quarter of 2021 compared with $94.6 million in the prior year quarter.
The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties since the end of the third quarter of 2020 and the execution of numerous refinancing transactions that were collectively dilutive for the quarter as we paid down low cost, short-term variable-rate bank debt with the proceeds from the property sales and issued new unsecured senior notes that have higher interest rates than the debt we repaid.
The property sales and refinancing transactions lowered our overall debt levels, extended our weighted average debt maturities and repositioned the balance sheet for long-term success.
The 47 properties that we sold accounted for $7.3 million of EBITDA in the prior year quarter.
Therefore, excluding these sales, adjusted EBITDA increased $13.6 million or 16% from the prior year quarter, demonstrating strong core operating results.
Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.1% in the third quarter of 2021 from 70.9% in the prior year quarter, and increased from 71.6% in the second quarter of 2021.
The impact of COVID-19 began in the second quarter of last year as populations, primarily ICE, declined sequentially throughout 2020 as the Southwest border was effectively closed to asylum seekers and adults attempting to cross the Southern border without proper documentation or authority in an effort to prevent the spread of COVID-19.
As the federal and state court systems have begun to return to normal operations and as the number of undocumented people encountered at the Southern border has increased, the utilization of our facilities has increased.
Operating margins have trended similarly and was 27.2% in the third quarter of 2021 compared with 23.8% in the prior year quarter and 26.8% in the second quarter of 2021.
The increase in our operating margins reflects the continuation of lower cost trends combined with higher occupancies.
Many of our facilities continue to operate with pandemic related capacity and operating restrictions that are modifying the services that we are able to provide, impacting margins compared with normal operations.
Further, staffing in this challenging labor market has become increasingly difficult and we have provided annual as well as additional off cycle wage increases and special incentives to help address depressed staffing levels.
Conversely, our government partners are experiencing the same staffing challenges which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help offset the wage increases.
Turning to the balance sheet.
As of September 30, we had $456 million of cash on hand and $786 million of availability on our revolving credit facility, which matures in 2023.
During the third quarter of 2021, we issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026.
The issuance constituted a tack on to the original 8.25% senior notes we issued in April 2020 of $450 million aggregate principal amount.
The additional 8.25% senior notes were priced at 102.25% of their face value, resulting in an effective yield to maturity of 7.65%.
While we believe this effective yield is still high relative to the stability of our cash flows and credit ratings, it compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of 8.5%.
As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase, in privately negotiated transactions, $176 million of the $350 million outstanding principal balance of our 4.625% senior unsecured notes that are scheduled to mature in 2023.
We continue to be steadfast on our debt reduction strategy, paying down $188 million of additional debt during the third quarter alone, net of the change in cash, including the $112 million outstanding balance on our revolving credit facility which remains undrawn today.
Subsequent to quarter-end, we repaid $90 million of the outstanding balance on our Term Loan B, reducing its outstanding balance to $133.4 million.
Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets, during the nine months ended September 30th, 2021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million.
Our leverage, measured by net debt to EBITDA was 2.7 times using the trailing 12 months, down from 4 times using the trailing 12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and decision to revoke our election.
As Damon mentioned, the last time our leverage was below 3 times was 2012, which was the last year we operated as a taxable C Corporation prior to our conversion to a REIT in 2013.
Notably, 2012 followed an aggressive stock repurchase program in 2009 through 2011 when we repurchased over $0.5 billion of stock or equal to half our market capitalization today.
As a REIT from 2013 through 2020, we cannot implement a meaningful share repurchase program.
It is possible we could slip slightly above our targeted leverage ratio of 2.25 to 2.75 times in the fourth quarter, when we are scheduled to make almost $40 million of semi-annual interest payments on our unsecured notes, about $15 million in social security payments that were deferred under the CARES Act, and capital expenditures consistent with our previous guidance.
But we expect to be sustainably within the range on a quarterly basis thereafter.
We have made great strides in enhancing our capital structure by accessing the debt capital markets, addressing near term maturities, selling non-core assets, reducing debt and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders.
These steps have enabled us to reduce our reliance on bank capital and we intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track.
Our intention is to reduce the size of our bank credit facility and extend the maturity yet enabling us to continue operating with optimal flexibility and cost efficiency.
We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021.
I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter.
These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic.
Higher demand for our detention facilities could also result from lifting Title 42 to healthcare policy causing the Southern border to remain effectively closed in an effort to prevent the spread of COVID-19.
However, the timing of when the federal government ends Title 42, which is evaluated every 60 days, is difficult to predict and therefore likely won't have a material impact in the fourth quarter.
We also anticipate higher staffing levels as we return our correctional detention and reentry facilities to normalized pre-pandemic operations.
Longer-term, as we look toward 2022, we will endeavor to hire in anticipation of increases in occupancy, which could have a negative impact on our margins at least until we experience further increases in occupancy.
We continue to anticipate a challenging labor market, which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels.
By signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the four 2021 contract expirations with the U.S. Marshal Service.
The contract with the U.S. Marshal Service at our 600-bed West Tennessee Detention facility expired September 30 and was not renewed.
As we previously disclosed, we responded to a request for proposal to utilize the West Tennessee facility and we remain optimistic in signing a new contract.
We have temporarily redeployed most of the staff at this facility to other facilities we operate, while we negotiate the contract in order to provide minimal disruption in ramping back up operations.
But depending on the outcome and timing of a decision as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to $0.02 per share compared with the third quarter.
Our last contract with U.S. Marshals expiring in 2021 is at our 1,033 bed Leavenworth Detention Center in Kansas, which expires in December.
We are in discussions with other potential partners to utilize the Leavenworth facility in the event we are unable to reach a solution that enables the U.S. Marshals to fulfill its mission at this facility.
Since the contract doesn't end until the end of the fourth quarter, however, we don't expect a material impact in the fourth quarter even if the contract is not renewed.
During the third quarter, we responded to a request for proposal from the state of Arizona to care for up to 2,700 inmates the state plans to transfer from a facility owned and operated by the Arizona Department of Corrections, Rehabilitation and Reentry.
We are optimistic in a contract award near the end of the year, which would obviously be more impactful in 2022.
Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes, somewhat offset by the $90 million repayment in October of our Term Loan B, which has a total effective rate of 7%.
We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items. | compname posts q3 revenue of $471.2 million.
q3 adjusted ffo per share $0.48.
q3 revenue $471.2 million.
expect to provide full year 2022 financial guidance in february 2022. | 1 |
We expect to file our Form 10-Q and post it on our website on or before August 6.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Turning to slide 4, we reported operating earnings per share of $0.66, which represents 20% growth over the prior period, or 60% growth excluding significant items in both periods.
Sales activity remains strong and we have exceeded pre-pandemic levels in a number of areas.
Total Life and Health NAP was up 35% over the second quarter of 2020 and up 10% relative to 2019 levels.
Our results also benefited from ongoing deferral of medical care which boost our health margins, solid alternative investment performance, and continued share repurchase activity.
Premium collections remain strong in our underlying margins excluding COVID impacts performed well as expected.
Our capital and liquidity remain conservatively positioned.
We ended the quarter with an RBC ratio of 409% and $336 million in cash at the holding company while also returning $105 million to shareholders through a combination of share repurchases and dividends.
We continue to execute well against our strategic priorities, specifically, successfully implementing our strategic transformation that we initiated in January 2020, growing the business profitably, launching new products, and services, expanding to the right to slightly younger wealthier consumers within the middle-income market, and deploying excess capital to its highest and best use.
Turning to slide 5 and our growth scorecard: As was the case for 6 consecutive quarters prior to the pandemic, all 5 of our scorecard metrics were up year-over-year.
Life sales remained strong, fueled by continued momentum in both our direct to consumer and exclusive field agent channels.
Overall health sales were up almost 90% over the prior period which reflected the first full quarter of the pandemic when state home restrictions were first Instituted.
Total collected life and health premiums were up 1%.
This reflects continued solid growth in Life NAP and persistency of our customer base offset as expected by lower Medicare Supplement premiums.
Annuity collected premiums were up 42% year-over-year, relative to the second quarter of 2019 annuity collected premiums were up 1%.
Client assets in brokerage and advisory grew 33% year-over-year to $2.6 billion fueled by new accounts, which were up 13%, net client asset inflows and market value appreciation.
Sequentially client assets grew 8%.
Fee revenue was up 50% year-over-year to $31 million, reflecting growth in 3rd party sales, growth within our broker dealer, and registered investment advisor, and the inclusion of DirectPath results.
Turning to our Consumer division on Slide 6: We continue to leverage our cross-channel sales program.
Our hybrid sales and service model which blend virtual engagement with our local field, exclusive field agents has led to significant improvements in lead conversion rates, customer acquisition costs, and sales product.
Life and health, sales were up 32% over the prior period, and 19% over the same period in 2019.
Life sales climbed 8% for the quarter to over $50 million reflecting the 6th consecutive quarter of year-over-year growth.
Direct to consumer life sales were level with the record production in the prior period.
Life sales generated by our exclusive field agents were up 23% and comprised over 40% of our total life sales.
Leads from our direct to consumer business supported this growth.
Within our health product lines supplemental health and long-term care sales saw healthy growth over both the second quarter of 2020 and the second quarter of 2019.
These results benefited from initiatives that enable our products to be sold through multiple channels.
Our 3rd-party Medicare Advantage party sales were up 20% in the second quarter.
Medicare supplement sales remain challenged.
Med sales were up modestly over the first quarter.
However, as discussed in previous quarters, our market is experiencing a secular shift away from Medicare supplement and toward Medicare Advantage.
We continue to invest in both our Medicare supplement and Medicare Advantage offerings to ensure we are well positioned to meet our customers' needs and preferences.
Consistent with the first quarter, roughly 50% of our Consumer Division life and health sales were completed virtually.
Consumer selecting to engage virtually held steady, even as communities reopened and vaccination rates increase.
This is a profound change in how we connect with consumers and further validate the transformation we initiated in January of 2020.
It will continue to have significant implications for our business going forward.
Among other things, this change, expand our agents' ability to interact with customers across a broader geographic area.
As I mentioned annuity collected premiums were up 42% as compared to the prior year and up 1% versus 2019.
The number of new annuity accounts grew 16% and the average annuity policy size rose 14%.
Our portfolio of index annuity products continues to be well received by our middle market consumers.
Our recently launched guaranteed lifetime income annuity plus was a key contributor to our second quarter annuity sales growth.
Of course, we continue to maintain strict pricing discipline on our annuities to balance sales growth and profitability.
Participation rates and other terms are reviewed regularly to reflect current macro environment conditions.
Client assets and brokerage and advisory grew 33% year-over-year and 8% sequential to $2.6 billion in the second quarter.
Combined with our annuity account values, we now manage $12.7 billion of assets for our clients.
This has fundamentally shifted the relationship we have with our customer base.
Unlike some insurance products, which can be transactional in nature, investment products tend to create deeper and longer-lasting customer relationships.
We continue to reap the benefits of the shift in the agent recruiting strategy that we initiated several years ago.
We now rely more heavily on targeted recruiting approaches, including personal referrals.
This has periodically resulted in fewer new agent recruits.
However, the new agents we appoint are more likely to succeed and stay with us over time.
Relative to the year-ago period, our producing agent count increased 7%.
Sequentially, our producing agent count was down slightly but overall, our agent force remained stable.
Our securities licensed registered agent force was up 6%.
Improvements in agent productivity had became more important driver of our sales growth then agent count in recent quarters and we have significant runway for future growth.
Turning to slide 7 in our worksite Division: It looks like sales were up sharply in the second quarter as compared to the year-ago period.
We expect to approach 2019 sales levels when access to workplaces improves.
Ongoing pilots and programs to target new employer groups, offer new services, and capture new business continue to progress retention of our existing customers also remained strong with continued stable levels of employee persistency our producing agent count was up 15% year-over-year and 7% sequentially.
Recall that we slowed our agent recruiting during the pandemic due to workplace restrictions.
As a result agent count remains down nearly 40% from pre-COVID levels.
To help boost recruitment and support a return on to pre-COVID production levels, we are rolling out a field agent referral program.
This program is designed similarly to our successful Consumer Division program.
Relative to 2019 levels, our veteran agent count is up 7%.
Retention in productivity levels among our veteran agents who have been with us for more than 3 years remains very strong.
These agents have been the driving force behind our recent sales momentum and are expected to be instrumental in helping to rebuild our overall agent force.
Few revenue generated from our business is more than doubled in the quarter due to the DirectPath acquisition feedback has been strong surrounding the unique combination of products and services we can now bring to the worksite market.
We are realizing early cross sale successes between Web Benefits Design and DirectPath and the pipeline continues to grow.
Along with strong client retention, these business has also generated double-digit increases over both 2020 and 2019 in various metrics.
Turning to slide 8: Our robust free cash flow enabled us to return $105 million to shareholders in the second quarter, including $87 million in share buybacks.
We also raised our dividend 8% in May and 9 consecutive annual increase.
Our capital allocation strategy remains unchanged.
We intend to deploy 100% of our excess capital to its highest and best use over time.
While share repurchases form a critical component of our strategy, organic, and inorganic investments also play an important role.
Turning to the financial highlights on Slide 9: Operating earnings per share were up 20% year-over-year and up 60% excluding significant items.
The results for the quarter reflect solid underlying insurance margins, ongoing net favorable COVID related impacts, strong alternative investment performance, and continued disciplined capital management.
Over the last 4 quarters, we have deployed $337 million of excess capital on share repurchases reducing weighted average shares outstanding by 7%.
Return on equity improved 90 basis points in the 12 months ending June 30, 2021 compared to the prior year period.
The sum of expenses allocated to products and not allocated to products.
Excluding significant items increased by about $6 million sequentially driven by incentive compensation accrual adjustments related to earnings outperformance in the first half of the year.
The increase in expenses over the prior year period also reflects lower a management expenses in 2020 due to COVID related restrictions and the June 30, 2020 conclusion of a transition services agreement related to the long-term care reinsurance transaction completed in 2018.
In general, our expenses continue to reflect both expense discipline and operational efficiency on the one hand and continued targeted growth investments on the other hand.
Turning to slide 10: Insurance product margin in the second quarter was up $17 million or 8% excluding significant items.
Net COVID impacts were $21 million favorable in the quarter as compared to $6 million unfavorable in the prior year period.
Excluding COVID impacts, margins in the quarter remained solid and stable across the product portfolio.
The net favorable COVID impacts in the quarter reflect continued favorable claims experience in our healthcare products, particularly impacting Medicare supplement and long-term care due primarily to continued deferral of care.
This was partially offset by the unfavorable impact of COVID related mortality in our life products.
The favorable COVID impact in the quarter exceeded our expectations as the outlook that we provided on our April earnings call assume that healthcare claims would begin to normalize in the second quarter, including an initial spike in claims due to pent-up demand that did not materialize in the quarter.
Regarding our annuity margin, recall that in the second quarter of 2020, we saw a favorable mortality in our other annuities block unrelated to COVID, which translated to $10 million of positive impacts.
As we noted at the time, this resulted from a handful of terminations and large structured settlement policy, which we expect from time to time in this block, but not on a regular basis.
Turning to slide 11: Investment income allocated to products was essentially flat in the period as growth in the net liabilities and related assets was mostly offset by a decline in yield.
Investment income, not allocated to products, which is where the variable components of investment income flow through increased $40 million, reflecting a solid gain in the current period and our alternative investment portfolio and a loss on that portfolio in the prior year period.
Recall that we report our alternative investments on a 1/4 lag.
Our new money rate of 3.38% for the quarter was lower sequentially reflecting a continuation of our up in quality bias from the first quarter and continued spread tightening in general, partially offset by higher average underlying Treasury rate in the second quarter versus the first quarter.
Our new investments comprised $1.1 billion of assets, with an average rating of single A and an average duration of 16 years.
This higher level of new investment reflected reinvestment of maturing assets and a higher level of prepayment activity in the period.
Our new investments are summarized in more detail.
Turning to slide 12: At quarter end, our invested assets totaled $28 billion, up 8% year-over-year approximately 96% of our fixed maturity portfolio is investment grade rated with an average rating of single A. This allocation to single A rated holdings is up 200 basis points sequentially.
The BBB allocation comprised 39.4% of our fixed income maturities, down 140 basis points.
Both year-over-year and sequentially.
We are actively managing our BBB portfolio to optimize our risk-adjusted returns to the extent suitable and attractive opportunities develop, we may over time balance recent up an quality bias with a modest increase in allocation to alternatives asset-backed securities closed or investment grade emerging market security.
Turning to slide 13: We continue to generate strong free cash flow to the holding company in the sector with excess cash flow, $114 million or 128% of operating income for the quarter and $432 million or 119% of operating income on a trailing 12 month basis.
Turning to slide 14: At quarter end, our consolidated RBC ratio is 409%, which represents approximately $45 million of excess capital relative to the high end of our target range of 375% to 400%.
Our Holdco liquidity at quarter end was $336 million, which represents $186 million of excess capital relative to our target, minimum Holdco liquidity of $150 million.
Even after returning $105 million of capital to shareholders in the quarter, our excess capital grew by approximately $22 million from March 31 to June 30 of this year.
This primarily reflects the strength of our operating results in the quarter and the recent up in quality bias in our investment portfolio.
Turning to slide 15: While uncertainty related to COVID continues, we believe it is very unlikely that any future COVID scenario would cause our capital and liquidity to fall below our target levels.
For that reason, we are no longer running a formal adverse case scenario as we had been doing through the first quarter of this year.
Instead, we are updating a single base case scenario or forecast with upside and downside risks to that forecast.
In our most recent forecast, we expect a continuation of the sales momentum we've seen in the past 5 quarters, we expect a modest net favorable COVID related mortality and morbidity impact on our insurance product margin for the balance of 2021 and the modest net unfavorable impact in 2022.
This assumes that COVID deaths do not worsen in the second half of this year and that healthcare claims begin to normalize after a brief spike beginning in the 3rd quarter due to pent-up demand from deferral of care.
When and if a spike actually occurs and when our health product claims actually normalize is highly uncertain.
So far, we have seen some intra-quarter volatility in our health claims during the pandemic, but nothing that has persisted long enough to establish a trend.
On the mortality side impacting our life products, the number of COVID deaths we will see for the next several quarters is also uncertain, given the recent rise in infections largely from the Delta variant and the potential for material impacts from additional variants.
Certainly, one of the biggest risks to our forecast is how exactly COVID will evolve from here.
But again, we believe, however it evolves, it represents an earnings event for us, favorable or unfavorable, not the capital or liquidity of that.
Assuming no shift in interest rates, we expect net investment income allocated to product to remain relatively flat in this base forecast as growth in assets is offset by lower yields reflective of both the lower interest rate environment and are up in quality shift in asset allocation.
In general, we expect alternative investments to revert to a mean annualized return of between 7% and 8% at some point and over the long term, but the actual results will certainly be more variable with likely more upside potential than downside in the near term given the current economic outlook.
We expect fee income to be modestly favorable to the prior year as we grow our 3rd party Med Advantage distribution and improve the unit economics of that business.
Growth in web Benefits Design, earnings, and the inclusion of DirectPath will also contribute to fee income.
We expect the sum of our quarterly allocated and not allocated expenses tax significant items for balance of the year to be generally consistent with levels reported in the first quarter of this year, allowing for some quarterly volatility.
And finally as COVID related uncertainty diminishes which is certainly will at some point, we expect to manage our capital and liquidity closer to target levels, reducing our excess capital over time.
We are pleased with the healthy results we've generated this quarter and in the first half of the year.
The strength of our diversified business model and the steady execution of our strategic priorities and organizational transformation underpin that success.
The consumer division has met or exceeded pre-pandemic performance and our worksite Division is making meaningful progress.
As we enter the second half of the year, we remain squarely focused on maintaining our growth momentum, building upon our competitive advantages, and managing the business to optimize profitability, cash flows, and long-term value for our shareholders.
Please continue to take care of your health, including vaccinations for those that are eligible. | q2 operating earnings per share $0.66.
qtrly total revenues $1,073.1 million versus $1,014.2 million. | 1 |
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 Justin Loweth, 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 had a great fourth quarter with operating results of $0.95 per share, up 138% over last year.
The value of our integrated model and the underlying strength of our business were both clearly evident with each of our reporting segments contributing to the increase.
The improvement in commodity prices, the ongoing benefits of our Appalachian acquisition and the continued investment in the expansion of our interstate pipeline system drove the increase and will remain as tailwinds into fiscal '22.
The fourth quarter capped an outstanding year for the Company, one in which the underlying fundamentals of our business continued to strengthen.
Against the backdrop of capital discipline by producers and strong domestic and global demand for natural gas, the long-term outlook for pricing has improved substantially to levels where we expect to generate increasing amounts of free cash flow from our upstream and gathering businesses.
On the pipeline side of the business, our recent Empire North and FM100 projects are two of the largest interstate pipeline expansions in the Company's history.
Combined, these projects represent incremental pipeline revenues of more than $75 million and provide much needed capacity out of the basin.
And lastly at the utility, we continue to see customer and demand growth which supports the need for further investment in our distribution system.
To that end, in August, the New York Commission approved an extension of our system modernization tracker, which will allow us to add the cost of new replacement projects to that mechanism through March 2023.
This is a great program that enhances the safety and reliability of our system and reduces emissions.
Construction of the FM100 expansion and modernization project is nearly complete.
Earlier this week, we made a filing with FERC, which would allow us to place this project fully in service on December 1.
This is an important project for us.
In addition to growing our regulated pipeline earnings and cash flows, FM100 when combined with Transco's Leidy South expansion project create the path to attractive markets in the Mid-Atlantic for production from each of Seneca's major development areas.
This path gives Seneca considerable flexibility in its development plans and supports growth in both Seneca's production and our gathering systems throughput.
Without a doubt, this project is a perfect example of the inherent benefits of our integrated approach to development.
The project team has done a terrific job leading an aggressive in-service timeline amid the global pandemic and supply chain disruptions.
Total project costs are expected to come in nearly 15% under budget.
Those of you who have followed us for a while know that safety is a top priority at National Fuel.
We strive to have a strong safety culture where everyone in the organization, from me at the top, to our newest employee sees the value of a safe work environment.
I'm happy to say that in fiscal '21, our systemwide dark injury rate was the lowest it's been since we've been keeping track.
This is a great accomplishment and I'd like to congratulate the team on our continued improvement.
As we look to the future, it's clear that Natural Gas will play an important role in meeting the world's energy needs.
As is evident from recent events in Europe and Asia, global demand for Natural Gas is growing and we see continued growth here in Western New York and Northwest Pennsylvania where Natural Gas' resilience reliability and affordability compared with other alternatives make it the energy of choice for both space heating needs and commercial and industrial processes.
But as the world decarbonizes we too much lower the carbon footprint of both our customers and our own operations.
By doing so will require us to embrace low carbon fuels like renewable natural gas and hydrogen and new solutions like hybrid heating.
At the same time through our Conservation Incentive Programs, we have to encourage our customers to use less.
And lastly, we have to improve the emissions profile of our own operations.
To that end, in December, coincident with the publication of our 2020 corporate responsibility report.
We announced aggressive emissions reduction targets.
In particular, we committed to reduce methane intensity at our major operating segments by 30% to 50% from 2020 levels by 2030.
In addition, we pledged to reduce absolute greenhouse gas emissions by 25% again by 2030.
Importantly, unlike the aspirational goals that have become commonplace, these targets while challenging are based on tangible projects that use today's technology.
This is an important step for the Company, one that demonstrates our commitment to sustainably operating our assets for the long term.
Before closing, I want to spend a minute on our expectations for free cash flow.
As you can see from page 7 of our current IR deck, at $4.50 natural gas prices, we project free cash flow of approximately $320 million in fiscal '22.
Looking beyond 2022, I expect that to trend even higher as capital moderates and FFO continues to grow across the system.
Our first priority for that free cash flow will be our dividend, which we paid for the last 119 years and grown for the last 51.
After paying the dividend, we'll still have considerable free cash.
And I see three options for redeploying that capital.
First is reducing leverage on the balance sheet with the goal of gaining an upgrade from the rating agencies.
While our credit metrics will likely improve with the recent rise in pricing, we need to be able to sustain those metrics through the cycles.
And to do so, we'll probably require a reduction in our absolute debt levels.
We see the ability to start that deleveraging over the next few quarters.
Ideally we'd also use that capital to fund growth projects.
We continue to pursue expansions of our pipeline system and while projects of the size of FM100 aren't likely in the near future.
I do see the opportunity for us to build more modestly sized projects.
In addition should Seneca secure additional firm transportation or long-term firm sales.
It certainly has the acreage to continue to grow production.
M&A is also a possibility.
If the right assets come on the market, we'd certainly take a look at them.
And lastly should those growth opportunities not materialize, we'd look to return capital to shareholders.
In closing, National Fuel had a great quarter and a great fiscal year.
Our integrated model continues to deliver considerable benefits that are clearly evident in our financial and operating results.
Looking forward, we expect to transition to a period of substantial free cash flow which will give us significant financial flexibility and our focus on ongoing emissions reductions will improve the sustainability of our operations and position us well for the future.
The fourth quarter concluded a great year for Seneca Resources.
Production came in at 79.6 Bcfe nearly a 20% increase from the prior year's fourth quarter.
This increase was driven by strong operational performance from our two rig development program as well as an additional month of production from our Appalachian acquisition that closed in July 2020.
For the full year, production increased 36%, which along with significant realized synergies from our acquisition helped to drive a 7% reduction in cash operating unit costs.
We've also updated our reserve estimates with proved reserves increasing nearly 400 Bcfe to 3.9 Tcfe up 11% from last year.
We remain conservative in our approach to reserve bookings with 84% of our reserves being proved developed.
Before diving into some operational and marketing updates, I wanted to hit on the growing benefits of last year's Appalachian acquisition.
The growth in production and related drop in unit costs help to expand operating margins and deliver significant accretion to Seneca's earnings and cash flows.
Additionally, as we talked about in the past, given the depressed natural gas price environment at the time of the acquisition, we ascribe no value in our [Technical Issues] long-term upside.
Since closing the acquisition last July, our team has continue to evaluate the undeveloped potential.
From a geologic operational and Midstream synergy perspective, this highly economic inventory has been more fully incorporated into our development plans both this year and into the future, resulting in a shift of more drilling activity to Tioga County.
In fiscal '22, we expect to bring online thee pads in Tioga with two targeting the Utica and the other in the Marcellus, incorporating more of this inventory into our program enhances capital efficiency further improving consolidated upstream and gathering returns.
Our ability to ship activity across our three major operating areas is supported by our diverse marketing portfolio including the incremental 330,000 per day of new Leidy South capacity expected to come online in December.
As we've discussed previously, Leidy South will provide an outlook to valuable Mid-Atlantic markets for each of our three major operating areas, giving us additional flexibility to optimize our development activity and maximize returns.
As Dave mentioned, the project is on track and we should be able to start using this capacity next month.
With more clarity on the Leidy South in service date, we've been very active on the marketing front.
Since last quarter, we've converted a significant portion of our existing Leidy South firm sales from a Transco Zone 6 index sale to a NYMEX based sale, providing basis certainty on those volumes.
Overall, at this point we have hedges and fixed price firm sales in place for about three-quarters of our expected fiscal '22 natural gas production.
We have another 17% with basis protection that is not hedged, which leaves less than 10% of expected production exposed to in basin pricing.
This is a great spot to be in and allows us to be opportunistic in our marketing and hedging activities over the remainder of the year.
Shifting gears, our operating and spending plans for the year remain largely unchanged.
As we talked about previously, our plan to ramp up production over the course of the year to fill our new Leidy South capacity is right on track.
I expect Q1 production to be sequentially flat, and we are timing several pads to come online during the quarter in conjunction with the new Leidy South capacity.
From there production should ramp up in Q2 and Q3, then level out around 1 Bcf a day net toward the end of the fiscal year.
Capital is the opposite, with the extensive completion activity driving capital higher in Q1 and Q2 then decreasing over the second half of the year.
Also on capital, there has been a lot of industry discussion around cost inflation and service availability.
On the latter point, we think we're well positioned to avoid meaningful impacts.
We've been in regular communication with our key vendors and do not expect service availability will pose any issues.
However, we do see some modest headwinds on the cost front as is the case with most industries, labor challenges, supply chain issues and increased fuel costs are impacting our service providers.
Cost of certain materials such as tubulars are up as well.
All that being said, we expect these increases to be largely offset by continued operational efficiencies.
In aggregate drill and complete drill and complete costs are likely going to rise a few percent, but this is all accounted for in our capital guidance range, which remains unchanged from last quarter.
In California, our team has done a great job managing through the last 18 months and we are forecasting relatively flat oil production from fiscal '22 to fiscal '20, excuse me, for fiscal '21 to fiscal '22.
This is a result of long-term planning for permits for our drilling program and a more active workover program in the second half of fiscal '21 that will carry into fiscal '22 while we are facing some modest cost headwinds largely from increasing steam fuel costs, those are more than offset by rising oil prices and we expect to generate significant free cash flow this year.
Also, our new solar facility at South Midway is substantially complete and should go in service very soon and we are moving full speed ahead with our next solar facility at South Lost Hills, which is expected to go in service late next year.
[Technical Issues] honestly, I want to provide an update on Seneca's sustainability efforts.
As I mentioned last quarter, we are undertaking a comprehensive study of emissions generated by various types of completion equipment.
We have completed all testing and are working with our completion service providers as well as air hygiene and West Virginia University to evaluate the data and develop a comprehensive report.
This is a landmark study that will provide truly comparative data across a wide array of completions equipment including e-frac technology.
Most importantly, with this data, we will be able to make more informed decisions and selecting completions equipment that aligns with our sustainability values as well as our cost and performance requirements.
We also announced our plans to seek a responsible natural gas certification for 100% of our Appalachian production through Ekahau [Phonetic] origin.
This ISO based framework evaluates our operations under a rigorous set of ESG performance criteria with independent verification.
The third party verification is ongoing and we expect to conclude the process in the next couple of months.
Additionally, we are working with project canary toward the responsibly sourced gas designation for approximately 300 million a day of our production utilizing their trust well process.
As part of our relationship with project canary, we are also installing continuous emissions monitoring devices on three of our well pads.
We expect -- we expect these installations to be completed by the end of the year.
In addition, since June of this year, we have committed to the use of compressed air or electric power pneumatics on every new Seneca development pad.
And we are retrofitting existing natural gas pneumatics [Phonetic] on return trip pads to also run on compressed air.
This will continue to reduce our already low methane emissions intensity as we strive to meet our long term emissions reduction goals.
All of these initiatives are key steps that demonstrate our commitment to sustainability and we will remain focused on furthering and building upon these efforts throughout the coming years.
In closing Seneca's business is fundamentally sound with a great outlook.
The added scale and synergies from our 2020 acquisition and recent growth have reduced operating costs and strengthened our margins.
Our larger scale and increased inventory has given us the opportunity to further optimize our development program leading to improved capital efficiency and driving earnings and cash flows higher.
We also operate in one of the lowest emissions intensity basins in the world and work hard to be on the leading edge of the industry sustainability initiatives.
This dual focus on enhancing free cash flow, while reducing our environmental footprint positions us well for ongoing success.
National Fuel closed out its fiscal year on a strong note with earnings coming in at $0.95 per share.
For the full year after adjusting for several items impacting comparability, operating results were $4.29 per share.
This is well above the high end of our guidance range and was driven by several factors.
First, the significant improvement in natural gas and crude oil prices during the quarter drove higher after hedging price realizations.
Second, operating cost came in below expectations as we continue to find ways to optimize our cost structure across all of our businesses.
Lastly, we completed some tax planning around intangible drilling costs.
This resulted in an adjustment to a state tax valuation allowance reducing our effective tax rate.
Turning to fiscal '22, we now expect earnings to be in the range of $5.05 to $5.45 per share, an increase of $0.65 per share or 14% at the midpoint from our preliminary guidance.
A few items are driving this change.
First, we've increased our commodity price assumptions.
We're now forecasting NYMEX natural gas prices of $5.50 per MMBtu for the first half of our fiscal year and $3.75 from April through September.
We've also increased our NYMEX crude oil price assumption to $75 per barrel.
While we're well hedged for the year approximately 25% of forecasted production remains unhedged.
For reference, a $0.25 change in our natural gas price assumption is now expected to impact earnings by $0.12 per share.
Given the cadence of our production profile, roughly two-thirds of this price impact would occur in the second half of the year.
On the oil side, our sensitivities remain unchanged with a $5 change oil impacting earnings by $0.03 per share.
The second major driver is a modest increase in Seneca's LOE.
We've increased our range of $0.01 [Phonetic] now projecting $0.83 to $0.86 per Mcfe for the year.
This is entirely driven by streaming operations in California.
The higher price of natural gas will lead to higher steam fuel costs.
However, this increase will be more than offset by the forecasted increase in oil revenues.
The last major driver is the impact of the system modernization tracker extension in our New York utility.
We expect us to increase margin at the utility by approximately $4 million for the year.
One other major item of note related to a recent preceding in our Pennsylvania Utility jurisdiction.
While this doesn't impact earnings or cash flow, it will have an impact on the utility's EBITDA, it's a bit complex, so I'll hit the high point.
Due to the over-funded status of our Pennsylvania jurisdictions post-employment benefit plans, we made a regulatory filing to stop recovering these costs from our customers each year, using money previously set aside in the trust we also agreed to pass back a regulatory liability through one-time and ongoing bill credits.
[Technical Issues] material impact to our ongoing earnings or cash flows.
The point of note here is that the annual collection of OPEB funding costs is reflected as margin in the utility's financial statements.
While the vast majority of the OPEB expense is related to non-service costs which sit below operating income.
By reducing our OPEB collections from approximately $10 million to zero, we expect to see an equivalent reduction in utility EBITDA.
This doesn't fundamentally change the business in any way, but we wanted to point out the negative impact to EBITDA despite no change to our expected earnings or cash flows.
Switching over to capital.
Fiscal '21 came in at $770 million for the year, which was toward the lower end of our guidance range.
This was primarily driven by costs coming in below expectations in our Midstream businesses including the FM100 project Dave mentioned earlier.
For fiscal '22, our guidance was $640 million to $760 million remains unchanged.
Bringing this altogether, our balance sheet is in a great position and our free cash flow outlook is strong.
In fiscal '21, funds from operations exceeded cash capital expenditures by approximately $120 million for the year.
Adding to that, the proceeds from the sale of our timber assets which closed in December, we generated free cash flow in excess of our $165 million dividend payment for the year.
As we look to fiscal '22, we would expect our funds from operations to exceed capital spending by $300 million to $350 million.
At this level, our free cash flow, we are projecting more than $150 million of excess cash after funding our dividend for the year.
This provides additional cash flow that can be directed toward the debt-reduction efforts Dave referenced to earlier.
While our free cash flow is in line with previous expectations, I did want to spend a minute talking about one item on the balance sheet.
Given the recent run up in prices, we recorded $600 million mark to market liability associated with our hedge portfolio.
Well, this is a rather large liability, our investment grade balance sheet minimize collateral requirements such that we were limited to approximately $90 million posted with counterparties at the end of September.
Today, the collateral amount has been further reduced now sitting closer to $25 million.
As we progressed through the winter, most of those hedges driving the current liability will settle and as a result, we expect to have minimal, if any collateral requirements.
In conclusion and echoing, Dave's earlier comments, we're in a great spot, the outlook for the business is strong and our ability to generate significant and sustainable free cash flow, positions us well to deliver shareholder value well into the future. | now projecting that fiscal 2021 earnings will be within the range of $3.55 to $3.85 per share. | 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. | compname reports q2 earnings per share of $3.58.
compname reports 2021 second quarter results and $100 million share repurchase authorization.
q2 earnings per share $3.58.
q2 revenue $961 million.
backlog units increased 49% to 5,488 in quarter.
backlog sales value reached $2.5 billion in quarter.
qtrly homes delivered increased 23% to 2,258.
also announced board has approved a $100 million share repurchase authorization. | 1 |
I'm joined on the call today by our Chairman and Chief Executive Officer, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our Chief Financial Officer, Jim Marischen.
This audiocast is copyrighted material of Stifel Financial Corp.
and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial.
Our value as a company is and always will be our people.
So let me give some highlights of our quarter, have Jim Marischen review our balance sheet and expenses, and I will wrap up with our outlook before Q&A.
As you can see on Slide one, the first quarter of 2021 was another record for Stifel as we continue to benefit from our ongoing investment in our firm as well as the strength of the operating environment.
Our revenue in the first quarter was a record of nearly $1.14 billion, an increase of 24% and surpassed last quarter's record by more than $75 million, driven by record revenue in both our Global Wealth Management and Institutional Groups.
The growth in revenue and our focus on expense management resulted in non-GAAP earnings per share of $1.50, which was up 88% year-on-year and represented the second highest quarterly earnings per share in our history.
The investments that we've made in our business have enabled us to participate to a far greater magnitude than we would have had we not invested in the business.
Our record results were driven by our past recruiting success to growth in our balance sheet and robust capital markets.
Other highlights for the quarter.
Pretax margins of more than 21%, annualized return on tangible common equity of over 28% and tangible book value, which increased 32%.
Turning to the next slide.
As I stated, our first quarter net revenue increased 24% to a record surpassing $1.1 billion.
Compensation as a percentage of net revenue came in at 60.9%, which was just above the high end of our annual range, yet is consistent with our policy of accruing for compensation conservatively early in the year.
Our operating expense ratio was about 18%.
But excluding credit provision and investment banking gross-ups, our operating expense ratio totaled approximately 16%.
This came in below our full year guidance due to the strength of our revenue and strong expense management.
As the economic outlook improves, we, like other banks, have updated our economic models.
This, coupled with strong credit performance in our loan portfolio, resulted in a relief of $5 million of our credit provisions during the quarter.
As you recall, our provision expense last year was driven by the adoption of CECL, and more specifically, the negative economic outlook that was a key input into the calculation.
So neutralizing the impact of credit provisions, Stifel's pre-tax pre-provision income totaled $238 million, which increased 61% from the first quarter of 2020.
Moving on to our segment results and starting with Global Wealth Management.
First quarter revenue totaled a record $631 million, up 8% year-on-year.
While this increase is impressive, I believe it understates the strength of our business as it includes a nearly $24 million decline in net interest income at our bank subsidiary.
Excluding the impact of lower bank NII, our private client business improved 13%, driven by the strength in asset management as well as growth in brokerage revenue, as we benefited from enhanced client activity levels and continued success in recruiting.
We again finished the quarter with record client asset levels.
Total assets under administration of nearly $380 billion increased $21 billion from the prior quarter.
Additionally, fee-based assets of $138 billion rose 7% sequentially, which should drive further growth in the asset management and service fees line item in the second quarter of this year.
The next slide highlights the strength of our recruiting and the growth drivers of our platform.
We had a solid quarter in terms of advisor additions as we added 15 advisors with total trailing 12-month production of $13 million.
While this was fewer advisors than we've typically recruited in recent quarters, I'd remind you that recruiting is cyclical and is best examined over a longer time frame.
Since the beginning of 2019, we've added 300 financial advisors with cumulative production of approximately $233 million.
As I look at the remainder of the year, our recruiting pipelines remain at robust levels and I anticipate another strong year.
In the first quarter, we announced that we were rebranding Century Securities, which we've operated since 1990 as Stifel Independent Advisors.
Given the growth in this industry channel and the fact that we already have the legal and supervised restructure in place plus an outstanding platform, we believe that our overall recruiting efforts will be enhanced by our renewed focus on this market channel.
Moving on to our Institutional Group.
This quarter represented our second consecutive record quarter for Institutional Group.
Net revenue totaled $506 million, which was up 52% from the prior year and surpassed last quarter's record by approximately $15 million.
Our performance was strong across all of our major revenue lines as our business continues to benefit from strong market activity, the recent investments in our business and contributions from both Canada and Europe.
We generated a 23% pre-tax operating margin, which was up more than 1,000 basis points from the same period a year ago.
Looking at the revenue components of our institutional business, I would note that our equities business totaled $226 million, up 74%; while fixed income totaled $146 million, which increased 10% from the comparable first quarter of 2020.
With respect to our trading businesses, we generated record equity brokerage revenue in the first quarter, surpassing our prior record set a year ago by 13% as strong activity levels continued and trading gains increased.
Additionally, I'd note that our electronic brokerage businesses, which include our ATS and algo products are now fully launched, and we would expect to see increased contributions from these products as the year progresses.
Fixed income brokerage revenue in the quarter was up 12% sequentially and represented our third highest quarterly revenue, trailing only the first and second quarter of last year.
Similar to my comments last quarter, our fixed income trading continues to be driven by increased activity across the board as well as non-CUSIP businesses.
On Slide seven, investment banking revenue of $339 million was our second consecutive quarterly record, surpassing last quarter's record by a few million dollars, driven primarily by record capital raising revenue.
Equity underwriting revenue was standout in the quarter, coming in at $160 million and surpassing the record we set last quarter by nearly $50 million.
This is a good example of how, by investing in our business over the last several years, we've become a more significant player as we were a book runner on more than 50% of the IPOs we participated in the quarter.
Our strongest verticals were healthcare, technology, financials and consumers.
As widely reported, there was an incredible amount of SPAC-related activity within our industry during the first quarter.
However, SPACs accounted for a little more than 15% of our equity underwriting revenue in the quarter.
So whether the recent slowdown in SPAC activity represents a pause or a saturation point, we are confident about the strength of our more traditional pipeline.
While our equity business was quite robust, we also recorded great results in fixed income.
Our fixed income underwriting revenue of $49 million was a record for the first quarter and was up 43% year-on-year.
Our municipal finance business rebounded from challenging market conditions in the first quarter of 2020 as we lead manage 236 municipal issues, which represented an increase of 42%.
While we are off to a strong start for the year, we believe that if Congress were to pass an infrastructure bill, we would see additional tailwinds to our public finance business.
We also continue to see solid contributions from our growing corporate debt issuance business.
Regarding our advisory business, revenue of $130 million represented our third highest quarterly revenue and a record by almost 25% for any first quarter.
In terms of verticals, we benefited from the expected pickup in financials and continue to see broad-based results from technology, consumer and healthcare.
Looking forward to our second quarter, based upon anticipated closings of some larger previously announced transactions and of course, barring a substantial change in the market or the economy, we expect to see a solid increase in our advisory revenue.
In terms of our overall pipelines, they are up double digits compared to where we began the year, and I remain very optimistic for our investment banking business in 2021.
Let me begin by making a few comments regarding our GAAP earnings.
In the quarter, we generated the second highest GAAP earnings per share in our history at $1.40, which was only surpassed by the results generated last quarter.
We again generated strong returns on equity with an ROE of 18% and ROTCE of nearly 27%.
Similar to last quarter, the strong GAAP earnings resulted in increases in our book value and tangible book value.
This was accomplished while increasing assets by $1.5 billion, resuming our open market share buyback program and given the seasonal impact of stock compensation on equity in the first quarter.
And now let's turn to net interest income.
For the quarter, net interest income totaled $113 million, which was up $8 million sequentially.
Our firmwide net interest margin increased to 200 basis points, and our bank's net interest margin improved to 240 basis points.
Both NII and NIM benefited from the remix of bank assets out of our securities portfolio and into our loan portfolio as well as growth in our average interest-earning asset levels by 6% during the quarter.
I would also note that we did see some more episodic loan fees earned during the quarter that contributed to NII.
We expect this contribution to decline somewhat in the second quarter, but the loan and securities growth that occurred in the first quarter will more than offset this decline.
As such, in terms of the second quarter, we expect net interest income to be in a range of $110 million to $120 million and with a similar NIM to the first quarter.
Further, while we have produced a stabilized NIM over the last few quarters, we continue to be very asset sensitive.
As an update to what we discussed last quarter, assuming a 100 basis point increase in rates across the curve and a 30% deposit beta, we would generate an additional $150 million to $175 million of pre-tax earnings.
I would note that our deposit betas have been and will continue to be driven by the competitive environment.
But for this analysis, we used a 30% deposit beta.
This represents an estimate from what actually happened to Stifel over the entire last rate cycle, but I would highlight that beta was very much weighted to the latter portion of the cycle.
Moving on to the next slide.
I'll go into more detail on the bank's loan and investment portfolios.
We ended the period with total net loans of $12.2 billion, up approximately $1 billion from the prior quarter.
We saw growth in both the consumer and commercial portfolios.
Our mortgage portfolio increased by $200 million sequentially, and as we continue to see demand for residential loans from our wealth management clients despite the increase in interest rates during the quarter.
Our securities-based loan portfolio increased by approximately $170 million.
Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances.
Our commercial portfolio accounts for 39% of our total loan portfolio and is primarily comprised of C&I loans, which increased by 15% during the quarter.
Our portfolio is well diversified with our highest sector exposure in fund banking and PPP loans, each representing approximately 5% of the portfolio.
PPP loans accounted for more than $400 million of C&I growth, while fund banking accounted for $260 million.
But given its size, we felt it made sense to break this out as an individual line item.
We will look to continue to be active in the fund banking space as we view this as an attractive risk-adjusted return.
Moving to the investment portfolio, which continues to be dominated by AAA and AA CLOs.
We've not seen any material change in the underlying credit subordination provided by these securities and continue to be pleased with their performance.
This can be seen in the fair value of the portfolio, which was at an average price of 99.9% of amortized cost at quarter end.
We increased our CLO holdings by 7% from last quarter in anticipation of some payoffs expected to occur in the second quarter.
Turning to the allowance.
We had a $5 million reversal of our allowance through a negative provision expense as additional reserves tied to loan growth were more than offset by the improved economic scenario in our CECL calculation.
As a result of the reserve release and the composition of our loan growth during the quarter, our ratio of allowance to total loans declined to 118 basis points, excluding PPP loans.
It is important to look at the level of reserves between our consumer and commercial portfolios given their relative levels of inherent risk.
At quarter end, the consumer allowance to total loans was 31 basis points, while the commercial portfolio was at 174 basis points.
We also continue to see strong credit metrics with nonperforming assets and nonperforming loans remaining at seven basis points.
Further, we did take the opportunity to derisk from our commercial book by selling or reducing positions by $83 million on five C&I loans, which resulted in less than $1 million of charge-offs.
This equates to a roughly 1% discount to bar.
All five of these loans were in sectors more impacted by COVID and carried reserves well in excess of where we sold them.
Moving on to capital and liquidity.
Our risk base and leverage capital ratios came in at 19.4% and 11.5%.
The decline in our capital ratios was driven by balance sheet growth and the $68 million impact in equity to net settle taxes on our issues in the first quarter.
This was offset by the strength of our retained earnings.
We also resumed our open market share repurchase program late in the first quarter.
We repurchased approximately 195,000 shares at an average price of $61.79 per share.
Our book value per share increased to $35.96, up modestly from the prior quarter as the impact of net income on equity was offset by the aforementioned vesting of restricted stock.
Our tangible book value per share increased to $23.93.
We continue to feel good about our financial position as our liquidity remains strong.
The total third-party cash REIT program increased by approximately 5% during the quarter, which was used to fund the aforementioned bank growth.
I would also highlight that S&P recently improved Stifel Financial's outlook to positive based on our strong operating results and overall financial position.
On the next slide, we go through expenses.
In the first quarter, our pre-tax margin improved 730 basis points year-on-year to more than 21%.
The increase was the result of strong revenue growth, lower compensation accruals and our continued expense discipline.
Our comp-to-revenue ratio of 60.9% was down 160 basis points from the prior year.
That ratio came in above our full year range of 58.5% to 60.5% and is consistent with our strategy to be conservative in our compensation accruals early in the year given the transactional nature of a large portion of our business.
That said, assuming market conditions stay strong, we anticipate that our conservative accruals early in the year could lead to added flexibility in the back half of the year.
Noncomp opex, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $184 million and represented approximately 16% of net revenue.
This was also below our recent guidance, primarily due to stronger-than-expected revenue.
The effective tax rate during the quarter came in at 24.1%, which was driven by the impact of the excess tax benefit related to stock compensation.
Absent any other discrete items, we would expect to see the effective rate to be in the 25% to 26% range in the second and third quarters as we have limited RSU vesting that occurs before the fourth quarter.
In terms of our share count, our average fully diluted share count was up 1% primarily as a result of the increase in our share price.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted average share count to total 118.7 million shares.
As I said at the beginning of the call, this year is off to a very strong start.
Looking back at our guidance for 2021, many of the expectations for economic and market conditions that we then highlighted have not only played out as we expected but in some cases, has happened much faster.
Our business is benefiting from past recruiting success, higher equity markets, increased levels of interest-bearing assets, robust trading activity for debt and equity, record equity issuance, solid credit metrics and a strong investment banking pipeline.
As vaccinations increase and the economy continues its recovery, we continue to expect a very strong operating environment for the remainder of 2021.
Additionally, looking forward to our second quarter, for many of the same factors already cited, our business is off to a good start.
With respect to our full year revenue guidance of $3.8 billion to $4 billion, based on what I'm seeing in our outlook, we are tracking above the high end of our full year guidance.
And if favorable market conditions continue, we see a path to exceed our full year revenue guidance.
With that said, I'll make some comments about what we're seeing so far in the second quarter and our expectations.
Global Wealth Management is off to a strong start.
Our asset management fees will benefit from the 7% increase in fee-based assets last quarter.
And the midpoint of our NII guidance is above first quarter levels, and we continue to see client engagement.
For Institutional Group, our investment banking pipelines remain at robust levels.
While timing will always play a factor in our investment banking revenue in any given quarter, we'd expect to see a greater contribution from our advisory business given the expectation for increased M&A, particularly in financials.
Additionally, as I look forward, we have a number of large transactions that are scheduled to close, and this increases my confidence for the remainder of the year.
In terms of underwriting, activity levels so far in the quarter have pulled back from the torrid pace experienced in the first quarter but still remains strong.
Moving on to expenses.
Our full year compensation guidance remains in place, and we would expect to see the typical sequential decline in the compensation ratio in the second quarter, assuming market conditions remain stable.
Our noncomp operating expenses should be similar to those in the first quarter as we continue to see relatively modest increases in travel and entertainment expenses.
In terms of capital deployment, as always, we will continue to focus on risk-adjusted returns.
In the first quarter, we took advantage of good credit conditions to deploy capital into growing our balance sheet.
The $1.5 billion in balance sheet increase represents 75% of our full year guidance.
If we continue to see similar credit conditions, we could grow our balance sheet more than our initial guidance as we see solid returns from this use of capital.
We will continue to repurchase shares to offset dilution, but otherwise, we're likely to continue to be opportunistic with our repurchase activity.
Lastly, we will continue to look at acquisition opportunities and investments into our business as Stifel is and always has been a growth company and investing in our franchise has historically generated strong returns.
So let me sum all this up by saying our business is in a great position to not only capitalize on the current strength of the operating environment but has proven to have the flexibility to successfully adapt to changes that could occur. | compname reports preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
sfl - preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
board has decided to effectively exclude all cash flow earned from offshore assets for time being. | 0 |
I am joined on the call today by Michael Happe, president and chief executive officer; and Bryan Hughes, senior vice president and chief financial officer.
These factors are identified in our SEC filings, which I encourage you to read.
As always, we deeply appreciate your interest in Winnebago Industries and taking the time to discuss our fiscal 2021 third-quarter results.
I will begin with an overview of our performance before turning it over to Bryan Hughes, who will discuss our financial results in more detail.
In those challenging and uncertain early weeks of the pandemic in spring of 2020, Winnebago Industries suspended our manufacturing operations while we work with our team and suppliers to develop the safety protocols necessary to keep our people safe.
It is also remarkable that as we sit here today, our scientists, healthcare professionals, public health officials and the broader pharmaceutical industry collaborated to bring effective and safe vaccines to market in record-breaking time, helping us to slow down the spread of the virus to levels with which we can live carefully through today.
Our gratitude is immense to all those involved.
We believe the pandemic not only accelerated some existing purchase intent within the recreational vehicle and marine markets these last 15 months, but we are equally convinced there has been, is and will be a meaningful expansion of interest and engagement in the outdoors that will benefit our business and industries for many years, even through when avoidable cyclical periods that have been and will be a part of the outdoor economy for decades.
Today, more families than ever are seeking ways to enjoy the outdoor lifestyle.
With 10.1 million households having camped for the very first time in 2020 and another estimated 4.3 million households undergoing their own rookie camping experience as well in 2021, our team is helping to meet increased demand for our products and brands while delivering record financial performance.
More new families, more first-time buyers and more diverse customers, getting their taste of what exploring this great country via the open roads and expansive waterways is all about.
Now some will look for signs of fallout of first-time buyers and challenging comparative periods in the short term to record retail demand a year ago.
But others like us, see a net positive new wave of engaged enthusiasts, especially millennials and younger generations, who are actively now shifting their available time and income to invest in a lifestyle that is rewarding and accommodating to countless use cases personally and professionally when using our products.
Today's fresh memories for youth, first-time explorers and even veteran outdoor participants will be the foundation for our industry to grow from in the decades ahead.
We are long and bullish on America's outdoor recreation economy and the place in that ecosystem Winnebago Industries will hold in the future.
I'm incredibly proud of the progress we have made in the past year, and it is all due to our team, which we serve as leaders here at the company.
Our results for the third quarter of fiscal-year 2021 continue to build on the momentum we have generated throughout the fiscal year.
In the third quarter, Winnebago Industries grew net sales to a record $960.7 million, representing a 139% growth year over year and an organic ex-Newmar growth of 53% over our pandemic fiscal third quarter in 2019.
Our two-year performance demonstrates not only the exceptional growth in consumer demand for pursuing the outdoor lifestyle, but also that Winnebago Industries has continued to diligently execute to meet that demand while growing market share at the same time.
As of April 2021, our RV fiscal year-to-date market share is now 12.5%, up 40 basis points from the same period last year.
Winnebago Industries top-line performance in the third quarter also represented 14% sequential growth over our fiscal 2021 second quarter.
And while we do not talk about sequential growth, typically for seasonal reasons, given the unique nature of our comparable periods because of the pandemic's impact on a year ago's Q3 results, it is helpful in demonstrating our sustained revenue growth throughout the year and speaks to the stickiness of consumer demand.
Though catalyzed undoubtedly by the onset of the pandemic, demand for our products has remained strong as the vaccine rollout and gradual reopening across North America has picked up.
Our team has stepped up production output as a result.
The golden threads of quality, service and innovation extend to everything we do, and were a significant driver of our strong profitability in the third quarter.
The craftsmanship and quality of our premium products at every price point and across each of our Winnebago, Grand Design, Newmar, and Chris-Craft brands enables us to continue to grow our market share, even at historically low levels of discounting.
Similarly, the superior service and support we provide our consumers through deep partnerships with our dealers, affords us the ability to execute carefully consider pricing actions to reflect the surging demand for our products, but also offset the real input cost inflation that is present across our industries.
Our enterprisewide build-to-order production approach also continues to serve us well as we remain disciplined, considering ongoing supply chain challenges.
Our consolidated working capital and overall profitability remain improved.
At Winnebago Industries, we often talk about the importance of our dealer network relationships and the strength of those partnerships as a critical differentiator.
Our dealers are committed to our premium brands, and they have not sacrificed their dedication to customer satisfaction at any time through this pandemic.
The dealers have done an exceptional job of managing through lower inventory levels than desired and rising sales and service demand.
They continue to express their confidence in both the future retail demand environment and in Winnebago Industries as an OEM through increased levels of backlog orders.
We are also committed consequently to working closely with our supplier partners to meet that order appetite as quickly as possible.
But as always, safely, and delivering high levels of product quality always.
Our record sales in dollars and units in fiscal 2021 third quarter show that we are sequentially determined to invest in finding ways to increase output.
We continue to experience demand-driven supply chain challenges that restrain our operations from reaching full production capacity and have been facing various ways of inflation pressure as well in the last six months.
The impact of these supply based inconsistencies is evident in some of the segment results.
But our team is working closely with our supply chain partners to manage through these conditions with flexibility, nimbleness and process discipline as much as possible.
We are grateful for our supplier relationships and all they are doing to feed our assembly lines daily.
We provided this as a means of disclosing additional context for the strong results we are reporting for our third quarter ended May 29, 2021.
As a reminder, the prior year third quarter was significantly impacted by the roughly six-week shutdown period that we imposed on our operations in response to the COVID pandemic and are imperative to keep our employees and other stakeholders safe.
As a result, comparisons against this prior year are less meaningful in providing context for this year's performance.
With this in mind, our third-quarter consolidated revenues, gross margins, EBITDA margins, and earnings per share were all significantly ahead of the prior-year results.
Our strong sales generated substantial operating leverage and improved yield, and also reflected the strong demand driven by interest in our products.
In short, we had record results in sales and EPS, and our great term -- our great team, excuse me, deserves a lot of credit for executing a terrific third quarter.
Due to the significant disruption in Q3 of last year, I will discuss our performance compared to 2019, where helpful, two years ago, and also sequentially, meaning compared to our second-quarter results released last quarter to provide additional context.
Sales increased by 81.6% as compared to two years ago for third-quarter 2019, representing strong organic growth of our brands and also benefiting from the acquisition of Newmar.
Sales increased by 14% in Q3 as compared to Q2, representing the continued efforts by our supply chain and our team to generate increased output to meet the very strong demand that our dealers and end customers are exhibiting for our products.
This is also demonstrated by the record backlog related to dealer orders, up an additional 18.2% versus Q2.
While we continue to address the ongoing constraints presented by the supply chain, we are pleased to see the sequential progression in our output and shipments to our dealer partners.
Gross margins of 17.7% increased 130 points versus the 16.4% of third quarter two years ago, driven by cost savings initiatives, product mix and productivity improvements.
Gross margins declined modestly in Q3 compared to Q2; 17.7% in Q3, as compared to 18.6% in Q3 -- Q2, excuse me, driven by labor productivity impact from some of the supply chain inconsistencies, timing of investments in the business and higher material costs.
Margins of 17.7% in Q3 were well above our historical run rate and reflect primarily, the improvement in the motorhome segment.
Net income increased to $71.3 million in Q3, which is up 97% or almost double what was delivered two years ago.
Net income increased 3%, compared to the $69.1 million in Q2.
Reported diluted earnings per share of $2.05 in Q3 compares to a reported diluted earnings per share of $0.37 in the prior-year period and sequentially compares to a reported diluted earnings per share of $2.04 in Q2.
Adjusted diluted earnings per share of $2.16 in Q3 compares to $2.12 in Q2.
Diluted earnings per share was $1.14 Q3, two years ago.
In summary, Q3 was up significantly across all metrics when compared to our Q3 two years ago and showed a sequential improvement in sales, profit and in EPS, driven by continued sales growth in a very dynamic demand landscape and supply chain environment.
Now I'll turn to our segment performance starting with towables.
Revenues for the towable segment were $555.7 million for the third quarter and increased 26.5% sequentially versus the second quarter, driven by elevated output and supported by strong consumer demand for our Grand Design and Winnebago-branded products.
Winnebago Industries' unit share of the North American towable market on a trailing three-month basis through April 2021, was 11.4%, reflecting an increase of 90 basis points over the same period last year.
Segment adjusted EBITDA was $80.1 million, up 28.5% sequentially or compared to the second quarter.
Adjusted EBITDA margin was a strong 14.4%, increasing from 14.2% in Q2, as continued leverage and pricing, combined with lower discounts and allowances, helped to offset rising costs driven by inflation.
Backlog increased to a record $1.5 billion, an increase of 17% versus the second quarter, reflecting continued strong consumer demand, combined with extremely low levels of dealer inventory.
Next, let's turn to our motorhome segment.
In the third quarter, revenues for the motorhome segment were $385.3 million, up 1% sequentially compared to the second quarter.
As Mike mentioned, our motorhome products are in high demand, but results were limited by our inability to keep pace with the very strong demand due to certain supply chain challenges across many of our motorhome models.
Segment adjusted EBITDA was $37.5 million, compared to a loss of $10.8 million in the same period last year.
EBITDA in Q2 was $51 million.
EBITDA margins of 9.7% remained very strong relative to the 4% to 5% recorded historically, and is down from a record Q2 due to a different product mix, lower productivity due to the supply chain inconsistencies and also investments in the business, including the very successful dealer meeting held by the Newmar business.
The Newmar EBITDA margin of 9.7% was well ahead of EBITDA in Q3 of 2019 at 0.2%, reflecting the significant improvements from our cost savings, productivity and product mix.
Backlog in the motorhome segment increased to a record $2.2 billion, an increase of 323.3% over the prior year and an increase of 21.2% versus Q2 as dealers continue to experience significant reductions in inventories due to extremely high levels of consumer demand.
While we are experiencing inflationary pressures and remain conscious of competitive dynamics that may impact our net pricing equation, as well as continued supply chain inefficiencies caused by certain chassis or component constraints, we continue to expect to achieve a level of sustained profitability that is notably above the 4% to 5% EBITDA margin we've delivered in this segment historically.
While we are pleased to see this meaningful improvement we have more work ahead of us in the areas of productivity and labor efficiency, asset utilization and the positioning and health of our product line.
Now turning to the balance sheet.
Driven by consistent levels of gross debt, growing levels of cash and consistent growth in adjusted EBITDA, our leverage ratio or net debt to adjusted EBITDA, is now 0.5 times.
We have strong financial flexibility to invest in the business, pursue value-added M&A opportunities and support shareholder returns.
Our liquidity, including our currently untapped ABL, is just short of $600 million.
Cash flow from operations was $148 million in the first nine months of fiscal 2021, a decrease of $14.5 million from the same period last year.
On a year-to-date basis, we're benefiting from our improved profitability and working capital improvements driven by our made-to-order model that were more than offset by changes in working capital required to support increased production and rapid sales growth, as well as additional working capital from supply chain challenges.
On a quarterly basis, cash flow from operations was $81 million in Q3, which is an increase of $11.4 million versus the $69.6 million in Q2.
Our effective tax rate in our fiscal third quarter decreased to 22.8%, compared to 25.3% in the same period last year.
For the full year, we currently expect our tax rate to approximate 23% to 24%, excluding all discrete items from year-to-date results and those that may occur in the remainder of the year.
Our capital allocation priorities are focused on investing in organic growth opportunities for our businesses, executing strategic expansion to our portfolio through M&A, maintaining our leverage ratio within our targeted zone, maintaining a strong liquidity position and returning cash to shareholders.
During the third quarter, we paid a dividend of $0.12 per share on May 19, 2021, and, and our Board of Directors just approved a quarterly cash dividend of $0.12 per share payable on June 30, 2021, to common stockholders of record at the close of business on June 16, 2021.
That concludes my review of our quarterly financials.
Mike, back to you.
We continue to meet the social challenges of the day with grit, determination, compassion and an intense focus on the safety and well-being of all members of our team.
I am incredibly happy to report that COVID-related impacts to our labor force are at their lowest level since the pandemic started.
As we begin to take steps into a brighter, less socially distanced future, we are proud to carry out our mission of providing families and friends with access to beautiful outdoor spaces.
In doing so, we will continue to support our employees by serving them in communities where they live, work and play and optimizing our ESG performance across our organization.
To that end, we announced two exciting new community initiatives in the recent third quarter.
First is our participation in the United Nations Global Compact, a corporate sustainability initiative, designed to advance universal principles on human rights, labor, environment and anticorruption.
We joined over 12,000-plus global signatories, including several others in the outdoor recreation industry in supporting United Nation Global Compact's 10 principles and integrating these principles into our company's strategy.
Additionally, the Winnebago Industries Foundation has partnered with Habitat for Humanity, a global housing nonprofit to support their community-based neighborhood revitalization efforts.
The partnership includes a significant financial donation in support of Habitat's RV Care-A-Vanner program.
These organizations' missions are clearly aligned with Winnebago Industries values and enable more communities to enjoy the outdoor safely and equitably.
Winnebago Industries remains committed to advancing our core values in our operations and our communities, executing on our strategy, capitalizing on opportunities created by favorable market dynamics and innovating to sustain the unique appeal of our products with consumers.
You will continue to hear more about our corporate responsibility momentum within our enterprise in the future and the incremental resources we will allocate.
It is not only who we are, but it is how we do what we do.
As Winnebago Industries enters the final quarter of fiscal 2021, it is safe to say that we are in exciting and yet unique time still.
Field inventories in the RV and marine markets remain at almost historically low levels when using inventory turns as the metric.
Retail demand and interest remains very strong for our products as we enter the summer months, even as the outdoor industry potentially faces unprecedented retail comp periods versus a year ago.
While there are a few reports of some consumer retail order cancellations attributed to product delivery lead times or price increases in recent months, the high majority of retail orders are indeed intact, and we believe dealers will honor a high percentage of their backlog orders for the foreseeable future.
Retail financing remains available and affordable, with lenders staying disciplined in most cases on approval criteria.
And, lastly, and certainly importantly, all stakeholders are managing to the best of their ability, the implication of rising material input costs, tight labor markets and component availability challenges.
Regardless of the above topics, we are pleased with our results and are convinced that our teams at Winnebago Industries are managing these dynamics as well, if not better than most of our peers.
We will maintain our focus on executing our proven strategy to build a differentiated, premier outdoor lifestyle company and drive long-term value for end customers, dealers, employees and shareholders.
Our market share progression validates that we are improving our overall competitiveness every quarter.
Our financial results are demonstrating consistent, credible, sustained traction on improving profitability, creating very strong cash flow and managing our assets effectively, while preserving financial stability and liquidity for both strategic growth opportunities in the future, but also any uncertain times ahead.
We are continuing to invest in our business to ensure we are best positioned to meet the persistent elevated demand we anticipate in quarters and years to come, driven by the secular and ongoing growth in outdoor lifestyle products and consumer priorities for leisure and family activities, and our own ability to grow faster than the market.
We have mentioned our need to add capacity across the Winnebago Industries' enterprise in previous earnings calls.
These plans were foreseen in our previous year's long-range plan exercises and were validated again during our most recent long-range plan.
In the immediate future over the next 12 to 18 months, we will add capacity in many ways, building new facilities, as well as reengineering existing business processes operational flow or building redesigns.
Capacity is being added inorganically via new spaces and more square feet at Grand Design, Chris-Craft, and Newmar, and organically through continuous improvement initiatives on the Winnebago brand and on every campus in the company.
These investments should be a clear sign of our confidence in the future, both in terms of the vitality of the end markets, but also our market share prospects led by the development of many yet-to-be-announced, innovative new products in our pipeline.
Now before we open the call to questions, I want to touch quickly on expectations for the RV industry as we enter the last quarter of our 2021 fiscal year.
We believe industry wholesale shipments will grow approximately 50% annually in our 2021 fiscal year, and we are aligned with the RVIA forecast of approximately 34% more shipments for the industry for the full 2021 calendar year.
And, finally, I will take a moment to reiterate my immense appreciation to the world-class Winnebago Industries team, without whom, we would not be sharing such outstanding results today.
Our team truly believes in our core value system and takes pride in creating the world's finest outdoor lifestyle products.
Bryan, Steve and I are honored to be a part of such a dedicated and talented group as we continue to serve our employees and the communities in which they live, work and play, along with the customers who count on our brands as their conduits to extraordinary experiences in the outdoors.
I'll now turn the line back over to the operator for the Q&A session. | compname posts q3 earnings per share $2.05.
q3 earnings per share $2.05.
q3 revenue $960.7 million versus refinitiv ibes estimate of $839.4 million.
q3 adjusted earnings per share $2.16. | 1 |
Today we will be reviewing our fourth quarter and full year 2020 financial results and providing investors with an update on our transformation.
Further information can be found in our SEC filings.
Let's begin on Slide 3.
We started 2020 enthusiastic for a strong year of commercial execution, launching new products and continuing to simplify our business.
I'm pleased that despite the unforeseen pandemic challenges, we still managed to do all of those things and achieved remarkable results.
For the full year, we delivered higher profitability at lower net sales, while expanding gross margins and reducing SG&A expense.
We also achieve breakeven cash flow by prudently managing working capital with a special emphasis on reducing inventory.
At the same time, we strengthened our financial flexibility by retiring debt and extending the maturity of a significant portion of convertible notes.
It was another great year of new products.
Our innovation team added great new products expected to drive incremental sales and improved profitability.
We also manage through challenging global supply chain disruptions and took steps to optimize our manufacturing network.
We did this while quickly adapting to a new work environment to safety measures for our associates and creative ways to engage our customers.
Our ability to conduct virtual training and support our customer's non-contact clinical assessment and the unique ability of many of our products to perform remote programing and diagnostics really put us ahead.
For the best of best of these to widen our competitive advantage in the future.
2020 has made our business stronger.
Invacare participates in durable, healthy markets and serves a persistent need for its products with a tremendous opportunity to grow by commercializing new products and servicing pent-up demand for purchases.
We continue to simplify the business, so we can better serve our customers and make transactions easier.
At the same time, we have a great team of people, working to drive efficiency and financial performance.
After strong results in a challenging 2020, I have even more confidence about the bright future ahead of us.
On Slide 4, you'll see the fourth quarter, we delivered stronger operating income with a substantial increase in free cash flow.
This was the result of overall good sales performance, cost containment measures and less restructuring in the period.
As guided, in the fourth quarter, we achieved improvement in sequential consolidated net sales of 5.7%, in constant currency sequential net sales increased by 4.2%, driven by continued strength in respiratory products, increased sales of lifestyle products and growth in North America mobility and seating.
These results were consistent with our expectations about the lessening of pandemic restrictions in the periods.
Compared to prior year, operating income increased by $5 million and free cash flow increased by nearly $12 million.
I'm pleased with the continued progress in the business and the improved financial results achieved during the quarter.
Turning to Slide 5, with fourth quarter, adding to the strong results from the three prior quarters, full-year operating income increased by $21.7 million and adjusted EBITDA grew by over 11% to nearly $32 million.
During the year we launched new products, improved gross profit margin and effectively managed SG&A expense to achieve these results.
Importantly, after years of improvements, North America returned to profitability with more than $17 million increase in operating income and modest growth in constant currency net sales.
As mentioned previously, we generated breakeven free cash flow as a result of prudent working capital management.
I'm pleased with the significant improvement in our key metrics.
This demonstrates our strategic initiatives are working and that we have built a strong business foundation.
As demonstrated on Slide 6, having a full pipeline of compelling new products with meaningful innovation is at the core of our growth strategy.
In 2020, our innovation and commercial efforts continued unabated.
We launched new power wheelchair products in adults and smaller sizes, active manual, passive manual and Bariatric wheelchairs, folding compact power wheelchairs, power add-on beds, lifts and hygiene products.
It was really a great year, adding to our portfolio, which will help us find more ways to engage with clinicians, and help them engage with end users looking for the latest solutions for independence and great healthcare aids.
In 2020, we also introduced the Pico Green product line, the first shower chair made using renewable materials from sustainable products and which eliminates 99% of surface bacteria, particularly maintaining a safer patient environment.
These products come in many varieties and will help us engage with customers to provide better solutions for 24 hours of care.
This is the kind of pipeline we expect to continue in the future.
Also in 2020, we completed the previously announced structural business improvements.
We outsourced all of our IT infrastructure and began deploying our modernized IT system in the first stage in Canada and New Zealand.
We're pleased with the system's new functionality and look forward to using these new systems to improve our customers' experience transacting with us, and to providing our associates with modern tools to simplify their work and improved results.
Additionally, in December, we successfully completed the German plant consolidation, which is anticipated to generate approximately $5 million in annual cost savings, starting in 2021.
In 2021 we'll turn our attention to further optimizing operations and our manufacturing facilities, into working with our logistics partners, which should further improve results.
In summary, 2020 was a good year in both results and from fundamental improvements that will help us grow and improve in the future.
On Slide 7, I'd like to take a brief moment to address how our ESG initiatives support our mission and enhance shareholder value.
At our core, Invacare is a company focused on our mission of inclusion.
After all our products are designed to maximize the person's independence and to help people achieve the best lifestyle and outcome in any setting they choose.
Our business results are what we do every quarter and ESG guides us on how we achieve -- as an employer and community number, it's important for us to align our mission-driven purpose that yields great healthcare solutions for people and to do that in a way that engages all of us that work with us.
Three years ago we began a concerted effort to ensure Invacare is a responsible environmental steward, with employment practices and community outreach that engage with us.
You can see the areas we're focused on to leverage our efforts to reduce waste, consume energy responsibly and engage with social purpose.
Turning to Slide 9, during the fourth quarter, while constant currency net sales decreased compared to the prior year, revenues increased sequentially as healthcare restrictions began to loosen.
During the early days of the pandemic, there was no playbook and now every day we learn how to be more effective in this new environment.
We achieved a higher gross profit margin, both year-over-year and sequentially, despite continued supply chain challenges with the benefit of previous initiatives and product mix.
To offset lower sales, we took actions to reduce SG&A expense and improved operating income by $5 million.
As we will discuss later, some of the reduction in SG&A expense was a result of lower sales and related business activities.
However, of the available actions we implemented, many of them are durable.
That said, as revenue grows back, we expect that selling expenses like commissions will return, but this is a good thing and will allow us to scale against our SG&A expense.
At the end of the year, free cash flow was helped by the increase in third quarter sales that were collected in the fourth quarter.
In addition, our colleagues around the globe were diligent in managing down inventory, which peaked in the second quarter as sales declined faster than fulfillment levels could be reasonably adjusted.
I am pleased with how quickly we were able to adapt.
Turning to Slide 10, while the pandemic had little to no impact on sales in the first quarter, by late March to early April the whole world had gone into a simultaneous and hermetic shutdown, which lasted throughout mid-summer.
Access to healthcare was oftentimes limited to only pandemic related or urgent care, with elective care suspended or delayed.
As a result, consolidated net sales declined significantly in the second quarter and have continued to improve throughout the year, but have not yet returned to pre-pandemic level.
Each of the product lines was impacted differently, which I'll address in more detail on the next slide.
Despite lower revenues, gross profit as a percentage of sales improved by 60 basis points, due to favorable sales mix and prior actions taken to expand margins.
As mentioned previously, we executed both temporary and durable actions to reduce SG&A expense to match the lower sales level.
As a result in 2020, we managed to grow operating income, reversing course from an operating loss in 2019, a significant turnaround in results.
In addition, adjusted EBITDA improved over 11% from 2019 and free cash flow exceeded our expectations.
Turning to Slide 11, as Matt discussed in the previous two quarters, the pandemic had a different impact on each one of our product lines.
Mobility and Seating product sales began to see early signs of recovery as consolidated sequential net sales improved modestly.
North America's sequential sales growth of 3.3%, was more than offset by weakness in Europe as more stringent public health restrictions imposed during the fourth quarter continued to limit access to our customers and end users.
As our products mainly serve chronic conditions, we believe these sales are generally non-perishable and these delayed sales will be fulfilled in 2021.
Our new Mobility and Seating products are beginning to contribute as well, and we expect their contributions in 2021 to help lift the category even higher.
Lifestyle Products grew sequentially, driven by Europe, with strong demand in all product categories, primarily bed and bed related products.
Respiratory, which continue to experience elevated demand globally, increased by over 75% compared to the prior year, and also grew sequentially, driven by sales of stationery oxygen concentrators used for the COVID-19 response.
Global supply chain issues that were almost insurmountable during the second quarter have improved considerably, but still impact our ability to meet the outsized demand.
We continue to experience global demand in excess of our ability to supply, currently impacted by transportation and logistics delays.
Turning to Slide 12, Europe constant currency net sales during the fourth quarter decreased compared to the prior year, as growth in respiratory was more than offset by lower sales of Mobility and Seating and Lifestyle products.
Sequentially, reported net sales increased 10.8%, driven by increases in Lifestyle and Respiratory products.
Europe continues to be impacted by more recent pandemic related measures, which may limit our end users ability or willingness to obtain healthcare, although our customers generally remain open.
As a result of the lower sales both gross profit and operating income declined, and we incurred unfavorable manufacturing variances from the lower volume.
For the full year, although we saw sequential improvement in net sales in both the third and fourth quarter, overall sales were limited by the pandemic.
Historically, the second half of the year is seasonally stronger due to higher sales of Mobility and Seating products, primarily scooters in Europe, which are popular during the warmer months.
Strict health restrictions in many of our key markets dampened sales as our end users had limited opportunity to enjoy being outside or travel freely.
As a result, we saw the same impact on gross profit and operating income for the full year as we did in the fourth quarter.
Turning to Slide 13.
In North America we achieved higher constant currency net sales in both the fourth quarter and the full-year, driven by two primary factors.
First, we saw a tremendous growth in sale of respiratory products primarily stationary oxygen concentrators.
Not only did we see higher unit volumes, we also realized a favorable mix shift toward higher acuity products.
Although, sales increased significantly, fulfilling these orders was not easy.
We had to battle multiple global supply chain challenges early on when our suppliers were closed due to not being deemed essential businesses, had difficulties assembling our workforce and inefficiencies driven by the scarcity of transportation and logistics.
While most of these issues have resolved themselves, we feel an impact today.
The second factor is that the individual states in the U.S. never fully shutdown cohesively as the countries in Europe.
As long-term care facilities closed their doors to new residents, we saw a shift toward home healthcare, an area where we have a strong presence.
With improved sales, we were able to expand gross profit, which improved 510 basis points for the quarter and 260 basis points for the full year.
This was largely driven by favorable sales mix and lower freight and material costs.
Importantly, operating income improved by $4 million for the quarter and by $17 million for the year, as we realize the benefit of transformation initiatives, which return the segment to profitability.
I'd like to commend the team on all their hard work, which led to such great results.
Turning to Slide 14, we made great progress in Asia-Pacific, as constant currency net sales improved year-over-year and sequentially.
In the fourth quarter, constant currency net sales increased 16.2%, driven by all product categories with a nearly 36% improvement in mobility and seating sales.
Sequentially, reported net sales increased 11.5%, driven by mobility and seating sales.
Operating loss for all other improved, driven by higher operating profit in the Asia-Pacific business and decreased SG&A expense related to corporate stock compensation expense.
Moving to Slide 15.
As of December 31, 2020, the company had approximately $273 million of total debt and approximately $105 million of cash on its balance sheet.
In 2020, we took proactive steps to improve our financial flexibility by retiring approximately $25 million of convertible notes in 2021.
In addition, we extended the debt maturities to November of 2024 of a significant portion of our convertible notes, which were due in 2021 and 2022.
As a result of these actions, the remaining balance of $1.3 million of the 2021 notes will be settled in cash this month.
As always, we will continue to assess opportunities to further optimize our capital structure.
Let's shift from talking about strong results in 2020 and talk about the future as we provide our outlook for the company's expected performance in 2021.
We now know so much more about operating in a pandemic and we anticipate it's going to have a heavy influence in 2021, both in restricting access to healthcare and affecting supply chain and logistics, much like it did in 2020.
We also have a view on improvements we're going to make in 2021 to make another great year.
On Slide 16, we show guidance with expected operating results for the full year 2021 to consist of the following.
Constant currency net sales growth in the range of 4% to 7%, we're giving a range of revenue, reflecting good growth over 2020 with the range providing for variations in sales by product line and in key markets depending on how the pandemic unfolds.
Given these assumptions, this is expected to result in a 41% improvement in adjusted EBITDA, taking us to $45 million, and free cash flow generation of $5 million.
Based on the healthcare restrictions currently in place, especially severely in Europe, consolidated reported net sales in the first quarter maybe down slightly to mid-single-digit, compared to prior year, which was not impacted by the pandemic.
We're bullish for the full year, expecting a strong uplift in the second half with public health restrictions are lifted.
While, it's impossible to project the exact path of the pandemic in 2021, we remain confident that as weather gets warmer in the Northern Hemisphere, where we do most of our sale, and as people desire to get outside and as vaccines become more widely available, we'll see strong sales growth, driven by new products and pent-up demand from 2020.
As I mentioned earlier, we expect some increase in SG&A expense, primarily to support increased sales, although it should remain below 2019 spending.
Not yet factored into guidance is the anticipated benefit related to improved customer experience and efficiencies from the IT modernization initiative as it's rolled out in North America.
Finally, free cash flow is expected to be lumpy in the quarters, especially in the first half, if we fund seasonal inventory early in the year and payments for 2020 programs like severance from the German plant consolidation and deferred taxes.
Our guidance demonstrates the continued confidence we have in our strategic plan and our ability to drive future growth.
While we could not have predicted the pandemic, the test of the result of our customers, suppliers, associates and the people who rely on our products every day, I am incredibly proud of all we accomplished.
This would not have been possible without the inspired and tireless support of our associates who battled through global supply challenges, found creative ways to engage with our customers and end-users and adapted quickly to a new working environment, all while ensuring the health and safety of our colleagues.
Looking ahead, we have clear objectives with the focus on delivering sales growth and generating gains in our key markets, which we expect will result in significant improvement in profitability and free cash flow.
We're confident the long-term economic potential for Invacare remains strong.
Later this year, we'll provide an update on the timing of our longer-term targets, which we believe will achieve according to our prior and ongoing strategic initiatives as they continue to gain traction and as consequences of the pandemic sub-side.
We will now take questions. | full year 2021 financial guidance reaffirmed. | 0 |
We have posted to www.
I hope you're staying safe and healthy.
We are pleased to kick off today's call by reporting that we've rounded the corner into positive growth.
We had extremely strong results top and bottom line and continue to make very good progress on several of our strategic initiatives.
Organic growth for the second quarter was a positive 24.4%.
This growth was broad based across our agencies, geographies, disciplines, and client sectors.
We experienced a significant increase in spend from existing clients as the effects of the pandemic subsided and we benefited from strong new business wins.
EBIT was $568 million in the quarter, an increase of 67% versus the second quarter of 2020.
Q2 2021 included a gain of $50.5 million from the sale of ICON International in early June.
In Q2 2020, EBIT included $278 million of charges related to the repositioning actions.
Excluding gains and charges, EBIT margin was 14.5% in the quarter compared to 12.2% in Q2 2020.
Phil will provide further details on expected impact of the sale of ICON on our results for the balance of the year.
As we stated on our last call, we view 2019 as a reasonable proxy for our ongoing margin expectations.
Excluding the sale of ICON, our six months 2021 EBIT margin was 14% which is in line with our EBIT margin of 13.9% for the first six months of 2019.
Net income was $348 million in the second quarter, an increase of 75% from the second quarter of 2020 and earnings per share was $1.60 per share, an increase of 74%.
The net impact on the gain on the sale of ICON, which was offset by an interest expense charge related to the early retirement of debt increased earnings per share in Q2 2021 by $0.14 per share.
Our leaders took difficult and effective actions over the past year and a half.
At the same time, they remained laser-focused on the health of their teams, servicing our clients, winning new business, and managing their cost structures.
Our ability to navigate in this environment and come out the other side with such strong results is a testament to their commitment as well as the dedication and tireless effort of our people around the world.
Turning now to our performance by geography.
Every region had double-digit growth in the quarter.
The U.S. was up just shy of 20% in the quarter.
All U.S. disciplines had double-digit growth except for healthcare, which was up in the low-single digits.
It was the one discipline that grew in Q2 of 2020.
Other North America was up 37.1%, the U.K. was up 23.8% with all disciplines in double-digits.
Overall growth in the Euro and non-Euro region was 34.5%.
In Asia Pacific, we had 27.9% increase with all major countries experiencing double-digit growth.
Our events business in China had another quarter of strong performance.
Latin America was up 20.8% and the Middle East and Africa increased 42.8%.
By discipline, all areas were up year-over-year as follows: Advertising and media 29.8%; CRM Precision Marketing, 25%; CRM Commerce and Brand Consultancy 15.2%; CRM Experiential 53%; CRM Execution and Support 22.7%; PR 15.1% and Healthcare 4.5%.
Looking forward, we expect to continue to see positive organic growth as client spend increases albeit at a slower pace than we experienced in Q2.
Our management teams are continuing to align costs with our revenues as markets reopen around the world.
Many of our companies are hiring staff to service an increasing client spend and the new business wins and we are seeing some pressure on our staff costs, particularly in the U.S. as the labor markets remain tight.
We are also beginning to see a return of travel and certain other addressable spend as government restrictions have eased.
Based on our use of technology during the pandemic, we are developing practices, particularly with respect to travel that should allow us to continue to retain some of the benefits we achieved in addressable spend.
We expect that the increase in addressable spend in the second half of the year will be mitigated in part by the benefits we will achieve from a hybrid and agile workforce.
Turning to our cash flow, we again performed very strongly.
For the first half of the year, we generated approximately $800 million in free cash flow.
As we indicated last quarter, in addition to our dividend increase, in May, our Board approved the reinstatement of our share repurchase program.
In the second quarter, we repurchased $102 million in shares.
We took further actions to reduce our debt during the quarter.
In late April, we issued $800 million of senior notes due in 2031.
The proceeds from this issuance together with cash on hand were used to repay $1.25 billion of senior notes due in 2022.
As a result of these actions, our balance sheet and credit ratings remain very strong.
While we are very optimistic about our future prospects, we remain vigilant and are maintaining flexibility in our planning as conditions can quickly change.
As we recently experienced in markets like Brazil, India, and Japan, the pandemic remains a significant health risk.
Overall, we are extremely pleased with our performance this quarter and proud of how we've navigated through the pandemic.
Our results reflect Omnicom's ability to adapt and respond to changes in the market and deliver through down economic cycles.
Let me now turn to the progress on our strategic and operational initiatives.
As I mentioned in early June, we completed the sale of ICON International, our specialty media business.
The divestiture was part of our continuing realignment of portfolio of businesses and is consistent with our plan to dispose of companies that are no longer aligned with our long-term strategies and investment priorities.
With the closing of this transaction, we are substantially complete with disposals.
We expect our primary focus moving forward will be on pursuing accretive acquisitions in the areas of precision marketing, market [Phonetic] and digital transformation, commerce, media and healthcare.
We have ramped up our M&A efforts in these areas and are pleased with the opportunities we are seeing.
We remain disciplined with respect to our strategic approach and valuation parameters.
Operationally, Omnicom continues to successfully deliver to our clients a comprehensive suite of marketing and communication services supported by technology and analytic capabilities around the world.
The leaders of our practice area agencies and global clients have used this formula to strengthen our relationships and grow with existing clients as well as pursue new business.
Importantly, our organization allows our leadership teams to quickly mobilize our assets to deliver strategic solutions for our clients from across the group.
Whether their need is for integrated services across regions or more bespoke individualized solutions in specific countries, we can simplify and organize our services in a manner that meets our clients' needs.
For example, we have a long history of providing integrated services to some of the world's largest brands such as Apple, AT&T, Nissan, and State Farm and we continue to be successful in winning new business.
A good example of this is our win with Philips who named Omnicom as their global integrated service partner for creative, media and communications.
Over months long and highly competitive pitch, we were able to demonstrate the strength of our agencies and the delivery model that connects creativity, culture, and technology to position Philips as a leader in the changing health industry.
Another example of our integrated creative, media and communications offerings is our recent win of the baby wipes brand WaterWipes.
We also serve clients and consistently win new business across dedicated service areas and geographies.
For example, some of the wins this quarter in addition to the ones mentioned above were BBDO being named global lead strategic and creative agency partner for the Facebook App; Discover naming team TBWA its brand creative agency of record; JetBlue hiring Adam & Eve as its new global creative partner; Red Bull awarding PHD in its media business in North America; BBDO being awarded Audi creative duties and social media communications in Singapore; and PHD winning Audi media business in China; and Virgin Atlantic selecting Lucky Generals as its lead creative agency.
Our comprehensive suite of services and our ability to simplify how we bring them to our clients will continue to drive our success.
In the second half, we expect to see an increase in new business activity across industry sectors including CPG, luxury, healthcare, retail and automotive.
I'm confident that our exceptional talent, range of services, and our ability to organize our ability to organize our offerings to meet the needs of potential clients will allow us to capture more than our fair share of new business.
Our constant innovation and service delivery has also resulted in highly regarded industry awards.
At Cannes Lions Live 2021, our agencies were recognized for their excellence in both the creative and media disciplines.
Omnicom's global creative networks BBDO, DDB, and TBWA placed in the Top 10 of the network over the festival competition taking the highly coveted title, AMV BBDO was named Agency of the Festival.
Omnicom media agencies, PHD and OMD earned first and second place respectively in the Media Network of the Festivals competition and overall, more than 160 Omnicom agencies from 45 countries won more than 180 Lions.
This impressive showing at Cannes Lions is just one example of how our agencies excel.
They received a number of other industry awards, which include FleishmanHillard being named Campaign Global PR Agency of the Year and TBWA APAC winning Digital Network of the Year.
Goodby Silverstein & Partners making Ad Age's A-List and TBWA being named as an Agency Standout.
DDB Worldwide winning 2021 Network of the Year at the 100th anniversary of the ADC Awards hosted by The One Club and DDB Germany being named Agency of the Year.
These awards are a direct reflection of our relentless pursuit of creative excellence.
Our best-in-class talent is what defines Omnicom and makes us an award-winning company.
With this in mind, we are constantly looking to invest in our people and create opportunities across the enterprise including at the C-Suite level and throughout our senior leadership.
A recent addition to our practice area leadership is Chris Foster, who was appointed CEO of Omnicom's Public Relations Group.
Chris will oversee our entire PR portfolio focusing on talent, innovation, and cross-agency collaboration to drive growth.
I'm confident that his track record of leading global growth initiatives, counseling executive level clients, and driving business development will lead to continued success of OPRG.
John Doolittle has been elevated as new Chairman of OPRG.
Another key leadership position we recently created is focused on our environmental sustainability initiatives.
Last week, we appointed Karen van Bergen as Chief Environmental Sustainability Officer.
Karen will be responsible for overseeing our climate change initiatives and processes which includes setting measurable goals, policies, and partnerships that will reduce our carbon footprint.
This new position will be in addition to Karen's current role as EVP and Dean of Omnicom University.
Environmental sustainability is an area where we are doubling down on our efforts.
We established goals five years ago to lessen the impact of our operations on the environment and we are now looking to drive even more progress.
We are currently establishing new goals and commitments to reduce the carbon emissions produced by our operations and increase the amount of electricity we derive from renewable sources.
In addition to these internal goals, Omnicom has joined numerous industry initiatives that will serve as catalysts for change.
For example, several of our U.K. agencies have joined Ad Net Zero, the industry's initiative to achieve real net zero carbon emissions from the development, production, and media placement of advertising by the end of 2030 and we are a founding member of Change the Brief Alliance, which calls for the agencies and marketers to harness the power of their advertising to promote sustainable consumer choices and behaviors.
Karen is just the right leader for driving our initiatives in this critical area given her long tenure with Omnicom and excellent previous experience working on environmental initiatives at multinational corporations.
I have no doubt we will continue to raise the bar on our global operations in our work with organizations and clients to reduce our impact on the environment.
Another critical area we have intensified our efforts over the past 12 months is DE&I.
We have doubled the number of DE&I leaders throughout Omnicom over this time and we have established specific KPIs to measure our progress.
The KPIs are focused on hiring, advancement, promotion, retention, training, and employee resource groups.
This is a key step to ensuring DE&I is embedded across the leadership agenda with a full commitment and accountability of our network and practice area CEOs.
For Omnicom, DE&I starts at the top with our Board of Directors.
Currently, our Board is the most diverse in the S&P 500 with six women and four African American members including our Lead Independent Director.
We're also pleased that three of our 12 network and practice area CEOs are people of color or female.
While it is still too early to measure our progress, I'm pleased to report that a preliminary review of our employee diversity in the United States shows a meaningful increase in the number of diverse employees as of June 30th, 2021 compared to the end of 2020.
I look forward to a lot more progress being made in the months ahead.
Continuing to focus on our people, we are pleased many of them have returned to the office as government restrictions are reduced or eliminated.
We are encouraging our people to begin to make plans to return to offices as conditions improve in their local markets.
Overall, we believe a return to an office-centric culture will enable us to invent, collaborate, and learn together most effectively.
In turn, it will allow us to best serve our clients.
The return to office will be grounded in safety and flexibility and local leaders will determine what combination of office and remote work is most effective for their teams.
I personally look forward to reengaging in-person with our people and our clients over the coming weeks and months.
As John discussed in his remarks, while the impact of the pandemic continues to be felt across the globe, that impact has moderated significantly as evidenced by our return to growth in Q2.
We expect our return to growth will continue in the second half.
However, as long as COVID-19 remains a public health threat, some uncertainty regarding economic conditions will continue, which could impact our clients' spending plans and the performance of our businesses may vary by geography and discipline.
Organic growth for the quarter was 24.4% or $682 million, which represents a significant increase compared to Q2 of 2020 which reflected the onset of the pandemic when revenue declined by 23% or $855 million.
In addition, in early June, we completed the disposition of ICON, our specialty media business, which resulted in a pre-tax gain of $50.5 million.
The sale of ICON was consistent with our strategic plan and investment priorities and the disposition is not expected to have a material impact on our ongoing operating income for 2021.
Flipping to Slide 4 for a summary of our revenue performance for the second quarter.
In addition to our organic revenue growth of 24.4% for the quarter, the impact of foreign exchange rates increased our revenue by 5.4% in the quarter, higher than we anticipated entering the quarter as the dollar continued to weaken against most of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 2.2% primarily related to the sale of ICON.
As a result, our reported revenue in the second quarter increased 27.5% to $3.57 billion from the $2.8 billion we reported for Q2 of 2020.
I'll return to discuss the details of the changes in revenue in a few minute.
Turning back to Slide 1, our reported operating profit for the quarter increased to $568 million including the $50.5 million gain on the sale of ICON.
As you remember, our Q2 2020 results included a $278 million COVID-19 repositioning charge, which included severance actions, real estate lease impairments and terminations and related fixed asset charges as well as a loss on the disposition of several small non-core underperforming agencies.
Our operating margin for the quarter was 15.9%, up significantly from Q2 2020 even after excluding the gain on the sale of ICON in the current period and adding back the repositioning charge recorded in Q2 of 2020.
We also continued to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories including a reduction in travel and related costs as well as reductions in certain costs of operating our offices given the continued remote work environment as well as benefits from some of the repositioning actions taken back in the second quarter of 2020.
Our reported EBITDA for the quarter was $590 million and EBITDA margin was 16.5%.
Excluding the $50.5 million gain on the ICON disposition, EBITDA margin for Q2 2021 was 15.1%.
EBITDA margin in Q2 of 2020 after adding back the $278 million repositioning charge, was 12.9%.
We've also included a supplemental slide on Page 15 that shows the 2021 amounts presented in constant dollars to exclude the effects of the year-on-year FX changes.
As we've discussed previously, we have and will continue to actively manage our costs to ensure they are aligned with our current revenues.
We also 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 $300 million versus Q2 of 2020 or $220 million on a constant dollar basis driven by the increase in our overall business activity.
We would also note that the Q2 2020 salary and service cost amounts were reduced by reimbursements received from government programs of $49.2 million.
Third-party service costs increased by $275 million or $242 million on a constant dollar basis.
These costs include expenses incurred with third-party vendors when we act as a principal when performing services for our clients.
Occupancy and other costs, which are not directly linked to changes in revenue, increased by $4 million.
Excluding the impact of FX, these costs declined by $10 million in the quarter as we continued our efforts to reduce infrastructure costs and we benefited from a decrease in general office expenses as the majority of our staff continue to work remotely in Q2.
SG&A expenses increased by $21 million or $18 million on a constant dollar basis, again related to the return to more normal activities in the quarter.
And finally, depreciation and amortization declined by $3.6 million.
Net interest expense in the second quarter of 2021 increased $26.3 million period-over-period to $73.5 million.
Because of our solid working capital and cash flow performance during the pandemic period, in Q2 we determined we no longer needed the liquidity insurance we added in early April 2020 when we issued $600 million in debt and added a $400 million 364-day revolving credit facility.
In April 2021, the credit facility expired unused.
In May, we issued $800 million of 2.6% senior notes due 2031.
In June, the proceeds from the issuance of the 2.6% notes plus cash on hand were used to redeem early all of our outstanding $1.25 billion 3.625% notes that were due in May of 2022.
Gross interest expense in the second quarter of 2021 increased $26.6 million resulting from the loss we recognized on the early redemption of all the outstanding $1.2 billion of 3.625% 2022 senior notes.
Additionally, the impact of this refinancing activity reduced our leverage ratio to 2.2 times at June 30th, 2021 and is expected to result in lower interest expense on our debt in the second half of approximately $6 million as compared to the prior year.
Interest income in the second quarter of 2021 was relatively flat.
Our effective tax rate for the second quarter was 24.9%, down a bit from the effective tax rate we estimated for 2021 of between 26.5% to 27% primarily due to nominal taxes recorded on the book gain on sale.
Earnings from our affiliates was marginally negative for the quarter while the allocation of earnings to minority shareholders of certain of our agencies increased to $23.4 million.
As a result, we reported net income for the second quarter was $348.2 million.
While we restarted our share repurchase program during the second quarter, our diluted share count for the quarter increased slightly versus Q2 of last year to 217.1 million shares resulting from the year-over-year increase in our share price and the increase in common stock equivalents included in our diluted share count.
As a result, our diluted earnings per share for the second quarter was $1.60 versus the loss of $0.11 per share we reported in Q2 of 2020.
The gain on the sale of ICON and the loss on the early redemption of the 2022 senior notes resulted in a net increase of $31 million to net income or $0.14 to EPS.
As we previously discussed, the prior year period included the net impact of the repositioning charges which reduced last year's second quarter net income and earnings per share by $223.1 million and a $1.03 respectively.
On Slide 2 for your reference, we provide the summary P&L, EPS, and other information for the year-to-date period.
Now returning to the details of the changes in our revenue performance on Slide 4, our reported revenue for the second quarter was $3.57 billion, up $771 million or 27.5% from Q2 of 2020.
Turning to the FX impact, on a year-over-year basis, the impact of foreign exchange rates increased our reported U.S. dollar revenue by 5.4% or $150.8 million, which was above the 3.5% to 4% increase that we estimated entering the quarter.
The strengthening of foreign currencies against the dollar was widespread.
It included most of our largest major foreign currencies.
In the quarter, the largest FX increases were driven by the strengthening of the euro, the British pound, the Chinese yuan, and the Australian dollar.
In the quarter, the U.S. dollar only strengthened against the Japanese yen and the Russian ruble.
In light of the weakening of the U.S. dollar compared to 2020, assuming FX rates continue where they currently stand, our estimate is that FX could increase our reported revenues by approximately 1.5% for the third quarter and 1% for the fourth quarter resulting in a full year projected increase of approximately 2.5%.
The impacts of our acquisition and disposition activities over the past 12 months primarily reflecting the ICON disposition as well as the recent acquisitions of Archbow and Areteans, during the second quarter of 2021 resulted in a net decrease in revenue of $62 million in the quarter or 2.2%.
Based on transactions that have been completed through June 30th of 2021, our estimate is the net impact of our acquisition and disposition activity for the balance of the year will decrease revenue by between 6% to 7% for the third and fourth quarters resulting in a full year reduction of approximately 4%.
While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning, as John has said with regard to dispositions, we are substantially complete.
Our organic growth of $682 million or 24.4% in the second quarter reflects strong performance across all of our major geographic markets and across all of our service disciplines.
Turning to our mix of business by discipline on Page 5, for the second quarter, the split was 56% for advertising and 44% for marketing services.
As for the organic change by discipline, advertising was up nearly 30% primarily on the growth of our media businesses reflecting a strong recovery of activity within the media space.
Our global and national advertising agencies achieved strong growth this quarter although the pace of growth by agency remains somewhat mixed.
CRM Precision Marketing increased 25%.
Through the strength of their service offerings, the agencies within the discipline have delivered solid revenue performance throughout the pandemic and they continue to perform well.
CRM Commerce and Brand Consulting was up 15.2% but the performance within this discipline was mixed as our shopper marketing agencies cycled through the effects of recent client losses.
While organic revenue for CRM Experiential was up over 50%, it should be noted that events were virtually shut down as lockdowns took effect in March and April of 2020.
While government restrictions on events have been eased recently in certain markets, these businesses still face challenges regarding when they will return to pre-pandemic levels.
CRM Execution & Support was up 22.7% reflecting a recovery in client spend compared to Q2 of 2020 in our field marketing and merchandising and point-of-sale businesses while our non-for-profit businesses continue to lag.
PR was up 15.1% coming off pandemic lows in 2020.
And finally, our Healthcare discipline was up 4.5% organically.
Healthcare was the only one of our service disciplines that had positive organic growth in Q2 of 2020.
The performance of these agencies remained solid across the Group.
Now turning to the details of our regional mix of businesses on Page 6.
You can see the quarterly split was 51.5% in the U.S.; 3.3% for the rest of North America; 10.6% in the U.K.; 18.6% for the rest of Europe; 12.5% for Asia Pacific; 2% for Latin America; and 1% [Phonetic] for the Middle East and Africa.
In reviewing the details of our performance by region on Page 7, organic revenue in the second quarter in the U.S. was up nearly 20% or $316 million.
Our advertising discipline was positive for the quarter.
Our media agencies excelled in the quarter as did our CRM Precision Marketing agencies and our PR agencies and our Commerce and Brand Consulting category rebounded to growth in the quarter while our Healthcare agencies are flat versus last year when organic growth was 3.7% in the quarter.
Our other CRM domestic disciplines, Experiential and Execution & Support also performed well organically versus Q2 of 2020.
We expect it will take a bit longer for them to return to 2019 revenue levels as social distancing restrictions and pandemic concerns subside.
Outside the U.S., our other North American agencies are up 37% driven by the strength of our media and precision marketing agencies in Canada.
Our U.K. agencies were up 23.8% organically led by the performance of our CRM Precision Marketing, Advertising, and Healthcare agencies.
The rest of Europe was up 34.5% organically.
In the Eurozone, among our major markets, France, Germany, Italy and The Netherlands were up greater than 30% organically while Spain was up in the mid-single digits.
Outside the Eurozone, organic growth was up around 35% during the quarter.
Organic revenue performance in Asia Pacific for the quarter was up 27.9% with our performance from our agencies in Australia, Greater China, India, and New Zealand leading the way.
Latin America was up 20.8% organically in the quarter with our agencies in Mexico and Colombia growing more than 20% and Brazil was up almost 17%.
And lastly, the Middle East and Africa was up over 40% for the quarter.
On Slide 8, we present our revenue by industry information on a year-to-date basis.
We've seen an improvement in performance across most industries with the overall mix of revenue by industry remaining relatively stable.
The travel and entertainment sector was boosted in Q2 of 2021 by increased activity related spend by clients in the entertainment category, which mitigated continued reduced spend levels for many of our travel and lodging clients.
Turning to our cash flow performance.
On Slide 9, you can see that the first six months of the year, we generated nearly $800 million of free cash flow excluding changes in working capital, up over $70 million versus the first half of last year.
As for our primary uses of cash on Slide 10, dividends paid to our common shareholders were $292 million, up about $10 million when compared to last year due to the $0.05 per share increase in the quarterly payments effective with the dividend payment we made in April.
Dividends paid to our non-controlling interest shareholders totaled $39 million.
Capital expenditures in the first half of 2021 were $23 million.
Acquisitions, which include our recently completed transactions as well as earnout payments, totaled $36 million and stock repurchases were $95 million, net of the proceeds from our stock plans reflecting the resumption of our share repurchases during the second quarter of this year.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $311 million of free cash flow during the first half of the year.
Regarding our capital structure at the end of the quarter as detailed on Slide 11, our total debt is $5.31 billion, down about $410 million since this time last year and down just over $500 million compared to year-end 2020.
Both changes reflecting the early retirement in Q2 of 2021 of $1.25 billion of 3.65% senior notes which were due in 2022 partially replaced with the issuance of $800 million of 2.6% 10-year notes due in 2031.
In addition to the net reduction in debt of $450 million from the refinancing, the only other meaningful change was the net balance for the LTM period, was an increase of approximately $65 million resulting from the FX impact of converting our EUR1 billion denominated borrowings into U.S. dollars at the balance sheet date.
Our net debt position as of June 30th was $922 million, up about $710 million from last year-end, but down $1.5 billion when compared to where we stood 12 months ago.
The increase in net debt since year-end was a result of the typical uses of working capital that occur over the first half of the year totaling just under $1.1 billion which was partially offset by the $311 million we generated in free cash flow in the first half of the year.
Over the past 12 months, the improvement in net debt is primarily due to our positive free cash flow of $790 million, positive changes in operating capital of $525 million, and the impact of FX on our cash and debt balances which decreased our net debt position by $154 million.
As for our debt ratios, as a result of our overall operating improvement versus Q2 of 2020 and our recent refinancing activity, we've reduced our total debt to EBITDA ratio to 2.2 times and our net debt to EBITDA ratio to 0.4 times.
And finally, moving to our historical returns on Page 12, the last 12 months our return on invested capital ratio was 25.9% while our return on equity was 46.8%, both significantly better than our returns from 12 months ago. | q2 earnings per share $1.60.
worldwide revenue in q2 increased 27.5% to $3,571.6 million.
experienced an improvement in our business in q2 of 2021 as compared to q2 of 2020.
operating margin for q2 of 2021 increased to 15.9% versus 2.2% for q2 of 2020.
qtrly increase in revenue from organic growth of 24.4%. | 1 |
During today's call, Bob will provide an overview of the third quarter results and discuss the current state of our operations and markets.
Shashank will discuss the details of our third quarter performance, provide our initial outlook for the fourth quarter and offer a revised outlook for the full year 2021.
Following our remarks, we will address questions related to the information covered during the call.
These statements are subject to numerous risks and uncertainties that could cause the actual results to differ materially.
For information concerning these risks, see Watts' publicly available filings with the SEC.
I request that questions be limited to one, plus a follow-up, to ensure everyone has an opportunity to participate.
If you have additional questions, please rejoin the queue.
First, I must recognize the efforts of all our employees for their sustained commitment while dealing with continued supply chain and logistics challenges and the delta variant.
Our team has maintained a customer focus and have worked diligently to deliver on our promises to them.
The team produced another strong quarter despite supply chain and logistics challenges.
We delivered record third quarter sales, adjusted operating margin and adjusted earnings per share.
All regions' sales grew organically by double digits.
Our results benefited from the continued economic recovery as well as price and volume tailwinds.
Cash generation remains a focal point.
Year-to-date, we have increased our free cash flow by 26% as compared to last year.
Shashank will review the financial results in more detail momentarily.
In late September, we purchased Sentinel Hydrosolutions in an all-cash transaction.
Sentinel, a $6 million sales business, provides leak detection solutions mostly to the high-end residential market.
Sentinel's systems are designed to detect leaks in water pipes, plumbing fixtures and appliances, and will automatically shut off water when a leak is detected.
This acquisition further expands our developing focus in leak detection technology.
Like many companies, we're dealing with supply chain and logistics challenges.
We previously mentioned concerns involving components used in our electronics products.
Since then, supply chain and logistics issues have gotten more dynamic.
We are seeing disruptions across the board in all regions, impacting many of our core raw materials and components.
Lead times, on average, have more than doubled, and suppliers are dealing with labor constraints.
We're addressing these and other problems daily to maximize customer order fulfillment.
Our expectation is that supply chain and logistics disruptions will continue into 2022.
We are monitoring this issue closely.
Now let me talk about the markets.
In general, markets have continued to be positive.
GDP expectations in most regions portend a solid finish to 2021 for repair and replacement in both commercial and residential end markets.
In the Americas, single-family residential new construction remains strong, and we've seen some pickup in multifamily starts as well.
Repair and replacement business in both nonresidential and residential end markets remains strong.
We still see pent-up demand in older projects, while new project starts are still lagging.
Contractors are also dealing with materials and skilled labor shortages at job sites in addition to substantial inflation on project costs.
In Europe, German and Italian OEMs continue to benefit from government energy efficiency subsidies.
Repair and replacement was again strong in France.
We are beginning to hear customer feedback that there is more uncertainty heading into Q4 as projects are being delayed due to material and labor shortages, as well as an across-the-board inflationary impact on project costs.
The team is watching this trend closely.
In APMEA, underlying market demand has improved but is being impacted by the pandemic.
New Zealand and Australia have both had recent lockdowns affect their economies.
China market demand has been steady, but is being impacted by a potential correction in the housing market in COVID outbreaks that caused lockdowns, which impacts both suppliers and customers.
China is also experiencing power outages, which is further exasperating the supply chain.
Finally, given our performance in the third quarter and our expectations for Q4, we are raising our full year sales outlook.
Sales of $455 million were up 18% on a reported basis and up 17% organically, driven primarily by the global economic recovery.
Foreign exchange and acquisitions combined had a favorable year-over-year impact of $5 million.
Adjusted operating profit of $66 million increased 24% and adjusted operating margin of 14.4% increased 60 basis points as volume, price and productivity more than offset the impact of supply chain challenges, logistics inflation, incremental investments, incentives and business normalization costs.
Adjusted earnings per share increased by 32% for the reasons just cited in addition to lower interest expense and reduced foreign currency transaction losses.
The adjusted effective tax rate of 26.9% is 40 basis points lower year-over-year.
For GAAP purposes, we recorded a charge of $0.9 million related to the previously announced restructuring of our Mery facility in France.
We expect approximately $1 million more will be incurred in the fourth quarter.
We anticipate another $5 million to $6 million in restructuring costs in 2022 with respect to this plant closure upon completion.
As Bob noted, year-to-date free cash flow is up 26% to $120 million as compared to the same period last year.
This was driven by higher net income and lower capital spend.
We expect to maintain free cash flow conversion at 100% or more of net income for the full year.
Our balance sheet remains strong and provides ample flexibility.
The gross and net leverage ratios at the end of September were 0.6 times and negative 0.3 times, respectively.
Our net debt to capitalization ratio at quarter end was negative 8%.
During the quarter, we purchased approximately 25,000 shares of our common stock at an investment of $4 million primarily to offset dilution.
Turning to slide five, and our regional results.
Organic sales in all regions increased by double digits during the quarter, primarily from the continued strong economic recovery.
Reported regional sales also benefited from favorable foreign exchange movements.
In addition, the Americas had approximately $1 million in acquired sales.
Americas' organic sales increased 17% during the quarter, with broad growth across all of our major product categories driven by strong repair and replacement and single-family residential markets and price.
We had minimal benefit in the quarter from the U.S. South Central freeze.
Americas' adjusted operating margin declined by 30 basis points during the quarter as gross margin expansion from price, volume and productivity was more than offset by inflation, incremental investments, incentives and business normalization costs.
Europe sales increased over 14% organically, delivering another solid quarter with expansion in both the Fluid Solutions and Drains platforms.
Sales were up in all key regions, driven by the wholesale activity in France and Italy, continued strong OEM demand in Germany and Italy, driven by local government energy subsidies, and an uptick in Scandinavian sales due to a gradual recovery of the commercial and marine market.
Europe's adjusted operating margin expanded by 420 basis points, benefiting from volume, price and productivity, which more than offset inflation, incremental investments and business normalization costs.
APMEA continued its strong performance with sales up 33% organically.
The region saw double-digit growth in most locations, except for New Zealand, where sales were down due to COVID-related shutdowns.
Adjusted operating margin expanded by 400 basis points in APMEA in the quarter as trade and intercompany volume and productivity more than offset inflation and business normalization costs.
Moving to slide six, and general assumptions about our fourth quarter and full year 2021 outlook.
Our expectation for the fourth quarter is sales should expand by 10% to 14% over the fourth quarter of 2020.
We anticipate that fourth quarter adjusted operating margin should range from 13.4% to 13.8%.
Margins may be challenged due to the impact of inflation, especially from supply chain and logistics costs, as well as continued growth in business normalization costs and incremental investments.
Corporate costs should approximate $11 million to $12 million for the fourth quarter.
We expect interest expense sequentially will be flat to the third quarter.
The adjusted effective tax rate should approximate 26%.
Foreign exchange would be a headwind to last year should current rates persist throughout the fourth quarter.
As a reference, the average euro-dollar foreign exchange rate for the fourth quarter of 2020 was 1.19.
Please recall that for every $0.01 movement up or down in the euro-dollar exchange rate, our European annual sales are impacted by approximately $4 million, and our annual earnings per share is impacted by $0.01.
We expect seasonally strong cash flow to end the year.
For the full year 2021, we anticipate organic growth to be 14% to 17% or about 350 basis points higher at the midpoint than our previous outlook in August.
Full year adjusted operating margin, adjusted margin expansion and free cash flow expectations are anticipated to be in line with our previous outlook in August.
Other full year inputs are noted on the right with some minor changes since August.
To summarize, I'd like to leave you with a few key points.
Third quarter results were better than we anticipated and was aided by continued global demand and a strong repair and replacement market.
We continue to drive price and proactively manage the many supply chain issues to support our customers.
We continue to invest for the long term, including smart and connected solutions.
We have raised our full year 2021 revenue outlook.
Adjusted margin expansion remains in line with previous expectations.
Finally, given our strong results today and our already healthy balance sheet, we are well positioned to drive our strategy, including expanding our smart and connected offerings and executing on strategic M&A opportunities as they arise. | q1 sales rose 8 percent to $413 million.
q1 adjusted earnings per share $1.24. | 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. | sees fy ffo per share $1.91 to $1.93.
q3 ffo per share $0.57.
qtrly earnings per share $0.17. | 1 |
We will also refer to certain non-GAAP measures.
We believe that these measures provide useful supplemental data that, while not a substitute for GAAP measures, allow for greater transparency in the review of our financial and operational performance.
At this point, it is my pleasure to turn things over to Philippe Krakowsky.
I hope everyone is keeping well.
As usual, I'll start with a high level view of our performance in the quarter.
Ellen will then provide additional details.
I'll conclude with updates on key developments at our agencies, and then we'll follow that with Q&A.
They are the principal reason we can report such strong results again this quarter.
Our people are delivering insight and execution required for the complex integration of creativity, technology and data at scale as marketers across industry sectors need in order to accelerate their business transformation journeys.
This kind of work is helping set a standard for our industry and further build on IPG's record of industry outperformance and margin expansion.
As we've moved through September and now into October, it's also been rewarding to begin welcoming our people back to office settings and to see many of our teams together again in the places where creativity, collaboration and culture are ultimately rooted and regularly renewed.
Turning to our results in the quarter, our net organic revenue growth in the third quarter was 15%.
That's against the third quarter of 2020 when, as you will all recall, our organic change was negative 3.7% due to the impact of the pandemic.
It's also important to note that our 2-year organic increase was 10.7% relative to the third quarter of 2019, which is a strong result.
Compared to 2020, our growth in the quarter was again broad based by region of the world, discipline as well as client sector.
Organic growth was 14.7% in the U.S. and it ranged between 11% and 20% in international regions.
Both of our operating segments also grew at double-digit rates.
Our IAN segment increased 14.4% organically with all major agencies contributing high single to double-digit percentage increases.
We were led by media, data and technology, R/GA and Huge as well as by MullenLowe, McCann and FCB highlighted by notable contributions from their Healthcare and Advertising disciplines.
At our DXTRA segment, organic growth was 18.6% reflecting double-digit increases across each of our DXTRA agencies and furthering the rebound from the sharp impact of the pandemic last year on our sports and entertainment as well as experiential businesses.
Looking at client sectors, the picture is also one of balanced growth with nearly every one of our major client sectors increasing at a double-digit percentage rate, led by the auto sector and other sector with government and industrials and the tech and telecom retail and healthcare sectors.
Turning to profitability and expenses.
Our results again demonstrate outstanding focus and execution by our operating teams even as we continue to invest to support areas of accelerating growth and to enhance our offerings.
Third quarter net income was $239.9 million as reported.
Our adjusted EBITDA was $369.5 million and our margin of adjusted EBITDA before restructuring was 16.3%, compared with 16.2% a year ago and 14.7% in the third quarter of 2019.
There were several factors worth noting within those comparisons.
We have a solid operating leverage on our expenses for base payroll as we continue to see the structural benefits of the strategic cost actions taken last year.
Those are reflected in our base payroll as well as our occupancy expense.
To-date, our very strong top-line growth is also outpacing the associated hiring and therefore our expense for temporary labor increased from a year ago.
Our travel and related expenses continue to track at low levels but still were somewhat higher than last year.
As we look ahead, T&E expense will pick up over the remainder of the year.
Our expense accrual for employee performance based incentive compensation however increased as a percentage of net revenue which is a direct result of our strong operating performance.
Third quarter diluted earnings per share was $0.60 as reported and was $0.63 as adjusted for the after-tax expense for the amortization of acquired intangibles and other items.
In sum, our quarter as well as our year-to-date speak to strong financial performance across the key metrics of growth, EBITA and earnings per share.
Our growth reflects the cyclical economic recovery as well as the important structural current that favor the kinds of higher order expertise with which we're well resourced.
The work we're doing solves for the increasingly complex world faced by our clients in marketing and media environment that's defined by a very rapid rate of change.
This is a validation of our long-term strategic focus on building offerings that help clients integrate brand experience across all consumer touchpoints, improve their capacity to apply data in the way their business goes to market and capitalize on the benefits of technology and digital channels.
Going back a number of years, we've anticipated transformational opportunities of this type of environment.
Other important drivers of our continued success, our ability to deliver fully integrated solutions through our open architecture model and our emphasis on strong agency brands and best industry talent so as to deliver breakthrough creative ideas and content.
We've also fostered a culture that respects the individual, is transparent with respect to clients and is accountable when it comes to data privacy and media responsibility.
Turning to our outlook, with our seasonally important fourth quarter still ahead, we're pleased to increase our financial performance objectives.
We now expect that we can deliver organic growth for the year of approximately 11% which is ahead of the 9% to 10% range we had previously indicated.
With growth at that higher level and given our strong results through the 9-months, we would therefore expect to achieve adjusted EBITA margin of approximately 16.8% which is an increase of 80 basis points over the level that we had previously shared with you.
Our outlook is based on expectations of a reasonably steady course of public health and global economic recovery.
We begin the fourth quarter well positioned and the strong operating momentum and the tone of the business remains solid, as we had into the year and into holiday season.
As such, we see 2021 as another year of strong value creation for all of our stakeholders.
And on that note, I'll now hand over the call to Ellen for a more in-depth view of our results.
I hope that everyone is safe and healthy.
Adjusted EBITDA before a small restructuring adjustment was $369.5 million and margin was 16.3%.
Diluted earnings per share was $0.60 as reported and $0.63 as adjusted for the after-tax impact of the amortization of acquired intangibles, a small restructuring adjustment and the net gain from the disposition of non-strategic businesses.
On October 1st, following the conclusion of the third quarter, we repaid our $500 million 3.75% senior notes from cash-on-hand further deleveraging our balance sheet.
Turning to Slide 3, you'll see our P&L for the quarter.
I'll cover revenue and operating expenses in detail in the slides that follow.
Turning to the third quarter revenue on Slide 4.
Our net revenue in the quarter was $2.26 billion, an increase of $307.1 million from a year ago.
Compared to Q3 2020, the impact of the change of exchange rates was positive 1.1% with the U.S. dollar weaker than a year ago in all world regions, with the exception of LatAm.
Net divestitures were negative 40 basis points.
Our net organic revenue increase was 15% which brings us to 12% organic growth for the nine months.
At the bottom of this slide, we break out segment revenue in the quarter.
Our IAN segment grew 14.4% organically.
We had notably strong growth across our offerings in media, data and tech, R/GA, Huge, McCann Worldgroup, FCB driven by health and the MullenLowe Group.
At IPG DXTRA, organic growth was 18.6%, which reflects double-digit growth across public relations, experiential, sports and entertainment and branding disciplines.
Moving on to Slide 5, which is a look at our organic revenue change by region.
In the U.S., which was 65% of our net revenue in the quarter, organic growth was 14.7%.
The organic revenue decreased a year ago was 2.4%.
Year-on-year performance was notably strong across both our IAN and DXTRA segments and at almost all of our agencies, led by media, data and tech, FCB, MullenLowe, McCann, Weber and Jack Morton.
International markets were 35% of our net revenue in the quarter and increased 15.4% organically.
You'll recall that the same markets decreased 6% a year ago.
The U.K. increased 13.3% organically, led by our offerings in media, data and tech, DXTRA, McCann and R/GA.
Continental Europe grew 11.8%.
Among our largest national markets, we had notably strong growth in Germany, Spain, Italy and France.
There were a number of operating highlights in the region led by media, data and tech, DXTRA, and R/GA.
Asia-Pac increased 17.4% organically, led by growth across most national markets notably, Australia, Singapore, India, the Philippines, China and Japan.
Our organic growth in LatAm was 20.3% with exceptional results in Brazil, Argentina, Colombia and Chile.
Our Other Markets group, which consists of Canada, the Middle East and Africa grew 17.1% organically, led by notably strong performance in Canada.
Moving on to Slide 6 and operating expenses in the quarter.
Our fully adjusted EBITDA margin was 16.3% compared with 16.2% a year ago and 14.7% in the third quarter of 2019.
We continue to see efficiencies in a number of different expense categories as we had in this year's first half and these were both structural and variable.
In the structural category, we are seeing the benefit of the strategic restructuring actions, which we initiated in the second quarter last year and continue to execute over the back half of 2020.
As we've called up previously, we also had a sharp decrease in certain variable operating expenses from pre-COVID levels.
I would call out specifically travel and related expenses, which while increased from the third quarter of a year ago were still well below their level in 2019.
As you can see on this slide, our ratio of total salaries and related expense as a percentage of net revenue was 66.8% compared with 65% in last year's third quarter.
The increase was due to higher expenses in two categories.
Our approval for performance-based incentive compensation was 5.8% of net revenue and our expense for temporary labor, which was 5% of net revenue in the quarter.
We had strong leverage on our expense for base payroll, benefits and tax, which was 53.9% of third quarter net revenue, which reflects the benefit of our restructuring actions and the fact of the pace of hiring lagged our strong revenue growth, which has been the case in past economic expansions.
At quarter-end, total worldwide head count was approximately 54,600, an 8% increase from a year ago.
We have added net 4500 people year-to-date to support our growth.
Also, on this slide, our office and other direct expense decreased as a percent of net revenue by 250 basis points to 13.3%.
That reflects lower occupancy expense mainly due to the restructuring of our real estate.
The ratio was 5% of net revenue.
We also reduced all other office and other direct expense by 120 basis points compared to last year, which reflects lower expense for bad debt and leverage as a result of our growth.
Our SG&A expense was 1.4% of net revenue with the increase from a year ago due to higher unallocated performance-based incentive expense and increased employee insurance, which was at a very low level last year.
On Slide 7, we present detail on adjustments to our reported third quarter results in order to provide greater clarity and a picture of comparable performance.
This begins on the left hand side of the page with our reported results and steps through to adjusted EBITDA and our adjusted diluted EPS.
Our expense for the amortization of acquired intangibles in the second column was $21.5 million.
The restructuring refinement in the quarter was a benefit of $3.5 million dollars.
To be clear, this is an adjustment to estimates of the 2020 restructuring program.
Below operating expenses in column 4, we had a gain due to the disposition of certain non-strategic businesses, which was $1.7 million in the quarter.
At the front portion of the slide, you can see the after-tax impact per diluted share of these adjustments, was $0.03 per share, which bridges our diluted earnings per share as reported at $0.60 to adjusted earnings of $0.63 per diluted share.
On Slide 8, we turn to cash flow in the quarter.
Cash from operations was $390.2 million compared to $689.3 million a year ago.
We generated $79.6 million from working capital compared to $376.8 million last year, which was unusually strong seasonal result.
Investing activities is $72 million in the quarter, mainly for capex $61.3 million.
Financing activities used $153.3 million mainly for our dividend.
Our net increase in cash for the quarter was a $152.5 million.
Slide 9 is the current portion of our balance sheet.
We ended the quarter with $2.5 billion of cash and equivalents.
Under current liabilities, the current portion of long-term debt refers to our $500 million, 3.75% senior notes, which have matured since the balance sheet date and we repaid with cash on hand.
Slide 10 depicts the maturities of our outstanding debt.
Again, this includes the October 1st maturity.
Our next maturity is $250 million to April 2024 and following that, there is nothing until 2028.
In summary, on Slide 11.
Our teams continue to execute at a high level in an unprecedented environment.
I would like to reiterate our pride in and gratitude for the efforts of our people.
The strength of our balance sheet and liquidity means that we remain well positioned, both financially and commercially.
The combination of our exceptionally talented people and a balanced portfolio of offerings and capabilities continues to set the standard for growth in our industry.
The strategic steps we've taken over the long-term have positioned IPG as a high value business partner to our clients.
We're able to combine the power of creativity and narrative storytelling with the benefits of data and technology in order to deliver growth for marketers across a broad range of sectors.
These strategic steps are evident in our strong results and position us well going forward.
By helping clients to better understand audiences and to engage with them with greater precision and accountability, we can help company succeed the digital economy.
Today, marketers are responsible for increasing business innovation, building new content platforms and e-commerce platforms as well as adopting emerging tech and leveraging data all while complying with an evolving data privacy landscape.
Our clients are also at the forefront for addressing societal issues and corporate purpose on behalf of their companies and brands.
As a partner, we're helping them solve all of these challenges.
With our ability to deliver complex integrations focused on business results and outcomes, our ability to help marketers proactively address these issues is further assisted by our intentional focus on ESG priorities as core business imperatives.
That's why we've been focused in working on ESG for many years at IPG.
We continue to build on a strong industry record in DEI initiatives which are integral to nurturing the highest quality and most representative perspectives, insights and creative voices across our company.
More recently, we've launched our first formal human rights policy and our work with clients around social issues includes campaigns focused on LGBTQ+ rights, mental health awareness, ways in which we can remove implicit bias from core datasets and also use data to increase the health of our planet as well as sustainable consumption models.
With respect to climate, we're now measuring our total greenhouse gas emissions around the world.
We're committed to setting a Science-based target and to reaching net zero carbon across our business by 2040.
We've also agreed to source a 100% renewable electricity by 2030 for our entire portfolio.
Now turning to the highlights of performance from across that portfolio during the quarter, a key sector that continue to show strength for us is healthcare.
As you know, IPG has significant operations in healthcare marketing totaling approximately a quarter of our total revenue.
This includes specialized global healthcare networks as well as significant healthcare activity and client relationships at our media and public relations operations and within some of our U.S. independents.
As health and wellness continue to be a top concern for people companies and governments around the world, we've seen an increased need for sound healthcare information to be delivered at speed in ways that are highly personal, culturally relevant as well as respectful of privacy regulations.
Within the healthcare sector as well as across other client sectors, our ability to deliver open architecture solutions will continue to drive success for our company.
We have deep experience providing customized, integrated client service models to many of our largest client partners and we continue to perform well and winning new business on this sort of work especially in pitches that leverage the IPG data stack as a key part of the strategy.
This past quarter for example, Morgan Stanley and E*Trade named Mediahub as media agency of record following a highly competitive review.
Data strategy was a key component of the brief.
For this reason our customer intelligence company, Acxiom was placed front and center in our winning proposal.
The Mediahub team is leading media strategy, planning and activation in the U.S. leveraging Acxiom's consumer data and expertise to fuel tightly targeted and effective communication solutions.
In media brands, we continue to see a high degree of engagement with many of the world's most sophisticated marketers across our two largest brands, UM and Initiative.
During the quarter, Initiative U.S. won Adweek's prestigious Media Agency Of the Year honor for 2021.
Last year at this time within media brands, we launched Reprise commerce, the global specialty e-commerce offering and since then, e-commerce revenue within that unit has increased significantly as we've held clients build out holistic approaches to e-commerce including e-retail, supply chain and warehousing, marketplaces and direct-to-consumer programs.
There's never been a more important time to connect the e-commerce opportunity with the full power of clients media and marketing investments.
In addition, we can create and deploy consistent cross channel experiences that dynamically adapt to consumer needs and goals in real-time.
With the expertise as a key part of the news last week that the owner of Werther's Original candy business, Storck USA had selected UM as it's media agency of record.
UM takes on all strategy, planning, buying and analytics duties, including the implementation of Storck's Shopper commerce activity.
Our data and technology offerings continue to be key drivers of performance for us as well, featuring an all major open architecture and new business activity of significant scale.
This month marks the third anniversary of Acxiom becoming part of IPG.
During the third quarter, Acxiom continued to post strong performance and to win in the marketplace bringing in major new clients from the media, retail and financial services sector.
Most recently, a top-10 financial services company engaged Acxiom to build their unified enterprise data layer which again shows the strength and depth of Acxiom's technology expertise.
During Q3, Kinesso launched -- we are calling the Kinesso Intelligence Identity product also called as Kii and this is a new identity solution that works across the open web as well as the walled gardens and is already live with clients across a broad range of verticals.
Along with IPG Mediabrands, the Trade Desk is among the first media partners using Kii and the launch comes at a particularly important moment as brands and agencies work to create and bolster privacy first identity solutions that can assure addressability as third-party cookies and mobile ad ideas begin to be phased out.
Kii can match our brands first party CRM data and map it to key identifiers significantly increasing match rates and reducing the need for third-party onboarders.
When it comes to the strength of our brands in the creative advertising space, McCann, FCB and MullenLowe continued to distinguish themselves this quarter.
McCann Worldgroup was named Global Network of the Year at the 2021 Gerety awards which recognizes the best creative communications from the female perspective.
Also notable McCann Worldgroup named a new President and Global Chief Creative Officer who joins us from Nike where he served in senior brand marketing and creative leadership roles for more than 20 years, most recently leading Nike's men's brands globally.
During his tenure at Nike, he was responsible for many of the world's best known and most iconic campaigns across a range of marketing disciplines and channels.
At FCB, the agency at Chicago office was ranked as the top creative agency in North America in the Lion's Creativity Report.
In that same report, FCB was ranked among the top networks in the world and FCB was also named North American Agency of the Year at the 2021 New York Festival Awards.
MullenLowe was named the second most effective agency at the recent U.S. Effie Awards.
And MullenLowe Group was named the number 2 most effective network globally, in both cases punching well above its weight against larger competitors.
During the quarter, the agency won the TJ Maxx creative account and just this week Mediahub won 3 Adweek Media Plan of the Year's awards as well as seeing it's U.K. office when global media duties [Phonetic] for Farfetch which is a luxury fashion e-commerce brand.
R/GA launched what they're calling a direct to avatar capability and that's going to create virtual stories for brands within metaverse platforms and that really stakes out new territory in direct to consumer sales.
On the growth front, R/GA added projects for digital forward partners like Tonal, Slack, CBS and Roku.
Huge also launched a new commerce offering which we call the experienced stack of the future, and that's a tool that consolidates various elements of SaaS into an integrated growth solutions for brands.
I think we're also going to see the agency's newly appointed CEO to further his plans to infuse data into Huge's core offerings.
IPG's DXTRA growth in the quarter was broad based and it benefited from the return of live events.
Jack Morton won new client assignments with Amazon and Twitch and along with Octagon Sports and Entertainment was listed among event marketers ranking of the top 100 event agencies of 2021.
Audio social media app Clubhouse added Golin as its global agency, lead agency.
Weber was named the Supplier of the Year by GM and security software company McAfee also named Weber Shandwick its global agency of record to help redefine the firm as a consumer brand.
Lastly, Weber launched a media security center in partnership with Blackbird AI to address emerging information bridge and this is an offering that's built to offer solutions to what business leaders say is a really leading reputational issue, which is the spread of misinformation and disinformation.
During the quarter, we also saw continued positive momentum at our U.S. independent agencies.
The Martin Agency won Hasbro's Nerf brand of products.
Carmichael Lynch was named Strategy and Creative Lead for H&R Block where he will take on responsibility for strategy, creative and social media as well as public relations and Deutsch LA added energy drinks brand, A SHOC to its roster.
All in, we are in a positive position from a net new business standpoint for the year and our new business pipeline continues to be active.
As it's typical at this time, we don't have full visibility and project work as we head into the fourth quarter which will include the crucial holiday shopping season.
Now in line with the growth we're seeing across much of the portfolio, our companies are adding staff with the requisite contemporary skillsets as well as expertise.
So hiring is yet to fully keep pace with a very strong growth we've seen to date this year.
We began seeing travel restrictions lifted in certain key markets as infection rates decline and we fully continue to use technology and practices developed during the pandemic to reduce travel and other carbon intensive parts of our business where and as appropriate but we believe that some of what we can call standard cost of doing business will return in Q4 and in larger measure in 2022.
Earlier on the call, we shared with you our perspective on the full year and our updated expectation that we will deliver approximately 11% organic growth and adjusted EBITDA margin of approximately 16.8% for the full year 2021.
That view is predicated as we indicated on the assumption that will continue to be a reasonably steady course of macro recovery and we're very proud to have delivered a very strong 9-months thus far this year, on top of the most challenging comps in the industry.
Current performance, combined with the continued execution of our long-term strategy should continue to be significant drivers for sustained value creation for all of our stakeholders.
We're committed to sound financial fundamentals as well as continuing to grow our dividend as we've consistently done, including through the pandemic and returning to our share repurchase program also remains a priority.
As we turn our focus on planning for the upcoming year, we will of course, keep you updated on our progress on that front.
We're confident as well that the investments in talent and capabilities we continue to make, position IPG well for the future.
As Ellen said, this is an unprecedented time, but we have a highly relevant and differentiated set of offerings underpinned by a sound financial foundation and a strong balance sheet. | compname posts q3 adjusted earnings per share $0.63.
q3 adjusted earnings per share $0.63.
q3 net revenue was $2.26 billion, an increase of 15.7% from a year ago.
q3 diluted earnings per share was $0.60.
interpublic group of companies - upgrades expectation for fy 2021 organic growth of approx 11.0% and adjusted ebita margin of approximately 16.8%.
expect that we can deliver fy organic growth for the year of approximately 11%.
expect to achieve fy adjusted ebita margin of approximately 16.8%. | 1 |
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm pleased to share we've delivered another strong quarter and continue to be ahead of plan for the year.
I'll walk through the specifics in a moment, but I couldn't be more pleased with the strong execution demonstrated by the team, both operationally and financially.
We continue to deliver every day for our customers, coworkers and for you, our investors.
Earlier this month, we completed the sale of EnerBank, grossing over $1 billion in proceeds.
The sale of the bank simplifies and focuses our business model squarely on energy, primarily the regulated utility, an important step as we continue to lead the clean energy transformation.
The proceeds from this sale will fund key initiatives in our utility business related to safety, reliability, resiliency and our clean energy transformation.
As shared in previous calls, we have eliminated our equity needs from 2022 through 2024.
The keyword there, continued.
As we double down on the clean energy transformation, I'm also pleased to share that we received approval for our Voluntary Green Pricing program, which would add an additional 1,000 megawatts of owned renewable generation to our growing renewable portfolio.
This program is in high demand and currently oversubscribed.
And more importantly, it's what our customers are asking for, an important step in offering renewable energy solutions for our customers.
As we prepare for the grid of the future, we have a highly visible and detailed capital plans outlined in our recently filed electric distribution infrastructure investment plan.
This plan provides a 5-year view of the projects down to the circuit level where we plan to invest to ensure the reliability and resiliency of our electric infrastructure and aligns with our operational and financial plans.
As always, we balance these investments with customer affordability.
Our prices remain competitive as the average residential customer pays about $2 a day to heat their home and $4 a day to keep the lights on.
And because we know our most vulnerable customers still struggle, our team has mobilized resources at the state and federal levels to ensure their protection.
In fact, as we approach the winter heating season, our 90-day arrears are back to prepandemic levels with an 80% reduction in our uncollectible accounts.
Our commitment to identifying and eliminating waste means that we keep our prices affordable.
This commitment is evident in our results.
In the first nine months of this year, we surpassed our full year cost reduction target of more than $40 million.
The CE Way is in our DNA, and we continue to deliver savings in the near term and well into the future.
Speaking of the future, this year, we grew our EV program with PowerMIFleet.
This is part of our long-term planning in collaboration with Michigan businesses, governments and school systems looking to electrify their vehicle fleets.
Within just a few months of the program introduction, we were working with nearly 20 different customers on their fleets and have another 50 who have indicated interest in the next tranche, exceeding our expectations.
This is an important contribution to our long-term sales growth.
And finally, one of my favorites which speaks to our culture, our coworkers and our ability to attract the best talent.
Our commitment to diversity, equity and inclusion continues to be recognized nationwide and most recently by Forbes, where we were ranked the #1 utility in the U.S. for both America's best employers for women and #1 for diversity, delivering excellence every day continues to position the business for sustainable long-term growth.
Strong execution leads to strong results.
but two are linked.
One drives the other.
In early August, we experienced one of the worst storms in our company's history.
Our team established and into command structure to deploy resources and took decisive action to restore customers.
We had a record number of crews on our system.
The speed of our response led to the highest positive customer sentiment we have ever received during a major storm.
During the storm, we had more than 3,700 members of our team working around the clock to safely restore customers.
Like we do every year, through storms, pandemics, and on seasonal weather, we continue to deliver.
And when there's upside, we reinvest.
This is the CMS model of responding to changing conditions that allows us to deliver consistently year after year.
Year-to-date, we've delivered ahead of plan with adjusted earnings per share of $2.18 for continuing operations.
Our strong performance, coupled with the completion of the EnerBank transaction and the financial flexibility that provides -- gives us further confidence in our ability to meet our full year guidance, which we've raised to $2.63 to $2.65 from $2.61 to $2.65 for continuing operations.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
And our continued strong performance in 2021 builds momentum for 2022 and beyond.
Longer term, we are committed to growing our adjusted earnings per share toward the high end of our 6% to 8% growth range as we highlighted on our Q2 call.
As previously stated, we are committed to growing the dividend in 2022 and beyond.
That's what you expect, why you own us, and we know it's a big part of our value.
As we move forward, we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time.
Many of you have asked about gas prices and the impact on our business and more importantly, our customers.
Let me tell you about our gas business.
We have one of the largest storage field in the U.S. and compressing resources to match.
That is a significant advantage.
We started putting natural gas into our storage field in April and continued throughout the summer when natural gas prices were low.
Right now, our fields are full and ready to deliver for our customers' heating needs throughout the winter months.
Most of the gas is already locked in at just under $3 per thousand cubic feet, which is well below current levels in the spot market and offers tremendous customer value.
Given the operational certainty of storage as well as the financial protection of a pass-through clause, our customers stay safe and warm all winter long and have affordable bills.
Heat in Michigan is not an option.
And we don't leave it up to the market.
We buy, store and deliver.
That's what we do.
Michigan's strong regulatory construct is known across the industry as one of the best.
It includes the integrated resource plan process, which is a result of legislation designed to ensure timely recovery of the necessary investments to advance safe, reliable and clean energy in our state.
It enables the company and the commission to align on long-term generation supply planning and provide certainty as we invest in our clean energy transformation.
Here's what I like about our recently filed IRP.
There is a win in it for everyone.
It is a remarkable plan that addresses many of the interests of our stakeholders and ensure supply reliability.
It reduces costs and it delivers industry-leading carbon emission reductions.
We continue to have constructive dialogue with the staff and other stakeholders, and we anticipate seeing their positions later today.
I'm pleased to offer the details of another strong quarter of financial performance at CMS, as a result of solid execution across the company.
As a brief reminder, throughout our materials, we report the financial performance of EnerBank as discontinued operations thereby removing it as a reportable segment in reporting our quarterly and year-to-date results from continuing operations in accordance with generally accepted accounting principles.
Now on to the results.
For the third quarter, we delivered adjusted net income of $156 million or $0.54 per share.
The key drivers for the quarter were higher service restoration expenses, attributable to the August storms that Garrick mentioned and planned increases in other operating and maintenance expenses in support of key customer and operational initiatives.
These sources of negative variance for the quarter were partially offset by favorable weather, the continued recovery of commercial and industrial sales in our electric business and higher rate relief net of investment-related expenses.
Year-to-date, we've delivered adjusted net income of $628 million or $2.18 per share, which is up $0.19 per share versus the first nine months of 2020, exclusive of EnerBank's financial performance.
All in, we continue to trend ahead of plan and have substantial financial flexibility heading into the fourth quarter.
The waterfall chart on Slide eight provides more detail on the key year-to-date drivers of our financial performance versus 2020.
For the first nine months of the year, rate relief continues to be the primary driver of our positive year-over-year variance to the tune of $0.45 per share given the constructive regulatory outcomes achieved in the second half of 2020 for our electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs such as depreciation and amortization, property taxes and funding costs at the utility.
This upside has been partially offset by the aforementioned storms in the quarter, which drove $0.16 per share of negative variance versus the third quarter of 2020 and $0.11 per share of downside on a year-to-date basis versus the comparable period in 2020.
To round out the customer initiatives bucket, planned increases in our operating and maintenance expenses to fund safety, reliability and decarbonization initiatives added the balance of spend for the first nine months of the year, which, in addition to the August storm activity, added $0.35 per share of negative variance versus the comparable period in 2020.
As a reminder, these cost categories are still net of cost savings realized to date, which as Garrick mentioned, have already exceeded our target for the year with more upside to come.
To close out our year-to-date performance, we also benefited from favorable weather relative to 2020 in the amount of $0.07 per share and another $0.02 per share of upside, largely driven by recovering commercial and industrial load.
As we look ahead to the remainder of the year, we feel quite good about the glide path for delivering on our earnings per share guidance range, which has been revised upward to $2.63 to $2.65 per share, as Garrick noted.
As we look ahead, we continue to plan for normal weather, which in this case, translates to $0.06 per share of positive variance, given the absence of the unfavorable weather experienced in the fourth quarter of 2020.
We'll also continue to benefit from the residual impact of our 2020 rate orders, which equates to $0.07 per share and is not subject to any further MPSC actions.
And we'll make steady progress on our operational and customer-related initiatives which are forecasted to have a financial impact of roughly $0.07 per share of negative variance versus the comparable period in 2020.
Lastly, we'll assume the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance.
All in, we are pleased with our strong execution to date in 2021 and are well positioned for the remainder of the year.
Turning to Slide 9.
I'm pleased to highlight that this year's financing plan has been completed ahead of schedule.
In the third quarter, we issued $300 million of first mortgage bonds at a coupon rate of 2.65%, one of the lowest rates ever achieved at Consumers Energy.
We also remarketed $35 million of tax-exempt revenue bonds earlier this month at a rate of under 1% through 2026.
Due to the strong execution implied by these record-setting issuances coupled with the EnerBank sale, which provided approximately $60 million of upside relative to the sale price announced at signing, we now have the flexibility to reduce our equity needs for the year even further, which will now be limited to the $57 million of equity forwards we have already contracted.
Our simple investment thesis has stood the test of time and continues to be our approach going forward.
It is -- it's grounded in a balanced commitment to all our stakeholders, enables us to continue to deliver on our financial objectives.
As we've highlighted today, we've executed on our commitment to the triple bottom line through the first nine months of the year.
We're pleased to have delivered strong results.
We're positioned well to continue that momentum into the last three months of the year as we move past the sale of the bank and continue progress to the IRP process.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A. | reaffirms fy adjusted non-gaap earnings per share view $2.61 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q2 adjusted earnings per share $0.55 from continuing operations.
q2 earnings per share $0.55 from continuing operations. | 0 |
We intend to file our 2019 10-K toward the middle of February.
It will contain significantly more details on the operations and performance of our company.
Please take the time to review it, and I will be referring to the data that was included in last night's release.
Now onto the fourth-quarter results.
Our profit before tax was $66.6 million, a 6.3% decrease, compared to the profit before tax for the fourth quarter of 2018 of $71.1 million.
With the Tax Reform Act affecting the quarterly earnings per share numbers, this profit before tax number is a good way to compare periods.
The next set of numbers I will mention does include the impact of the Tax Reform Act.
Net income for the fourth quarter of 2019 was $50.1 million or $4.48 a share, compared to net income of 20 -- or $62.8 million or $5.58 per share for the fourth quarter of 2018.
Income tax expense was $16.5 million for the fourth quarter of 2019, compared to $8.3 million for the fourth quarter of 2018.
The rate for 2018 was lower due to the onetime benefits recorded in 2018 associated with the Tax Reform Act.
Now on to petroleum additives performance.
Sales for the fourth quarter were $582 million, down 1% compared to sales for the same period last year.
Petroleum additives operating profit for the quarter was $73.6 million, down 7.4% versus the fourth quarter of 2018.
The decrease was primarily due to changes in selling prices and foreign currency rates, partially offset by lower raw material costs.
Shipments increased 1.4% between periods with increases in lubricant additive shipments partially offset by decreases in fuel additive shipments.
North America and Europe were the primary drivers for the lubricant additives increases, partially offset by decreases in Asia Pacific.
The decrease in fuel additive shipments was primarily driven by Latin America.
The increase in shipments between the fourth-quarter periods represents the first time since the second quarter of 2018 that we have seen an increase.
During this past quarter, in addition to funding of $21 million of dividends, we spent $22 million on capital expenditures in support of our long-term capital plan.
Turning to the full year, our petroleum additives operating profit was $359 million, up 15.5% versus the prior year with our profit before tax of $332 million, up 14.2% versus 2018 and net income of $254.3 million, up 8.3%.
The income tax rate for 2019 is more consistent with management's expectations in the post-tax reform environment.
Full-year petroleum additive shipments decreased 5.5% versus 2018, with decreases in both lubricant additives and fuel additive shipments across all regions, except North America, which reported an increase in lubricant additive shipments and Asia Pacific, which reported an increase in fuel additive shipments.
We saw market weakness throughout 2019 with it easing as the year progressed, with steady improvement reflected in each of the quarters in 2019 as we narrowed the shipments gap versus 2018, ending in Q4 with a year-on-year increase in shipments.
In 2019, we began to see a turnaround in the operating performance of the petroleum additives segment as compared to the prior year.
In the two years prior to 2019, our operations were impacted by a challenging economic environment, marked by a sustained increase in raw materials.
While we've seen evidence that this trend improved in 2019, we will continue to make operating margin stability a priority.
Petroleum additives operating profit for the rolling four quarters ended December 31, 2019, was 16.5%, which is more in line with the historical ranges our shareholders have come to expect.
Along with our substantial investments in petroleum additives from both a capital and R&D perspective, we returned value to our shareholders through dividends of $82 million.
We ended the year with a very healthy balance sheet and with net debt to EBITDA at 1.1 times.
As we have stated before, we are comfortable maintaining net debt to EBITDA in the 1.5 to 2 times range.
And at times, it will go outside that range.
In 2020, we expect to see capital investments in the $75 million to $85 million range.
Petroleum additives continued its steady performance as we continued to extend the reach of our products and services across the globe.
Our global supply network is suited to continue our growth in all geographic regions through our passion for solutions model.
We have maintained measured cost control and continue to make internal progress on our cost-to-serve efficiencies across the enterprise.
We continue to see the global economic challenges, and we will remain committed to making decisions for the long term through our consistent strategy of excellence in the petroleum additives business.
Our business continues to generate significant amounts of cash and our priorities for using cash remain the same as we reinvest in the business for growth, find acquisitions that can strengthen our competitive position in petroleum additives and reward our shareholders through dividends and stock buybacks.
As we look forward to 2020, we expect to build on the successes of the last year and will continue emphasis on margins.
It should be a solid year for our petroleum additives segment and the company as we are well-positioned for the long term.
We will continue to focus our research and development efforts to bring higher-value products to our customers and will continue to improve quality and cost to be more effectively serving the market.
We appreciate your support.
I need to make one clarification.
For petroleum additives, fourth-quarter sales were $532 million.
I misspoke and said $582 million, apologies for that.
Jim, that concludes our planned comments.
If there are any questions, please contact us directly via email or via phone and we will expeditiously get back to you with a response and an answer.
That concludes our conference call for the quarter, and we'll talk to you all next quarter. | compname reports q4 earnings per share $4.48.
q4 earnings per share $4.48. | 1 |
I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss ITW's first quarter financial results and update our guidance for full year 2021.
In Q1, we saw continued improvement in both the breadth and pace of the recovery, with six of our seven segments delivering strong growth in the quarter, with revenue increases at the segment level ranging from 6% to 13%, and that's with one less shipping day in Q1 of this year versus last year.
At the enterprise level, organic growth was plus 6% in Q1 or plus 8% on an equal days basis, and that was despite the fact that our Food Equipment segment was still down 10% in the quarter.
The fundamental strength of our 80/20 front-to-back business system and the skill and dedication of our people around the world, combined with the Win the Recovery actions that we initiated over the course of the past year allowed us to meet our customers' increasing needs while at the same time delivering strong profitability leverage, as evidenced by our 19% earnings growth, 45% incremental margins, and 120 basis points of margin benefits from our enterprise initiatives in the quarter.
Despite rising raw material costs and a tight supply chain environment, we maintained our world-class service levels to our customers while also establishing several all-time Q1 performance records for the company, including earnings per share of $2.11, operating income of $905 million, and an operating margin of 25.5%.
Based on our first quarter results and our normal practice of projecting current demand rates through the balance of the year, we are adjusting our 2021 guidance.
For the full year, we now expect organic growth of 10% to 12%, operating margin in the range of 25% to 26%, and earnings per share of $8.20 to $8.60 per share, which at the $8.40 midpoint represents 27% earnings growth versus last year.
At the midpoint of our revised guidance, 2021 full year revenues would be up 1% versus 2019 and earnings per share would be up 9%.
Now, stating the obvious, there's still a lot of ground to cover between now and the end of the year, and the near-term environment is certainly not without its challenges.
That being said, I have no doubt that we are well positioned to respond to whatever comes our way as we move through the remainder of the year and to continue to deliver differentiated performance in 2021 and beyond.
Solid demand momentum we had coming out of the fourth quarter continued to gain strength across a broad cross-section of our business portfolio in Q1.
Our operating teams around the world responded to our customers' increasing needs, as they always do, and delivered revenue growth of 10%.
Organic growth of 6% was the highest organic growth rate for ITW in almost 10 years.
And as Scott mentioned, Q1 had one less day this year.
And on an equal days basis, organic revenue grew 8%.
Organic growth was positive across all major geographies, with China leading the way with 62%, North America was up 4% and Europe grew 1%.
Relative to Q4, a new trend that emerged in Q1 was a meaningful pickup in demand in our capex-driven equipment businesses, Test & Measurement and Electronics which grew 11%; and Welding, which grew 6%.
GAAP earnings per share of $2.11 was up 19% and an all-time earnings per share record for continuing operations.
Operating leverage was a real highlight this quarter with incremental margins of 45% as operating income grew 19% year-over-year.
Operating margins improved to 25.5% in the quarter, an increase of almost 200 basis points as a result of volume leverage and a continued strong contribution of 120 basis points from our enterprise initiatives, partially offset by the margin impact of price cost.
Excluding the third quarter of 2017, which had the benefit of a one-time legal settlement, operating margin of 25.5% was our highest quarterly margin performance ever.
As you know, supply chains around the world are under significant pressure, and ITW's operating teams certainly had to deal with their fair share of supply challenges and disruptions in the quarter.
By leveraging our produce where we sell supply chain strategy, our proprietary 80/20 front-to-back business system and supported by the fact that we were fully staffed for this uptick in demand due to our Win the Recovery initiative, we were able to maintain our normal service levels to our customers.
And once again, our ability to deal with the impact of some pretty meaningful supply chain challenges and disruptions and still take care of our customers, with strong levels of profitability, speaks to the quality of the execution at ITW.
In the quarter, we experienced raw material cost increases, particularly in categories such as steel, resins and chemicals.
And across the company, our operating teams have already initiated pricing plans and actions that will offset all incurred as well as known but not yet incurred raw material cost increases on a dollar per dollar basis, as per our usual process.
As a result, price cost is expected to be EPS-neutral for the year.
As you know, given our high-margin profile, offsetting cost increases with price on a dollar per dollar basis causes some modest dilution of our operating margin percentage and our incremental margin percentage in the near term.
In Q1, for example, our operating margin was impacted 60 basis points due to price costs.
And our incremental margin would actually have been 52%, not 45% if it wasn't for this impact from price costs.
For the balance of the year and embedded in our guidance are all known raw material increases and the corresponding pricing actions that have either already been implemented or will be, again, EPS-neutral for the full year.
At this early stage in the recovery, our 25.5% operating margins are already exceeding our pre-COVID operating margins.
Four of the seven segments delivered operating margin of around 28% or better in Q1, with one segment, Welding, above 30% in a quarter for the first time ever.
I think it says a lot of our operating teams, that when faced with the challenges of the global pandemic, they stayed focused on our long-term enterprise strategy and continue to make progress toward our long-term margin performance goal of 28% plus.
After-tax return on capital was a record 32.1%, and free cash flow was solid at $541 million with a conversion of 81% of net income, in line with typical seasonality for Q1.
We continue to expect a 100% plus conversion for the full year.
As planned, we repurchased 250 million of our shares this quarter, and the effective tax rate was 22.4%, slightly below prior year.
So in summary, the first quarter was solid for ITW with broad-based organic growth of 6%, strong profitability leverage, 19% earnings growth, 45% incremental profitability and record operating margin and earnings per share performance.
And the information on the left side of the page summarizes the organic revenue growth rate versus prior year by segment for Q1 this year compared to Q4 last year.
And it illustrates the broad-based demand recovery that we're seeing in our businesses.
And obviously, there's a positive impact as the easier comparisons begin on a year-over-year basis.
With the exception of Automotive OEM, every segment had a higher organic growth rate in Q1 than they did in Q4, and six of our seven segments delivered strong organic growth in the quarter, with double-digit growth in Construction Products, and Test & Measurement and Electronics, which were also the most improved segments in this sequential view, going down -- going from down 3% in Q4 to up 11% in Q1.
Welding improved eight percentage points, growing 6% in Q1, providing further evidence that the industrial capex recovery is beginning to take hold as visibility and confidence is coming back.
At the enterprise level, ITW's organic growth rate went from down 1% in Q4 to up 6%.
And I would just highlight that this is 6% organic growth with one of our segments, Food Equipment, while on its way to recovery is still down 10% year-over-year.
As we go through the segment slides, you'll see that this robust organic growth, combined with strong enterprise initiative impact contributed to some pretty strong operating margin performance in our segments.
So let's go into a little more detail for each segment, starting with Automotive OEM.
And the demand recovery in the fourth quarter continued this quarter with organic growth of 8% and total revenue growth of 13%.
North America revenue was down 2% as customers continue to adjust their production schedules in response to the well-publicized shortage of certain components, including semiconductor chips.
We estimate this impacted our Q1 sales by about $25 million, and it is likely to continue to impact our revenues to the tune of about $50 million in Q2 and another $50 million in the second half of the year.
As you can appreciate, the situation is obviously pretty fluid, but as we sit here today, that is our best estimate, and that is also what we embedded in our updated guidance.
Looking past the near-term supply chain issues affecting the auto industry, we're pretty optimistic about the medium-term growth prospects as consumer demand remains strong and dealer inventories are very low by historical standards.
By region, North America being down in Q1 was more than offset by Europe, which was up 4%, and China up 58%.
And finally, the team delivered solid operating margin performance of 24.1%, an improvement of 320 basis points.
So, revenue was down 7%, with organic revenue down 10%, but like I said, much improved versus Q4.
And there are solid signs that demand is beginning to recover, as evidenced by orders picking up and a backlog that is up significantly versus prior year.
Overall, North America was down 6%, with equipment down only 1% as compared to a 22% decline in Q4.
Institutional, which represents about 35% of our North American equipment business was down 7%, with healthcare about flat and education still down about 10%.
Restaurants, which represents 25% of our equipment business was down in the mid-teens, with full-service restaurants down about 30%, but fast casual up low single-digits.
Retail, which is now 25% of the business, was up more than 20% as a result of strong demand and new product rollouts.
International was down 15% and is really a tale of two regions.
As you would expect, Europe was down 22% due to COVID-19-related lockdowns.
And on the other hand, Asia-Pacific was up 44%, with China up 99%.
Overall, equipment sales were down 4% and service down 19%.
Test & Measurement and Electronics delivered revenue growth of 14% with 11% organic growth.
Test & Measurement was up 7% with continued strength in semiconductors and healthcare end markets now supplemented by strengthening demand in the capital equipment businesses as evidenced by the Instron business growing 12%.
The Electronics business grew 16%, with strong demand for clean room technology products, automotive applications, and consumer electronics.
Operating margin of 28.4% was up 330 basis points.
Moving to slide 6, as I mentioned earlier, we saw a strong sequential improvement in Welding as the segment delivered organic growth of 6%, the highest growth rate in almost three years.
The commercial business, which serves smaller businesses and individual users, usually leads the way in a recovery, and Q1 was their third quarter in a row with double-digit growth, up 17% this quarter.
The industrial business continued its sequential improvement trend and was down only 1% with customer capex spend picking up and backlogs building.
Overall, equipment sales were up 10% and consumables were flat versus prior year.
North America was up 7% and international growth of 4% was primarily driven by recovery in China and some early signs of demand picking up in oil and gas.
Solid volume leverage and enterprise initiatives contributed to a record margin performance of 30.3%, which, as I said, marked the first time an ITW segment delivered operating margins above 30%.
Polymers & Fluids delivered organic growth of 9%, with Polymers up 16%, driven by strength in MRO applications, particularly for heavy industries.
The automotive aftermarket business continued to benefit from strong retail sales with organic growth of 9%, while fluids, which has a larger presence in Europe was down 1%.
Operating margin benefited from solid volume leverage and enterprise initiatives to deliver margins of 25.7%.
Moving to slide 7, construction was the fastest-growing segment this quarter with organic growth of 13%.
North America was up 12%, with continued strong demand in residential renovation and in the home center channel.
Commercial construction, which is only about 15% of our U.S. sales was up 3%.
European sales grew 19% with double-digit growth in the UK and Continental Europe.
Australia and New Zealand grew 7% with strength in both residential and commercial markets.
Operating margin of 27.6% was an improvement of 420 basis points.
Specialty revenues were up 10%, with organic revenue of 7% and positive growth in all regions.
North America was up 6%; Europe, up 5%; and Asia Pacific was up 24%.
Demand for consumer packaging remained solid at 6%.
And per our usual process, and with the caveat that we're only one quarter into the New Year and a significant number of uncertainties and challenges are still in front of us, we are raising our guidance on all key performance metrics, including organic growth, operating margin and EPS.
In doing so, we've obviously factored in our solid Q1 results.
And per our usual process, we are projecting current levels of demand exit in Q1, into the future and addressing them for typical seasonality.
And as discussed, we've made an allowance for the estimated impact of semiconductor chip shortages on our Auto OEM customers.
The outcome of that exercise is an organic growth forecast of 10% to 12% at the enterprise level.
This compares to a prior organic growth guidance of 7% to 10%.
Foreign currency at today's exchange rates adds 2 percentage points to revenue for total revenue growth forecast of 12% to 14%.
As you saw, we're off to a strong start on operating leverage and enterprise initiatives, and we are raising our operating margin guidance by 100 basis points to a new range of 25% to 26%, which incorporates all known raw material cost increases and the corresponding pricing actions.
Relative to 2020, our 2021 operating margins of 25% to 26% are 250 basis points higher at the midpoint and they are almost 150 basis points higher than our pre-COVID 2019 operating margins of 24.1%.
As we continue to make progress toward our long-term performance goal of 28% plus, as I mentioned earlier.
Our incremental margins for the full year are expected to be above our typical 35% to 40% range.
Finally, we are raising our GAAP earnings per share guidance by $0.60 and or 8% to a new range of $8.20 to $8.60.
The new midpoint of $8.40 represents an earnings growth rate of 27% versus prior year and a 9% increase relative to pre-COVID 2019 earnings per share of $7.74.
A few final housekeeping items to wrap it up, with no changes to: one, the forecast for free cash flow; two, our plan to repurchase approximately $1 billion of our own shares; and three, our expected tax rate of 23% to 24%.
As per usual process, our guidance is for the core business only and excludes the previously announced acquisition of the MTS Test & Simulation business.
The process to close the acquisition by midyear remains on track.
And once the acquisition closes, we'll provide an update.
As we've said before, we do not expect a material financial impact to earnings in 2021.
So in summary, a quarter of quality execution in a challenging environment, and as a result, we're off to a solid start to the year. | illinois tool works inc - suspending previously announced annual guidance for 2020. | 0 |
We will be discussing results that were released yesterday after the close.
To listen online, please go to the stewart.com website to access the link for this conference call.
Because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected.
Dave will take you through the details of this quarter's financial results in just a minute, but before then, I want to touch on a couple of broader points.
When I began at Stewart almost two years ago, I discussed both the value of our people and brand, as well as the financial strength of our core business.
Stewart clearly was not a typical turnaround story, yet significant changes were necessary.
To compete effectively, we needed to focus on the strategy, founded on a targeted scale, operational improvement, talent upgrades, and acquisitions in core and ancillary business lines.
We realized that our journey to become the premier title services company would not happen overnight, but we began to put in place the pieces necessary to build a resilient long-term success.
As you know, the rebuild has been happening in the face of the pandemic and historic origination volatility [Phonetic].
[Technical Issues] our associates who have worked through these challenges, but our team understands our mission and is aligned to moving fast to achieve our long-term goals while taking care of customers.
I bring this up today as we deliver on record earnings because the improvements in process and investments in talent, scale, services, and technologies, we have made, though not complete, have begun to take hold.
While we are bullish on the real estate over the long term, we are realistic in our assessment that the current market will not last forever.
That said, on a daily basis, we are making decisions and taking actions that will define us through the current market and the next full real estate cycle.
That is what drives us and that is what you're beginning to see in our results.
I'm often asked the question, how do you appropriately quantify the changes that Stewart has made so far in our journey.
With all that we have been working on, it can, at times be challenging to measure all the ways we've improved our operations by being more efficient adding talent, unlocking existing expertise, eliminating redundancies, rescaling operations, and embracing new and improved technology.
But I feel comfortable that the picture that we – that can lie ahead if we execute on our plan is embedded in our performance in the first half of '21.
Our journey continues and we are a quarter closer to our goals.
We continue to see a strong residential real estate market driven by demand, favorable interest rates and an economy getting back to normal.
The commercial real estate market is also benefiting from this improving economy.
Although the economy is improving, there are several watch items including fed and government policy in action, virus variants and anti-vac sentiment, and an improving yet historically high mortgage delinquency and forbearance, which need to play out.
Since these watch items can create operating volatility.
We continue to focus on the areas that will have the most meaningful and durable impact on our long-term operating performance, gaining scale in attractive direct markets, improving scale and geographic focus in our agency and commercial operations, scaling and broadening lender services, and throughout our business, improving service and digital capabilities to provide a seamless end-to-end user experience.
For the second quarter 2021, Stewart reported, net income of $95 million and diluted earnings per share of $3.50 on total operating revenues of $802 million.
The main difference between reported and adjusted net income being the gain on sale of certain buildings.
Compared to last year, total title revenues for the quarter increased $248 million or 50% due to strong performances from our residential agency and commercial operations.
The title segment generated $126 million of pre-tax income, an increase of $71 million from last year's quarter.
As a result of revenue growth and continued management focus.
Pre-tax margin for the segment also improved to 17% compared to 11% from Q2 2020.
With respect to our direct title business, residential revenues increased $76 million or 47% from increased purchase and refinancing transactions.
Residential fee per file for the second quarter was approximately $2,100, a 15% improvement over last year's fee per file due to a higher purchase mix this year.
Domestic commercial revenues improved $30 million or 97% due to increased transaction volume and higher average fee per file, which was $12,600 versus $9,800 for last year's quarter.
Total international revenues increased $29 million or 118%, primarily due to improved volumes in our Canadian operations.
Total open orders increased 8%, while closed orders improved 27% compared to the last year, primarily due to the strong housing market.
Similar to our direct title business, our agency operations generated a solid quarter with revenues of $390 million, which was $113 million or 41% higher than last year.
The average agency remittance rate was settled or at 17.5%.
On title losses, total title loss expense increased $12 million or 56%, primarily as a result of increased title revenues as a percentage of title revenues, title loss expense was 4.5% compared to 4.3% last year.
In regard to operating expenses, which consist of employee and other operating costs, total operating expenses increased primarily due to increased revenue and order activity.
Employee cost as a percent of operating revenues improved to 24% from 27% last year while other operating expenses increased to 17% from 15% last year, primarily due to the pass-through appraisal and service costs in our increased appraisal services businesses, excluding these businesses overall other operating expense ratios would have been 12% for the second quarter 2021.
On other matters, our financial position remains very solid to support our customers, employees, and the real estate market.
Our total cash and investments on the balance sheet are approximately $600 million over regulatory requirements and we have approximately $225 million available on our line of credit facility.
Shareholders' equity attributable to Stewart increased to $1.13 billion with book value per share of approximately $42.
And lastly, net cash provided by operations for the second quarter increased to $103 million compared to $61 million from last year's quarter.
We are grateful for and inspired by our customers and associates, advocates for everyone's improved safety and prosperity, and confident in our supportive real estate markets. | q2 adjusted earnings per share $3.50.
q2 revenue rose 58 percent to $802 million. | 1 |
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. | compname posts q4 earnings per share $0.89.
q4 earnings per share $0.89. | 1 |
We appreciate you joining us today and hope you're staying safe and well.
We are pleased with the strong start to 2021 and ongoing recovery in our automotive and industrial businesses.
The GPC team remained focused on solid execution and in delivering strong financial results through improving sales trends, increasing operational efficiencies and enhancing customer value.
Through the quarter, we operated thoughtfully with the physical and mental well-being of our employees the top priority as our 50,000-plus GPC teammates are the core of our success.
Turning now to our first quarter financial results.
Total sales for the quarter were $4.5 billion, up 9% from last year and significantly improved from the 1% sales decrease in the fourth quarter of 2020.
Gross margin was also a positive, representing our 14th consecutive quarter of year-over-year gross margin expansion and our teams in the field continued to do a great job of managing our expenses through ongoing cost actions and the carryover of expense reductions implemented last year.
These results drove a 41% increase in operating profit and an 8.1% operating margin, which is up 180 basis points from the first quarter of last year.
Our strong operating performance drove net income of $218 million and diluted earnings per share of $1.50, up 88%.
We also continued to fortify our balance sheet ensuring ample liquidity and solid cash flow.
We are proud of our teams and we are encouraged by our results and we intend to build on this momentum throughout 2021.
Turning now to our business segments.
Automotive represented 66% of total sales in the first quarter and Industrial was 34%.
By region, 73% of revenues were attributable to North America with 16% in Europe and 11% in Asia-Pac.
Total sales for Global Automotive were $3 billion, a 14% increase from 2020 and much improved from a 1% increase in Q4 of 2020.
Comp sales were up 8%, improved from a 2% decrease in the fourth quarter and segment profit margin was up 250 basis points, driven by strong operating results in each of our automotive operations.
Sales were driven by positive sales comps across all our operations with 15% comps in Europe and Asia-Pac, 7% comps in the US and 3% comps in Canada.
The ongoing global economic recovery, including financial stimulus in the US, improving inventory availability, favorable weather conditions and our focus on key growth initiatives were all sales drivers in the quarter.
We would add that while we continue to expect a reasonable level of inflation as we move through 2021, price inflation was not a factor in our first quarter sales.
In Europe, sales were much improved from Q4 as our team capitalized on the strengthening sales environment, despite lockdown throughout the region.
In addition, initiatives to grow key accounts, enhance inventory availability and the ongoing launch of the NAPA brand continued to prove effective in driving profitable growth and market share gains.
For the quarter, our teams in France and the UK outperformed in the region with strong double-digit sales comps.
We would also call out a much improved performance by our team in the Benelux region.
The strong sales recovery combined with excellent expense controls produced a 500-basis point improvement in operating margin.
So a terrific start to the year for our European operations.
In Asia-Pac, our Automotive sales remained in line with the mid-teen growth we experienced through the second half of 2020.
For the quarter both retail and commercial sales held strong as the region operated through multiple lockdowns associated with the pandemic.
Retail sales, which represent over 40% of our total sales volume through our Repco stores continued to outperform posting a 33% increase in March and plus 24% in the quarter.
Our commercial sales continued to accelerate as well posting double-digit sales growth in the quarter.
We continued to benefit from the strength in online sales, which reached record highs at three times pre-COVID levels.
Finally building on the NAPA brand name has been well received and we remain focused on growing our NAPA presence in the region.
Summing it up, this group continues to perform at a very high level on both the top and bottom lines, resulting in a 150-basis point improvement and profit margin for the quarter.
In North America comp sales in the US were up 7% helping this business post a 180-basis point increase in profit margins.
In Canada, we operated through a variety of regional lockdowns which impacted our larger markets of Ontario and Quebec.
Comp sales were up 3% and operating margin was up 130 basis points.
Sales in the US, which posted its strongest quarterly comp since the first quarter of 2015, were driven by solid growth in both the retail and commercial segments.
This was our first quarter of positive commercial comps since pre-pandemic and our team produced record sales volumes in the month of March.
In addition, both ticket and traffic counts were positive on both our retail and commercial transactions, marking our first increase in traffic counts since several quarters.
By region, the Atlantic, Midwest and West Groups posted the strongest growth, although we would also call out our Northeast Group, which produced solid growth in the quarter.
This is notable as this region of the US has been most affected by the COVID-19 lockdowns over the past 13 months.
Likewise, we would add that product sales in categories such as batteries, tools and equipment and brakes were strong this quarter.
We are especially encouraged to see the rebound in our brakes business which generally is a positive indicator for our commercial business.
On the retail side, which continues to outperform with strong double-digit growth, we continued to drive sales via investments in retail specialists and store refreshes, as well as targeted promotions.
We would also call out our ongoing omnichannel investments and the increase in B2C online sales, which reached record levels in the quarter and were up 150% from the prior year.
Our commercial sales, our other wholesale category of independent garage customers, continued to generate strong growth.
We have been encouraged by the number of new accounts we are serving.
Clearly our investments in increasing the number of professional salespeople on the street has been effective in attracting new customers to NAPA.
We were also pleased to see improved sales with our NAPA AutoCare and major account customers which posted positive sales growth for the first time in several quarters.
Sales to the fleet and government group were down year-over-year, but sequentially improved from the fourth quarter and we look for further improvement in sales for this segment.
As we look ahead, we are excited for the growth opportunities we see for our Global Automotive segment.
We expect further improvement in aftermarket fundamentals such as increased miles driven, a growing vehicle fleet and an increase in vehicles aged six to 12 years, all favorable for the industry.
We can assure you we remain focused on our initiatives to deliver customer value and ultimately sell more parts for more cars.
These plans include further enhancing our inventory availability, strengthening our supply chain and investing in our omnichannel capabilities.
In addition, we expect to expand our global store footprint with additional bolt-on acquisitions, changeovers and new greenfield stores to further enhance our competitive positioning.
So now let's discuss the global Industrial Parts Group.
Total sales for this group were $1.5 billion, flat with last year.
Comp sales were down 2%, improved from the 4% decrease in Q4 and reflecting the third consecutive quarter of improving sales trends.
March was a breakout month with the North American Motion team posting a 7% increase in average daily sales and achieving record sales volumes.
This was a tremendous accomplishment and another turning point for GPC in our emergence from the pandemic.
The ongoing recovery over the last nine months is in line with the continued improvement in the industrial economy which you can see in several key indicators for our business.
For perspective, PMI was 64.7% in March, an increase of 4.2 points from December 31st.
In addition, industrial production increased by 2.5% in the first quarter, the third consecutive quarter of expansion, following the significant downturn in the second quarter of 2020.
Importantly, we can see these positive indicators translating to more activity with our customers, which are operating at higher run rates as well as releasing capital project orders.
The strengthening sales environment, along with our initiatives to drive growth and control cost produced an 80 basis point margin improvement with segment profit margin at 8.3% versus 7.5% last year.
Diving deeper into our Q1 sales.
We will start by saying that inflation remains a non-factor in our numbers thus far.
That said, we are seeing more pricing activity and expect another year of 1% to 2% price inflation from our suppliers.
For the quarter, we experienced improving sales trend among virtually all product categories and industries served.
We were especially encouraged by the recovery in the equipment and machinery aggregate and cement and wood and lumber sectors, all key industry groups for us.
In addition, we continue to benefit from the build-out of our omnichannel capabilities with digital sales up two times from the first quarter in 2020.
A key driver of our digital growth relates to our inside sales center which is generating incremental sales to new Motion customers.
While still a relatively small percentage of total sales, we are excited by the potential for future sales growth.
We also remain focused on growing our services and solution businesses to expand our expertise and sales opportunities in areas such as equipment repair, conveyance and automation.
We have made several bolt-on acquisitions to build scale in these areas and our services and solutions capabilities remain a key consideration in our overall M&A strategy for the Industrial business.
to further ensure profitable sales growth, we continue to enhance our pricing and category management strategies.
In addition, we plan to continue to optimize our supply chain network and further improve our productivity, while delivering exceptional customer service.
Closing out our Industrial comments.
We remain bullish about our Motion business and we are excited to see this team moving back into a growth mode.
So now I'll conclude my remarks by providing a brief update on our ESG initiatives.
As outlined in our Corporate Sustainability Report, GPC embraces our responsibility to innovate in ways that provide for our environment, our associates and the communities in which we operate.
In Q1 we expanded our training and development programs to ensure personal growth and enhance our comprehensive well-being program focused on the emotional, financial and physical health of our GPC teammates.
Additionally, we continue to make progress in the advancement of our corporate commitment to diversity and inclusion, we are actively recruiting talent that is representative of the communities we serve, training our teammates to mitigate unconscious bias and model inclusive behaviors while strengthening partnerships that support our D&I initiatives.
Finally, we remain focused on our mission to be good corporate citizens where we both work and live.
Since 1928, we have been giving back to communities and causes that make a difference and that legacy continues in 2021.
First I want to congratulate the global GPC team on the performance this quarter.
As Paul mentioned, our team delivered solid performance in the first quarter and have strong momentum.
The environment has improved compared to 2020, but we remain cautious as global uncertainty continues to be a part of doing business each day.
Areas of attention for us include COVID-19, inflation, global logistics and product and labor availability.
We also have more challenging year-over-year comparisons that will require sustained momentum during the second half of the year.
Despite the uncertainty, the GPC team is energized and focused to deliver performance.
I'll now share some additional perspective on our strategic initiatives in progress.
The foundation of our priorities is based on the customer experience and understanding their needs and working to exceed their expectations.
We are analyzing and listening to customer feedback and are corresponding to strength and opportunities.
In the simplest terms, our customers need us to be easy to do business with, reliable and helpful.
This independent data reinforces our priorities and serves as a guiding principle in terms of required action and strategic investment.
To deliver a best-in-class customer experience we have opportunities to simplify and integrate our existing operations.
The global teams are executing multi-year plans to realign teams, streamline processes, improve operational productivity and reduce costs.
These initiatives will not only create operating efficiency, but also enable faster team execution, deliver a better customer experience and accelerate profitable growth.
I'd like to highlight a few initiatives that illustrate our efforts to simplify and integrate.
For example, we're working to optimize facilities footprint and coverage, simplify and integrate disparate legacy IT systems, streamline back-office support functions, offshore non-customer facing functional activities and centralize GPC indirect sourcing processes as a few examples.
As we simplify and integrate, we're simultaneously investing in our core business and positioning for the future.
Our strong cash flow, solid capital structure and disciplined capital allocation provide the flexibility needed to continue to make these investments.
Key pillars of our core investments include talent, sales force effectiveness, digital supply chain and emerging vehicle technologies.
A few highlights of our progress across the key pillars during the quarter include.
We continue to take deliberate action across the globe to recognize high potential talent, infuse new capabilities into the organization and recruit diverse talent that is representative of the communities we serve.
Examples include category management, digital, emerging vehicle technology and field leadership roles to name a few.
Talent will always be a priority area of investment as we strive to be an employer of choice for teammates that share our GPC values and want to play a leadership role in our exciting future.
Two, sales force effectiveness.
Data and analytics to understand our unique customer segments, the different needs of each segment and associated strategies to serve the segment is a foundational element of sales force effectiveness.
The sales efforts reflect our omnichannel initiatives and include an increasing mix of both traditional selling and digital strategies.
As an example, the US automotive team revamped its sales intensity with new reporting tools to track customer visits, digital tools to communicate with field sales teammates and enhanced virtual product and skills training.
In addition, in 2021, the US automotive team adjusted compensation programs to better align incentives with profitable growth.
As I mentioned, digital is a foundational priority as we deliver a best-in-class customer experience and accelerate profitable growth.
Our businesses delivered excellent performance via digital channels in the quarter.
We continue to see strong increases versus prior year across our global digital channels.
Digital still represents a relatively small portion of our total sales and we're excited about the compelling digital vision our teams are executing.
Related, we continue to invest in foundational digital elements, including catalog, search and other critical customer experience elements, such as ease of ordering, pricing and analytics.
Our supply chain initiatives are focused to ensure we have the right product available in the right market at the right time.
We are continuously executing inventory, facility, productivity, logistics and technology strategies to achieve this goal.
One solid example is the success the US Industrial team enjoyed with recent facility automation investments that delivered a 500% labor productivity improvement.
Other select examples would be enhanced workforce management and delivery tracking tools in the US automotive business.
Lastly, emerging vehicle technologies.
We aspire to lead as it relates to the opportunities that emerging vehicle technologies present for our automotive industries.
We believe we have a unique position to leverage including our scaled global footprint, diverse portfolio, leading global brands, established customer-supplier relationships and one GPC team approach.
Through our planning process, we developed a multi-dimensional strategy to address electric vehicle trends.
A few select highlights include the alignment of talent 100% dedicated to developing and executing EV strategies, product and category management strategies with existing and new SKUs, global supplier councils with existing strategic partners, advisory groups leveraging our 25,000 global repair center relationships and partnerships with strategic EV market participants.
Lastly, strategic bolt-on acquisitions are a key part of our GPC growth strategy.
We utilize acquisitions to acquire new customers, further penetrate existing priority markets, enter new geographies, acquire product and service capabilities and acquire talent.
We also believe our acquisition capabilities position us well as we selectively consider and test new business models.
Our acquisition pipeline remains active and actionable given the fragmentation of our markets.
We believe our scale, market-leading brands, global footprint and unique culture position us to be an acquirer of choice.
We will remain selective and disciplined as we execute this important part of our strategy.
Similar to the approach utilized for our 2019 cost savings plan, the global teams develop tools in a monthly cadence to create visibility and status on initiatives.
This approach not only helps drive performance but also helps to share best practices around the globe as one GPC team.
In summary, I hope today's remarks reinforce our sense of focus and global teamwork.
We will remain agile as the global environment continues to evolve.
And we will remain focused on what we can control as we execute through the balance of the year and beyond.
And I'll now turn it to Carol to review the financial performance details.
We will begin with a review of our key financial information and then we will provide an update on our full-year outlook for 2021.
Total GPC sales were $4.5 billion in the first quarter, up 9% from last year and improved from the 0.7% decrease in the fourth quarter.
Gross margin was 34.5%, a 60-basis point improvement compared to 33.9% in the first quarter last year.
Our steady progress in improving gross margin continues to reflect the positive impact of a number of initiatives, including our pricing and global sourcing strategies.
And we also benefited from a sales mix shift to higher gross margin operations.
We would add that the level of supplier incentives in the quarter were in line with last year and neutral to gross margin.
And as Paul mentioned earlier, there was minimal impact of price inflation in our first-quarter sales and this is true for gross margin as well.
As we move through the year, we will continue to execute on our initiatives to drive additional gross margin gains via positive product mix shifts, strategic pricing tools and analytics, global sourcing advantages and also strategic category management initiatives.
Our selling, administrative and other expenses were $1.2 billion in the first quarter, up 4.6% from last year, or up 5.3% from last year's adjusted SG&A.
This reflects an improvement to 26.8% of sales this year, which is down nearly 100 basis points from 27.7% last year.
So tremendous progress and primarily due to the favorable impact of our cost savings generated in 2020 as well as ongoing cost control measures and also improved leverage on our stronger sales growth.
Our progress in these areas was slightly offset by rising costs and freight expenses which we're closely managing and planned increases in our technology spend which supports our strategic initiatives as Will covered earlier.
Our total operating and non-operating expenses were $1.3 billion in the first quarter, up 2.2% from last year or up 2.1% compared to last year's adjusted expenses.
First quarter expenses include the benefit of approximately $20 million related to gains on the sale of real estate and favorable retirement plan valuation adjustments that are recorded to the other non-operating income line.
All in, our total expenses for the quarter improved to 28.1% of sales, down 190 basis points from 30% in 2020.
Total segment profit in the first quarter was $361 million, up a strong 41% on the 9% sales increase.
And our segment profit margin was 8.1% compared to 6.3% last year, a 180 basis point increase.
In comparison to 2019, our segment profit margin has improved by 100 basis points.
So solid improvement and our strongest first quarter profit margin since 2015, a reflection of the positive momentum we're building in our businesses.
Our net interest expense of $18 million was down from $20 million in 2020 due to the decrease in total debt and more favorable interest rates relative to last year.
The corporate expense line was $31 million in the quarter, down from $55 million in 2020 due primarily to the favorable real estate gains and retirement plan adjustment discussed earlier.
Our tax rate for the first quarter was 23.8% in line with the reported rate last year and improved from the prior year adjusted rate of 26.5%.
This improvement primarily relates to the favorable tax impact of stock options exercised as well as the previously mentioned real estate gains and retirement plan adjustments.
Our first quarter net income from continuing operations was $218 million with diluted earnings per share of $1.50.
This compares to $0.84 per diluted share in the prior year or an adjusted diluted earnings per share of $0.80 for an 88% increase.
So now let's turn to our first quarter results by segment.
Our Automotive revenue for the first quarter was $3 billion, up 14% from the prior year.
Segment profit of $236 million was up a strong 65% with profit margin at 8% compared to 5.5% margin in the first quarter last year.
The 250 basis point increase in margin was driven by the continued recovery in the Automotive business and the execution of our growth and operating initiatives.
We were pleased to have each of our automotive businesses expand their margins for the third consecutive quarter.
In addition, we're encouraged that our first quarter margin also compares favorably to the first quarter of 2019, up 120 basis points.
So a broad recovery across our operations and we look for a continued progress in the quarters ahead.
Our Industrial sales were $1.5 billion in the quarter, flat with last year and improved sequentially for the third consecutive quarter, which is consistent with the strengthening industrial economy.
Our segment profit of $125 million was up 10% from a year ago and profit margin was up 80 basis points to 8.3% compared to 7.5% last year.
The improved margin for Industrial reflects the third consecutive quarter of margin expansion in both our North American and Australasian industrial businesses and it's also up by 90 basis points from the first quarter of 2019.
So another quarter of strong operating results for Industrial, which we expect to continue with stronger sales growth projected through the remainder of the year.
So now, let's turn our comments to the balance sheet.
We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy.
At March 31st, total accounts receivable is down 27% from last year, which is primarily a function of the $800 million in receivables sold in 2020.
Our inventory was up 6% from the prior year and accounts payable increased 14%.
And our AP to inventory ratio improved to 124% from 116% in the last year.
We are pleased with our progress in improving our overall working capital position and we continue to believe we have opportunities for further improvement.
Our total debt is $2.6 billion at March 31, down $1 billion or 28% from last March and down $60 million from December 31st of 2020.
We significantly improved our debt position throughout the course of 2020 with the issuance of new public debt and a new revolving credit agreement that provide for expanded credit capacity and more favorable rates.
With these positive changes to our debt structure, our total debt to adjusted EBITDA has improved to 1.8 times from 2.5 times last year.
Additionally, we closed the first quarter with $2.6 billion in available liquidity, which is up from $1.1 billion at March 31st last year and in line with December 31st.
We also continue to generate strong cash flow, generating $300 million in cash from operations in the first quarter, which is up from $28 million in the first quarter last year.
With a strong start to the year, including the increase in net income and the improvement in working capital, we continue to expect cash from operations to be in the $1 billion to $1.2 billion range and free cash flow of $700 million to $900 million.
Our key priorities for cash include the reinvestment in our businesses through capital expenditures, M&A, the dividend and share repurchases.
We invested $48 million in capital expenditures in the first quarter, an increase from $39 million in 2020.
Looking forward, we have plans for additional investments in our businesses to drive growth and improve efficiencies and productivity.
We continue to expect total capital expenditures of approximately $300 million for the year.
As you heard from Will earlier, strategic acquisitions remain an important component of our long-term growth strategy.
We continue to cultivate a strong pipeline of targeted names and we expect to make additional strategic bolt-on acquisitions to complement both our Global Automotive and Industrial segments in the months and quarters ahead.
In the first quarter we paid a cash dividend of $114 million to our shareholders.
The Company has paid a cash dividend to shareholders every year since going public in 1928 and our 2021 dividend of $3.26 per share represents our 65th consecutive annual increase in the dividend.
We have actively participated in a share repurchase program since 1994.
While there were no repurchases in the first quarter, the Company is currently authorized to repurchase up to 14.5 million additional shares and we will resume share repurchases in the months and quarters ahead.
Turning to our outlook for 2021.
In arriving at our updated guidance, we considered several factors including our past performance, current growth plans and strategic initiatives, recent business trends, the potential for foreign currency fluctuations, inflation and the global economic outlook.
In addition, we consider the continued uncertainties due to market disruptions such as with COVID-19 and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be in the range of plus 5% to plus 7%, an increase from our previous guidance of plus 4% to plus 6%.
As usual, these growth rates exclude the benefit of any unannounced future acquisitions.
By business, we are guiding to plus 5% to plus 7% total sales growth for the Automotive segment, an increase from plus 4% to plus 6% and a total sales increase of plus 4% to plus 6% for the Industrial segment, an increase from plus 3% to plus 5%.
On the earnings side, we are raising our guidance for diluted earnings per share to a range of $5.85 to $6.05, which is up 11% to 15% from 2020.
This represents an increase from our previous guidance of $5.55 to $5.75.
We enter the second quarter focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year.
Looking ahead, the GPC team is excited for the ongoing recovery in the global economy and the growth prospects we see for both Auto and Industrial.
Our strong balance sheet provides us the financial flexibility to pursue strategic growth opportunities and we remain focused on executing our plans to capture profitable growth, generate strong cash flow and drive shareholder value.
As a result, we are optimistic that we can deliver strong financial results in the quarters ahead. | q1 gaap earnings per share $1.50 from continuing operations.
q1 sales rose 9.1 percent to $4.5 billion.
raises 2021 outlook for revenue growth and diluted eps.
sees 2021 total sales growth 5% to 7%.
sees 2021 earnings per share $5.85 to $6.05.
sees 2021 free cash flow $700 million to $900 million. | 1 |
I think we're well on our way to our Safe Harbor statement being the longest component of our call, but perhaps that's just a reflection of the sign of the times.
On the call, in addition to me, you also have Bill Berkley, Executive Chairman; as well as Rich Baio, Executive Vice President and Chief Financial Officer.
We're going to follow a similar agenda to what we have in the past, where Rich is going to lead us through some highlights for the quarter.
So with that, Rich, do you want to lead off, please?
The company reported record quarterly net income of $312 million or $1.67 per share.
Despite the heightened catastrophes experienced by the industry, and slowdown in the economic environment due to global pandemic, our financials significantly improved in the quarter.
This improvement was evidenced in our current accident year combined ratio ex-cats of 88.8% and strong investment income and net investment gains, which contributed to an annualized quarterly return on equity of 20.6%.
Starting first with our top line.
Growth in our gross premiums written accelerated through the year, with fourth quarter representing growth of 9.3%.
Similarly, net premiums written grew by 8.2% to approximately $1.8 billion in the quarter.
All lines of business grew in the insurance segment, with the exception of workers' compensation, increasing net premiums written by 7.2% to approximately $1.6 billion.
Professional liability led this growth with 29.6%, followed by commercial auto of 20.6%, other liability of 10.6% and short-tail lines of 2%.
Growth in the reinsurance and Monoline Excess segment was 16.8%, bringing net premiums written to $205 million.
Casualty reinsurance led this growth with 21.2%, followed by 9.3% in property reinsurance and 6% in Monoline Excess.
Rate improvement, along with lower claims frequency and non-cap property losses contributed to our improvement in underwriting income of 44.2% to $165 million.
Offsetting this improvement were higher catastrophe losses resulting from natural cats and COVID-19 related losses.
We recognized $42 million of total catastrophe losses in the quarter or 2.3 loss ratio points, of which, 1.5 loss ratio points relates to COVID-19.
The current quarter's natural cat losses compare favorably with the prior year quarter of $20 million, or 1.2 loss ratio points.
The reported loss ratio was 61.3% in the current quarter, compared with 62.4% in 2019.
Prior year loss reserves developed favorably by $4 million or 0.2 loss ratio points in the current quarter.
Accordingly, our current accident year loss ratio, excluding catastrophes, was 59.2% compared with 61.4% a year ago.
Rounding out the combined ratio, we benefited from an improving expense ratio of 1.3 points to 29.6%.
We continue to benefit from growth in net premiums earned at 5.6%, which outpaced an increase in underwriting expenses of 1.2%.
In addition, the expense ratio is benefiting from reduced costs impacted by the global pandemic, including travel and entertainment.
This contributes a benefit of more than 50 basis points to the expense ratio.
Net investment income for the quarter increased 32% to approximately $181 million.
The increase was driven by investment fund income of $53 million due to market value adjustments and arbitrage trading income of $26 million, in large part coming from investments in special purpose acquisition companies.
Investment income from the fixed maturity portfolio declined due to lower reinvestment yields compared with the roll-off of securities due to maturities, calls and pay downs.
In addition, we continue to maintain a cash and cash equivalent position of approximately $2.4 billion, enabling us to maintain a relatively short duration of 2.4 years and significant liquidity.
Pre-tax net investment gains in the quarter of $163 million is primarily attributable to realized gains of $127 million and changes in unrealized gains on equity securities of $36 million.
As previously announced, the realized gain was largely driven by the sale of a real estate investment in New York City, which resulted in a gain of $105 million.
Foreign currency losses in the quarter were driven by the weakening U.S. dollar.
Two items of note.
First, you'll see that on a year-to-date basis, we were about breakeven; second, the loss in the quarterly income statement is offset considerably by the increase in stockholders' equity.
In the quarter, our unrealized currency translation loss improved by $66 million, resulting in a net equity pick up of approximately $47 million.
As a reminder, expenses included a non-recurring cost of $8.4 million relating to the redemption of our $350 million subordinated debentures in the quarter.
Stockholders equity increased 5.3% in the quarter and book value per share before share repurchases and dividends increased 6.1%.
We ended the year with more than $6.3 billion in stockholders equity, after share repurchases of approximately 6.4 million shares for $346 million at an average price per share of $54.43 and ordinary dividends totaling $84 million.
That brings total return to shareholders of $430 million in the year.
Finally, the company had strong cash flow from operations in the quarter of $480 million and more than $1.6 billion for the full year, an increase of more than 41%.
Very complete, you leave me nothing to say.
But I'll come up with something to babble on about for a relatively brief amount of time.
So, from my perspective, and I believe from our perspective, the market is clearly in the throes of firming.
When we look at the marketplace, is it what we saw at least at this stage in ‘86.
There is not a vacuum when it comes to capacity.
But clearly, there is a recognition within the industry among carriers that capacity is not going to be build out in such a casual manner as it has been done in the past.
And when it is provided, it will be with a lens towards a more appropriate rate associated with that.
When we look at the marketplace, overall, we think this is very appropriate.
And whether it will prove to be similar to what we saw in sort of late 2001 and 2002 and 2003, we’ll only see with the time, but the reality is no cycle looks like any other cycle.
All that being said, when we look at Q4 and when we think about our own business, every product line at this stage with the exception of workers compensation, we believe is achieving rate in excess of loss cost.
And quite frankly, that is appropriate and necessary.
When you think about where trend is and in addition to that, when you think about the realities of what one can expect from the investment income portfolio, particularly around the fixed income, we do need to be pushing full rate and driving down the combined ratio further in order to achieve a sensible risk adjusted return.
Just as far as different product lines go, at this stage we are seeing meaningful firming continuing in the much of the PL market, also, the excess and umbrella market is quite firm as well.
Property continues to be notably hard and auto, I would suggest, is also quite firm.
One of the laggards has been primary GL, and we've been pleased to see over the past couple of quarters that seems to be building some momentum.
And we think that's really important given what's going on, on the social inflation front and again as well as the realities of investment income.
And as mentioned in prior calls and just a couple of moments ago, workers' comp does continue to be the outlier.
Having said that, we continue to believe that's in the early stages of bottoming out, and would expect that to be reversing direction by the end of -- or later part or end of 2021.
Just on the topic of rate.
From our perspective, we think that there are many market participants that have a good deal of catching up to do.
When we think about the past several years, there have been moments where, quite frankly, it's been a little bit lonely when we've been pushing for rate.
As you may have picked up in the release ex-comp, we got 15.5-ish points of rate.
In the quarter, if you go back a year earlier to Q4 2019, we were getting just shy of 9 points of rate, Q4 2018, 4 points of rate, Q4 2017, 2.3, Q4 2016, we got a point of rate.
We think that there are many market participants that have not been pushing for rate for an extended period of time.
And again, we are going to see them needing to catch up, and they are going to need to catch a moving target.
One other comment that I would just make on this front related to rate and loss costs and how people think about rate adequacy.
It would appear as though there are some market participants that may be thinking about loss costs slightly differently than how we think about loss costs.
When we look at the current circumstance, I think it's very clear that severity is on the rise for much of the liability market.
And recently, as a result of COVID-19, there are certainly many parts of the market that had experienced somewhat of a benign period when it comes to frequency.
And our observation is that some may be in for a little bit of a route awakening hopefully, sooner rather than later when COVID is somewhat behind us, we see frequency return to a more traditional normal and that severity trend continues to take off like a rocket ship for the foreseeable future as we've been discussing.
Turning to our quarter, as Rich referenced, pretty healthy growth on the top-line, the growth was up about 9%, the net was up about 8%.
And, obviously, the rate increase that we mentioned earlier is a big contributor to that.
We've gotten the question from time to time from folks to saying, hey, help me do the math.
So you're getting 15 points a rate in this quarter or so.
But you're only growing a smaller amount?
Are you shrinking your business from an exposure perspective?
And the answer to the question is, yes and no.
And what I mean by that is our policy count is actually up a bit.
But what's actually going on is that our insurers, while we may be selling more policies and that number is growing, many of the insurers business activity are particularly measured in their revenue, which we price the policies off of is down as a result of this economic activity in the industry.
So when we look at the situation, here's sort of the short version.
Policy count is up a little bit.
Rate is up, but the number -- the amount of revenue or a number of widgets, if you will, that our insurers are producing is down.
So what does that mean?
That means that we are reasonably well positioned for growth when the economy starts to open back up.
And you will see in all likelihood, from my perspective, a notable catch up in audit premiums, as the revenue begins to pick up, even with those policies that we've already issued, because again, there is a catch up in our audit activities.
Just a couple of other things quickly, the expense ratio, again Rich, covered this pretty thoroughly, I would just offer a couple of quick sound bites.
One, the 15 basis points benefit, if you will, that the expense ratio is getting as a result of a reduction of activity on our end with travel and entertainment, and so on.
That will one of these days come back but we are actively looking at what does return to work look like for us, we certainly expect that people will be back in the office.
But will the travel be the same?
Or were there opportunities to learn through this period of time where maybe travel will not have to return to it what it once was.
That all being said, the reality is that we envision the business growing considerably more as the economy opens back up.
And in addition to that, these higher rates which will also contribute to the higher earned premium coming through, will help out on that front.
And on the loss ratio front, obviously, there was some improvement there.
We also have heard some commentary from some really asking, given all the rate increases, why are we not seeing more improvement in the loss ratio?
Short answer is that, we're trying to be as always very measured and not declaring victory prematurely.
As we've shared with some in the past, the simple reality is, we do not know what the legal system is going to look like and what that is going to mean for loss costs activity once the economy opens back up, and we see the legal system, particularly the courts, operating at more of a traditional level.
Having said all this, let me share with you just a quick observation.
If one were hypothetically, to look at our loss ratio that we had in 2020.
And one were to apply a healthy level of trend, just to pick a number arbitrarily a handful of points.
And then one were to apply that type of rate increases earnings through that we have been achieving.
I think that gives you a reasonable indication as to what the math may look like.
One other piece that one could factor in hypothetically speaking, would be it is perhaps reasonable assumption, I should say, that a pandemic will not happen every year.
And obviously there's significant loss associated with the pandemics and our 2020 numbers.
So some might suggest that we're being a little bit optimistic, but quite frankly, when the dayis all done, it’s pretty simple, straightforward math.
Just on the investment portfolio, again, I'm not going to repeat what you already heard from Rich, but again, it was a strong quarter both as far as the gains.
We have shared with people in the past that on the realized gain front, it's going to be lumpy.
And quite frankly just our alternative returns are going to be lumpy.
Penciling in on average, give or take 25 million a quarter is what we've suggested to people in the past.
We still think that's appropriate.
And they're going to be moments in time where it may feel like there's a bit of a drought.
And there's going to be moments in time where it feels like it's raining money but on average, we think we get great risk adjusted returns.
And again, the same thing applies to the funds.
As we have suggested to people there are going to be moments when the funds do great, there are going to be moments where the funds are lagging a little bit but on average, we suggested that people pencil in high teens, call it 20 million a quarter.
Rich mentioned and I know we've talked about this last quarter how the duration is sitting there at about 2.4 years.
We continue to have a view, that one does not get rewarded for taking the duration out or going out on the yield curve.
When we look at -- when we do the math, when we look at the numbers, yes, we could take it, the duration back out of it.
But the simple fact is that if you move rates up, call it our modeling 100 basis points or so, the impact on a quarterly basis, we will pick up after-tax give or take maybe $5 million.
But if you move rates up 100 basis points, the impact on book value will be approximately $160 million.
So, we are, at this stage, prepared to live with a slightly lower book yield and maintain the flexibility, the high quality and the liquidity and we think that makes sense.
One last topic for me is Lifson Re, you may have picked up the announcement we made just in time for the one-one.
This is a vehicle that we created to sit side-by-side with our traditional reinsurance partners.
We remained very committed to traditional reinsurance, but we felt as though that this was a good platform to sit side-by-side.
We're very fortunate to have two outstanding partners in Lifson Re and while there certainly are plenty of people to partner with these two institutions, not only are financially well heeled, but they are two organizations that are both thoughtful, sophisticated, with tremendous expertise in the insurance industry, and they are truly partners.
In addition to that, it was very important to us that there's a shared view around the topic of risk adjusted return, and a shared sense of obligation and duty to capital.
So, since people tend to unplug right after the Q&A, I'll just tuck in my parting comments now.
And that is while some might suggest that, I found a bit optimistic and some might even suggest that it is a genetic flaw being overly optimistic.
I think the simple reality of the situation is all you need to do is look at the facts and do the math.
And if one were to go down that path and look at the facts and do the math, I think it paints a pretty clear picture for what the next several years look like for this organization. | qtrly net premiums written increased 23.7%. | 0 |
Joining us today are Pedro Heilbron, Chief Executive Officer of Copa Holdings; and Jose Montero, our Chief Financial Officer.
First, Pedro will start by going over our second quarter highlights, followed by Jose, who will discuss our financial results.
Copa Holdings' financial reports have been prepared in accordance with International Financial Reporting Standards.
In today's call, we will discuss non-IFRS financial measures.
Many of these are discussed in our annual report filed with the SEC.
To them, as always, my utmost respect and admiration.
As many of you know, Raul Pascual decided to take on a new professional challenge and left the company earlier last month.
We're very grateful for the more than 15 years of outstanding work he dedicated to Copa.
Daniel has over 12 years of experience with the company in many areas, including airports, scheduling and most recently, fleet and network planning.
We're very confident in Daniel's ability to lead our Investor Relations group.
As you may remember, in our last earnings call, we discussed two diverging themes happening in Latin America.
On the one hand, some countries, including Panama, were experiencing a downward trend in infection rate, which led to fewer travel restrictions and an improved demand environment.
On the other hand, several other countries continued to struggle with the virus, which led many of them to reimpose air travel restrictions and/or new health requirements affecting demand for international travel.
As of today, the story has not changed much.
Due to the increase in COVID-19 cases, several countries have maintained and, in some cases, increased travel restrictions, which has affected our ability to reinstate capacity.
On the other hand, markets without significant restrictions, mainly to and from the U.S. and certain leisure destinations have continued to recover, which has allowed us to increase capacity quarter-over-quarter while also growing load factors.
In the month of June, we successfully transitioned our Hub of the Americas in Panama back to a six bank connecting structure, which enables cost efficiencies and lets us continue adding back frequencies and destinations.
Moreover, we started to reactivate some of the aircrafts sent to temporary storage during 2020.
Going forward, we assume ongoing vaccination efforts will have a positive effect on COVID-19 infection rates in the region, which we expect will lead to the relaxation of travel restrictions and a faster demand recovery, supporting the capacity deployment for the second half of the year.
Now I'll highlight some of our second quarter results.
In terms of capacity, we reached 48% of second quarter 2019 ASMs compared to 39% in the first quarter.
Load factor came in at 77%, which is an improvement of eight percentage points compared to the first quarter.
Revenues increased by 64% over the previous quarter to $304 million, as a result of the additional capacity, higher load factors and improved yields.
The additional capacity also allowed us to reduce our ex fuel CASM from $0.085 in Q1 to $0.076 in Q2.
We reported an operating profit of $8.7 million in the quarter.
Excluding a $10.4 million passenger revenue adjustment the company would have reported an operating loss of $1.7 million.
Cash accretion averaged $21 million per month, which was better than our expectations, primarily due to stronger sales in the quarter.
We ended the quarter with a cash balance of $1.3 billion and total liquidity of over $1.6 billion.
In terms of our operations and despite the complexity imposed by the multiple biosafety protocols, we're pleased to report an on-time performance of 92% for the quarter and a flight completion factor of 99.5%, which again, places us among the best in the world and is a true testament to our employees' continuous commitment to providing a world-class product to our passengers.
Turning now to Wingo.
We can report that it's now operating six 737-800s compared to the four it operated pre-pandemic.
During the second quarter, Wingo continued its regional expansion with new flights from Panama to San Jose, Costa Rica and from Bogota to Lima, Peru.
And since Q1, it's been operating more capacity than in 2019.
To finalize, I'd like to reaffirm that we have a proven and strong business model which is based on operating the best and most convenient network for intra-Latin America travel from our Hub of the Americas, leveraging Panama's advantageous geographic position with the region's lowest unit cost for a full-service carrier, best on-time performance and strongest balance sheet.
Going forward, the company expects that its Hub of the Americas will be an even more valuable source of strategic advantage.
I hope that you and your families are safe and doing well.
I'd like to join Pedro in acknowledging our great Copa team for all their efforts and great spirit many months of the pandemic.
I will start by going over our second quarter results.
Our capacity came in at $2.9 billion available seat miles, which amounts to about 48% of the capacity operated during the second quarter of 2019.
Load factor came in at an average of 77% for the quarter.
We reported a net profit of $28.1 million or $0.66 per share.
Excluding special items, we would have reported a net loss of $16.2 million or a loss of $0.38 per share.
Special items for the quarter are comprised mainly of an unrealized mark-to-market gain of $33.9 million, related to the company's convertible notes issued in 2020 and $10.4 million in revenues related to unredeemed tickets, which corresponds to sales made during 2019 and early 2020.
We reported a quarterly operating profit, which came in at $8.7 million.
On an adjusted basis, not including the $10.4 million in unredeemed ticket revenues, we had an adjusted operating loss of $1.7 million for the quarter.
It's worth noting that we achieved this result while operating at 48% of our pre-COVID capacity.
Unit costs, excluding fuel for the second quarter came in better than the first quarter at $0.076 per ASM, driven by quarter-over-quarter capacity growth as well as our continued focus on maintaining the savings achieved during the past year.
We continue with our cost savings initiatives, and we are targeting to achieve our unit cost below $0.06 once we reach 100% of our pre-COVID-19 capacity.
Aside from our cost performance, our operating results for the quarter were driven primarily by our yields, which at $0.119 on an underlying basis, came in 1% better than those in Q2 2019.
We also achieved cash accretion of approximately $21 million per month for the quarter, which is ahead of our expectation and driven mainly by increased sales during the period as well as some timing of operational cash outflows.
As a reminder for our cash accretion measure, we exclude all extraordinary proceeds from asset sales but include capex and the payment of our financial obligations.
I'm going to spend some time now discussing our balance sheet and liquidity.
As of the end of the second quarter, we had assets of close to $4.1 billion and our cash, short and long-term investments ended at $1.3 billion.
We also ended the quarter with an aggregate amount of $345 million in unutilized committed credit facilities, which added to our cash brought our total liquidity to more than $1.6 billion.
In terms of debt, we ended the quarter with $1.6 billion in debt and lease liabilities, similar levels to the ones reported for the end of the first quarter.
Turning now to our fleet.
During the second quarter, we finalized the sale and delivery of three Embraer-190s.
And in the month of July, we delivered the last remaining Embraer-190 aircraft in our fleet.
During the month of July, we also entered into an agreement for the sale of six 737-700s and decided to keep in our fleet the remaining six 737-700s.
We ended the second quarter with 81 aircraft.
68 737-800s and 13 737-MAX9s.
In these figures, we include our 737-800s that were sent to temporary storage during 2020.
During the fourth quarter, we expect to receive two more 737 MAX 9s and considering we are now keeping the six 737-700s, we expect to end the year with a total of 89 aircraft.
As to our outlook for the rest of 2021, we're still in an uncertain unpredictable demand and operating environment.
And as such, we will not be providing full year guidance.
However, based on preliminary results for the month of July, and the current state of the demand environment and air trial restrictions that can provide the following outlook for the third quarter of 2021.
We -- We expect capacity to be approximately 70% of Q3 2019 levels at about $4.5 billion ASMs, revenues to be approximately 58% of Q3 2019 levels at about $415 million.
We expect our CASM ex fuel to be approximately $0.66, a decrease of 14% versus the second quarter.
Given these operating assumptions, an all-in fuel price of $2.15 per gallon, as well as the incremental capex that we will incur during the quarter to reactivate our fleet, we expect to be cash neutral for the third quarter.
And with that, we'll open the call to some questions. | q2 earnings per share $0.66.
q2 loss per share $0.38 excluding items.
qtrly adjusted basic loss per share $0.38. | 1 |
Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today.
On the call today, we have Scott Donnelly, Textron's chairman and CEO; and Frank Connor, our chief financial officer.
Revenues in the quarter were $3 billion, up from $2.7 billion in last year's third quarter.
During this year's third quarter, we reported income from continuing operations of $0.82 per share.
Adjusted income from continuing operations, a non-GAAP measure, was $0.85 per share for the third quarter of 2021, compared to $0.53 per share in the third quarter of 2020.
Segment profit in the quarter was $279 million, up $90 million from the third quarter of 2020.
Manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year-to-date.
We continue to execute well across the company in the quarter.
At Aviation, we continue to see a solid recovery in the general aviation market with strong commercial demand, increased deliveries in Citation jets and commercial turboprops and higher aftermarket volume.
We delivered 49 jets, up from 25 last year and 35 commercial turboprops, up from 21 in last year's third quarter.
Order activity in the quarter remained very strong, resulting in backlog growth of $721 million bringing us to $3.5 billion at the quarter end.
Also in the third quarter, the Beechcraft King Air 360 and 260 achieved EASA certification and began to deliver customers throughout the region.
Continuing with our product strategy of upgrading existing models at NBAA, we recently announced the Citation M2 Gen2 and the XLS Gen2 product upgrades.
Also on the new product front, such as SkyCourier is continuing to progress through certification with over 1,600 hours of flight test activity and the Beechcraft Denali successfully completed its initial ground engine runs powered by GE's new Catalyst engine.
The Bell revenues were down 3% in the quarter, largely on lower military revenues.
On the commercial side of Bell, we delivered 33 helicopters down from 41 in last year's third quarter.
Moving to future vertical lift.
In September, Bell submitted its proposal for the FARA program, a downselecting award is expected in the second quarter of 2022.
On FARA, Bell is about 60% of the way through its build of the 360 Invictus prototype remains on schedule.
Also in the quarter, Bell inducted the first U.S. Air Force CV-22 for its nacelle improvement modifications.
We saw another strong quarter of execution with operating margins at 15.1%, up 190 basis points from last year's third quarter.
ATAC continued to expand its fleet of certified F1 aircraft with two additional aircraft entering service in the quarter bringing the total fleet to 19 aircrafts at the end of the quarter.
The fleet continues to support higher customer demand for adversary air services, driving higher revenues in the quarter.
At Air Systems, the team booked $25 million in new orders in the quarter, including both fee-for-service activities, as well as new hardware.
Moving to Industrial, overall revenues were lower in the quarter as we continue to experience manufacturing disruptions related to supply chain challenges.
In Kautex, we again saw order disruptions related to the global auto OEM supply chain shortages, which have directly impacted production scheduling and resulting in intermittent line shutdowns of manufacturing efficiencies.
At Specialized Vehicles, we saw continued strong demand in our end markets with higher pricing, which offset production disruptions from part shortages.
To wrap up, Textron delivered a solid quarter with increased aviation backlog, improved manufacturing margins and continued strong cash generation while working to minimize the impact of supply chain disruptions.
Let's review how each of the segments contributed, starting with Textron Aviation.
Revenues at Textron Aviation of $1.2 billion were up $386 million from a year ago, largely due to higher Citation jet volume of $290 million, aftermarket volume of $62 million and commercial turboprop volume of $48 million.
Segment profit was $98 million in the third quarter, up $127 million from a year ago, largely due to the higher volume and mix of $96 million and favorable pricing net of inflation of $22 million.
Backlog in the segment ended the quarter at $3.5 billion.
Revenues were $769 million, down $24 million from last year, largely reflecting lower military revenues.
Segment profit of $105 million was down $14 million primarily due to lower military revenues.
Backlog in the segment ended the quarter at $4.1 billion.
At Textron Systems, revenues were $299 million, down $3 million from last year's third quarter due to lower volume of $39 million at Air Systems, which primarily reflected the impact from the U.S. Army's withdrawal from Afghanistan on its fee-for-service contracts, partially offset by higher volume, primarily at ATAC and Electronic Systems.
Segment profit of $45 million was up $5 million to a favorable impact from performance and other.
Backlog in the segment ended the quarter at $2.2 billion.
Industrial revenues were $730 million, down $102 million from last year, reflecting lower volume and mix of $156 million primarily at Fuel Systems and Functional Components, reflecting order disruptions related to the global OEM supply shortages, partially offset by favorable impact of $44 million from pricing, largely at Specialized Vehicles.
Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above, partially offset by higher pricing net of inflation at Specialized Vehicles.
Finance segment revenues of $11 million -- were $11 million and profit was $8 million.
Moving below segment profit.
Corporate expenses were $23 million and interest expense was $28 million.
With respect to our 2020 restructuring plan, we recorded pre-tax charges of $10 million on the special charges line.
Our manufacturing cash flow before pension contributions was $271 million in the quarter and $851 million year-to-date, as compared to $129 million for the corresponding nine-month period in 2020.
Year-to-date, our cash generation reflects improved working capital management, which includes more linearity in quarterly aircraft deliveries and higher customer deposits in Aviation from an increased backlog.
In the quarter, we repurchased approximately 4.2 million shares, returning $299 million in cash to shareholders.
We're raising our expected full year guidance for adjusted earnings per share to a range of $3.20 to $3.30 per share.
This includes revised tax guidance at effective rate of 15.5% for the full year.
We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $1 billion to $1.1 billion, up $200 million from our prior outlook, with planned pension contributions of $50 million. | compname reports q3 adjusted earnings per share $0.85 from continuing operations.
q3 adjusted non-gaap earnings per share $0.85 from continuing operations.
q3 earnings per share $0.82 from continuing operations.
textron aviation backlog at end of q3 was $3.5 billion.
bell backlog at end of q3 was $4.1 billion. | 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 by discussing our second quarter financial highlights in the context of the current business and economic environment.
I'll then provide a strategic review of each of the segments during the quarter.
Jeff will review our financial results in more detail and provide some thoughts on the quarters ahead.
We are very pleased to report outstanding second quarter results, highlighted by strong growth with net written premium increases of 11.7% or 8.6% on an adjusted basis, excluding the impact of 2020 premium returns, driven by gains across all segments.
Operating income of $104 million or $2.85 per share, operating return on equity of 14.7% and a combined ratio of 94.4%.
Our strong underwriting results are a reflection of our ability to capitalize on evolving market opportunities while navigating the complexities of this dynamic underwriting environment.
From my perspective, there are two key takeaways for the second quarter results.
First, our growth has accelerated and exceeded pre-COVID-19 levels in all segments.
And second, we continue to achieve broad-based profitability with strong underlying underwriting results in each of our businesses.
I would like to briefly discuss each of these points in turn.
With respect to growth, we delivered a meaningful step-up in premium increases in each of our business segments compared to the first quarter of this year.
All of our major segments now are exceeding pre-COVID-19 growth levels as a result of our disciplined and consistent pricing strategy, strong retention and robust new business production metrics.
Strong relationships with our agent partners provide an opportunity for solid growth potential going forward, as we capitalize on our most profitable market sectors and leverage our state-of-the-art technology platforms.
Additionally, we continue to enhance the level of sophistication within our claims data and analytics, including our real-time driving pattern and inflation monitoring tools.
I've never been more confident in our ability to grow profitably.
In Personal Lines, we delivered growth of 11.6% in the quarter or 5% excluding the effect of premium returns in the prior year period.
Our continued strong growth momentum in this business is a reflection of sustained agent and customer interest in our attractive account offerings, targeted pricing actions, the strength of our market position and our ability to successfully adapt and navigate a competitive marketplace.
We grew our Commercial Lines business by 11.7%, driven by the strong performance of our specialty portfolio as well as our small commercial business, which benefited from the economic recovery and is beginning to see the impact of the rollout of our new quote-and-issue platform, TAP sales.
Overall, we are well positioned to continue driving growth in all segments, and we now expect to deliver mid- to high single-digit growth for the remainder of the year.
Regarding loss trends, we are still experiencing some remaining lower auto loss frequency in the quarter, reflecting the fact that a meaningful portion of our customer base likely has the opportunity to utilize more flexible working arrangements.
Additionally, in many areas of the country, our data indicates reduced traffic and less congested rush hours as potentially lingering consequences of the pandemic.
We expect frequency will reach its new normal over the course of 2021, which may provide some persistent lower accident frequency in certain geographies, given our mix and customer profile.
We believe this benefit will be partially offset by near-term increased severity from materials inflation and more severe accidents, including elevated fatalities.
We delivered strong Commercial Lines profitability in the quarter, although we experienced some elevated property losses, including in other commercial, which we do not believe are necessarily recurring or indicative of a trend.
We've been watching the overall property large loss activity for several quarters, and we believe it is consistent with that of the market.
Thus, we think that there is room for additional rate increases in the property lines moving ahead.
And as always, we remain very prudent on our loss selections.
We are mindful about the potential for increased social inflation, medical information and treatment delays and other inflationary trends.
We are watching the economic recovery and the acceleration of business activity closely, as well as the full reopening and catch-up of the court system in many jurisdictions.
While the impact and duration of inflation on our book of business is yet to be determined, we believe our comparatively short reserve duration positions us well to manage through that potential exposure.
With that as background, I would now like to share some recent highlights by business beginning with Personal Lines.
Our efforts to selectively apply rate adjustments where warranted have been very successful, as demonstrated by our sequential PIF growth of 1.8% in auto and 1.7% in home during the quarter.
New business growth came in ahead of expectations, and we are seeing significant sequential improvement and retention.
Our preferred customer focus and our value-based approach represents significant competitive advantages, particularly as agents become even more strategic with their Personal Lines operating models and carrier placement decisions.
Account business represents over 85% of our overall book, leading to a high level of retention and business stability.
Our Personal Lines retention improved by over two points in the second quarter compared to the first quarter, demonstrating the agility of our approach and the success of our business strategy even in this very dynamic environment.
In Personal Auto, we expect our claims auto frequency to gradually approach new normal levels as the year progresses.
Though the pricing environment remains competitive, we are seeing clear indications that the rate deceleration has bottomed out and the industry is looking to increase rates.
This is to be expected given the nature of the Personal Lines pricing cycle, as historically, Personal Auto rates adjust to loss trends rather quickly.
We believe we are more favorably positioned for the future given our prudent pricing strategy throughout the pandemic.
As a result, we have much less of a need to significantly increase rates and create customer disruption in the near future.
We continue to gain momentum with Hanover Prestige, our full account offering for customers with higher value homes and autos and more complex insurance needs.
These customers represent a growing segment of the Personal Lines market, which further positions us as a strategic partner with agents.
The contribution of this offering to our overall growth is increasing every quarter with the second quarter benefiting new business growth by three points.
Turning to Commercial Lines.
We executed extremely well on our strategic priorities, posting growth of 12% in Specialty and 11% in Core Commercial, driven by a pickup in new business, rate increases and exposure growth.
Strong topline growth in our Core Commercial business is expected to continue through the year, driven by the reopening of the economy, continued rate increases and a successful launch of TAP Sales, our small commercial quoting platform, which is proving to be a great addition to our already strong small commercial offering.
In the second quarter, we launched this new platform in an additional nine states, bringing the total to 20 states, and we complete the implementation countrywide for our first product business owners advantage by year-end.
As a reminder, this multiyear significant investment delivers a comprehensive set of capabilities to the marketplace.
It includes a new user front end for our agents, new products and endorsements, new states, new sophisticated pricing algorithms, a new policy administration system and new self-service capabilities.
In those states where TAP sales was deployed in the first quarter of this year, submissions significantly increased and our hit ratio also improved.
The response to this offering has been incredibly positive with agents praising the product's ease of use and simplified quoting process, calling it best in market.
The efficiency gains are substantial, enabling the quoting and an issuance of a single location risk in 50% of the time it required before.
The investments we have made to modernize our infrastructure and enhance our capabilities across our business are being realized at a time when agents are consolidating and buying more agencies that have substantial small commercial books of business.
This is forcing them to become more strategic about the carriers with whom they do business.
Our account focus, easy-to-use tools and product breadth are driving increased efficiencies for our agents and increasing our value proposition to them.
We are confident that our robust offering will provide further growth and agency penetration opportunities for us in the quarters ahead.
In Specialty, we also delivered significant growth.
During the quarter, we achieved double digit growth in our Marine, E&S and management liability lines, which are among our most profitable businesses.
We continue to leverage our expanded products and capabilities in the financial institutions and retail E&S spaces as well.
And we also advanced our total Hanover strategy, deepening the use of our specialty capabilities across our Commercial Lines customer base.
As agents continue to offer specialized products to more customers, we are confident that our Specialty business will continue to generate critical growth for us going forward.
We are pleased with the commercial rate environment and the exposure dynamics in our markets.
We achieved rate increases of 6.5% in Core Commercial and sustained strong retention at 84.9%.
We continued to implement double digit rate increases in Commercial Auto and upper single digits in property with granular pricing segmentation and a strong differentiation in price and retention by risk type.
Exposure growth exceeded historical levels in the quarter, which bodes well for our growth prospects going forward.
We achieved rate increases of 8.5% in Specialty, up from 7.5% in the first quarter.
In general, Specialty rates can fluctuate from quarter-to-quarter as a result of large account renewals and other unique items.
But overall, pricing in our Specialty markets has been very strong with price increases continuing to outpace loss trends.
There continue to be meaningful drivers that support the strength of the rate environment in Commercial Lines, including the potential of an increase in social inflation, property loss pressures from materials costs, increased reinsurance costs and low interest rates.
We believe our focus on smaller accounts and differentiated offerings will help to shield us from meaningful pricing deceleration, which can occur in larger-sized brokered accounts.
In summary, the exceptional growth we delivered during the quarter reflects the significant positive momentum we have established across our business and sets the stage for continued profitable growth.
We are performing exceedingly well in an uncertain environment, leveraging our unique distribution capability, distinctive agency and customer-centric strategies; disciplined approach to underwriting and pricing; and broad and specialized product offerings.
As we begin the second half of the year, we are encouraged by our performance year-to-date and confident in our ability to advance our strategy and capitalize on opportunities for profitable growth going forward.
As I have said many times, we are extraordinarily proud of the work our team has done over the course of this public health crisis, delivering on our promises, maintaining and even enhancing the levels of service we provide to those who depend on us.
As we continue to drive our business forward, positioning our company to deliver sustained profitable growth, we are being very thoughtful and opportunistic determined to emerge from this ordeal as a better insurance company, employer and corporate citizen.
We are closely monitoring the rapidly changing employment trends and practices as well as employee preferences, intent on strengthening a culture that for us has been an important competitive advantage, enabling us to attract and retain outstanding talent.
We have begun to invite employees back to work on a largely voluntary basis and expect to fully reopen our offices sometime during the fall, assuming the public health environment is conducive to do so.
We are planning to embrace a progressive hybrid model, one that will enable us to provide agents and customers the products and services they expect and deserve and to provide our employees a flexible engaging work environment where they can build rewarding careers.
These are truly exciting times for those that are up for the challenge.
For the second quarter, we reported net income of $128.5 million or $3.52 per diluted share compared with net income of $115.2 million or $3.01 per diluted share in the second quarter of 2020.
After-tax operating income was $104 million or $2.85 per share compared with $62.7 million or $1.63 per share in the prior year quarter.
The difference between net and operating income is due to the increase in the fair value of equity securities.
Book value per share increased 4.8% in the quarter driven by earnings and to a lesser extent, an increase in unrealized gains in our fixed income portfolio.
With the economy largely closed in most of the country placed under stay-at-home orders, many lines of business experienced historically low frequency of claims last year.
In response to the fewer miles driven, we returned some premiums to our auto policyholders which impacted our reported net written premiums and underwriting ratios.
In addition, business exposures, payrolls and receipts were exceptionally low in 2020.
As the economy continues to open up and individuals return to the roadways, we believe our more recent growth trajectory and loss experience, as well as our original expectations for 2021 are better barometers by which to assess our performance.
We are pleased with our overall combined ratio of 94.4% in the second quarter of 2021 compared to 96.2% in the prior year quarter, which, a year ago, reflected several large catastrophe events, including losses from social unrest.
In the second quarter 2021, we incurred catastrophe losses of $76.8 million or 6.5% of net earned premium, 40 basis points above our quarterly expectation, primarily reflecting severe wind, torrential rain and hail events throughout the Midwest in June on the heels of a very light April and May.
Michigan, our largest Personal Lines state, was severely impacted by the rain and flooding events in mid- to late June, particularly in the homeowners line.
Michigan is a very profitable state for us and historically runs at a low 90s combined ratio.
However, when adverse weather events occur, as expected, we do see losses.
We also experienced some favorable catastrophe development in the quarter from prior years, which is a testament to our prudent reserving approach.
Prior year reserve development, excluding catastrophes, was favorable in the quarter, adding $12.6 million to the bottom line, primarily reflecting continued favorability in workers' compensation, Personal Auto and several Specialty lines.
We continue to be prudent in our reserving in Commercial Auto, where extension of loss patterns and prior bodily injury development warrant a cautious approach.
Additionally, in light of the pandemics effect on loss patterns in 2020, we remain vigilant as we assess ultimate loss costs.
With the economy regaining momentum, we are also mindful of the potential for reserving uncertainties related to social and economic inflation, delayed medical procedures and information as well as ongoing court delays.
Over the past several years, we have placed a considerable amount of emphasis on strengthening our balance sheet.
It is stronger than it has been in many years coming out of the second quarter, and we believe such prudence will serve us well.
Claims activity related to COVID-19 exposures continues to be very manageable, and we are holding substantial IBNR in that area.
Our expense ratio for the second quarter of 2021 was 31.2%.
This was in line with our expectations, consistent with the second quarter of 2020, an improvement from the first quarter of this year.
We are confident that we can deliver a 30 basis point expense ratio improvement for full year 2021.
Overall, current accident year combined ratio ex-CAT was 89% in the quarter.
This very strong underwriting result is a reflection of our diversified book of business, our earning in of rate increases and some lingering frequency benefit in Auto Lines.
Looking at our underlying underwriting results by segment.
Our Commercial Lines combined ratio, excluding catastrophes, was 89.5%, up 2.7 points from the second quarter of last year, primarily reflecting a comparison to an extraordinarily low level of losses in the second quarter of last year.
Our CMP current accident year loss ratio, excluding catastrophes, was 57.6%, in line with most recent trends but slightly elevated compared to our expectations, driven by a higher incidence of property large losses.
We believe that our experience is relatively consistent with that of the industry, adding to our continued expectation that there is room for additional property rate increases in the marketplace.
We achieved substantial CMP property rate increases in the second quarter, and we believe this trend will continue.
In other Commercial Lines, the current accident year loss ratio, excluding catastrophes, was 55.3%.
This result reflected the impact of a large loss and reinstatement premium triggered thereon in our highly profitable Hanover Specialty Industrial business.
In fact, this particular loss was offset by the overall favorability in our specialty business within the quarter to bring overall loss amounts generally in line with our expectations.
Our specialty industrial business runs at a long-term combined ratio in the sub 80s.
We are confident in our underwriting capabilities and future strong performance in this business.
Our Commercial Auto current accident year loss ratio, excluding catastrophes, remains relatively consistent with the recent quarter's results.
We are continuing to take substantial rate increases to address the industrywide multiyear liability issues affecting this line.
Turning to workers' comp.
Current accident year loss ratio was 61.5%, which was generally in line with recent historical results.
Our second quarter 2020 ratio was unusually low due to stay-at-home mandates for much of the country.
While the underlying trends in this line remained largely favorable, we continue to be very prudent with our loss picks in light of the rate environment and the potential for new risks posed by office reopenings for certain businesses.
Commercial Lines net written premiums grew exceptionally well at 11.7% in the second quarter, powered by our small commercial and Specialty businesses.
We achieved strong operating metrics, including improved rate, meaningful increases in exposures, return to strong new business growth and a solid core commercial retention of 84.9%.
Overall, despite some minor and expected variability in losses, we are very satisfied with Commercial Lines trends and underwriting returns in the quarter.
Turning to Personal Lines.
Our combined ratio, excluding catastrophes, was quite low at 85.3%, but up from 76.8% in the same period last year reflecting the benefit of COVID-19 related auto claims frequency declines.
Our Personal Lines auto current accident year loss ratio, excluding catastrophes, was 62.2% below historical trends, but up slightly from 60% in the first quarter.
While frequency trends industrywide are quickly moving toward historical norms, our business is still benefiting slightly from lower frequency.
We believe there may be a modest longer-term frequency benefit due to changing driving patterns from work from home flexibility of our customer base.
So we are observing these trends carefully, and we continue to do an excellent job managing the balance between growth, rate and profitability.
Current accident year loss ratio in our homeowners line remained relatively consistent with prior results, but was slightly above our expectations.
Elevated property loss activity and higher material costs indicate the need for future rate increases.
We are seeing a significant push for rate in homeowners in the independent agency space.
Personal Lines net written premiums grew 11.6% in the quarter or 5% adjusted for last year's premium returns.
This strong result was driven by meaningful acceleration in new business.
We also reestablished momentum in our renewal premiums as a result of lower rate increases in certain areas and improve retention.
The strength of our data and analytics team and swift communication of market trends across our businesses positions us to opportunistically grow when market conditions allow and make well-informed adjustments when necessary.
We are pleased to see Personal Lines largely rebound to its pre-COVID-19 growth levels.
We have full confidence in Personal Lines strong growth and profitability prospects.
Moving to investment performance.
Our net investment income was $75.6 million for the quarter, up $17.9 million or 31% from the prior year period.
This is largely due to an unusual fluctuation in partnership income from period to period.
Net investment income in the second quarter of 2020 was adversely affected by a $4.6 million loss on limited partnerships, while partnership income in the second quarter of 2021 was $16 million, exceeding our expectations by $9 million.
Our partnership results through the first half of 2021 do not change our outlook for investment partnerships or overall net investment income for the balance of the year.
New money yields continue to put pressure on our overall net investment income.
Although so far, we've been able to meaningfully offset it with robust cash flows from operations.
We expect cash generation from our underwriting operations to remain strong.
Cash and invested assets at the end of the second quarter were $9.1 billion, with fixed income securities and cash representing 85% of the total.
Our fixed maturity investment portfolio has a duration of five years and is 96% investment grade.
We have a high-quality portfolio with a weighted average of A plus.
Net unrealized gains on the fixed maturity portfolio at the end of the second quarter 2021 were $357.8 million before taxes.
Moving on to our equity and capital position.
Our book value per share of $88.23 reflects an increase of 4.8% in the quarter.
We continue to be thoughtful stewards of our shareholders' capital and deliver on our capital allocation strategy.
Through July 26, 2021, we repurchased approximately $10 million of stock, leaving about $395 million of capacity under our stock repurchase authorization that the Board expanded in May.
In addition, during the quarter, we paid a regular cash dividend of approximately $25 million.
Our capital priorities remain unchanged.
First, we strive to maintain our strong capitalization and liquidity; second, we continue to prioritize organic growth for which we generate plenty of capital; and third, we continue to maintain our policy of returning excess capital to shareholders through cash dividends and share repurchases.
We will continue to remain nimble and actively manage our capital with the best interest of shareholders in mind.
Looking ahead, we now expect net written premium growth in the mid- to high single digits in the second half of the year.
Based on our strong results in the first half of the year, we believe upper mid-single-digit growth for the full year is possible.
With two quarters of better-than-expected ex-CAT combined ratio performance, we are improving our full year 2021 ex-CAT combined ratio outlook from 90% to 91% to 89% to 90%.
As noted earlier, we remain on track to reduce our expense ratio by at least 30 basis points in 2021 to 31.3% and we expect our third quarter cat load to be 5.2%.
We are very pleased with our underlying performance and our ability to continue our positive momentum in the quarter.
We are well positioned to sustain our robust growth momentum and top quartile profitability, delivering value to our agents, customers and shareholders.
In addition, we are pleased to announce that we will be hosting a Virtual Investor Day on September 23, in which we will discuss the key aspects of our differentiated strategy, go-forward growth drivers and long-range financial targets.
We will be providing additional details in the coming weeks and look forward to seeing you there. | compname reports second quarter net income and operating income of $3.52 and $2.85 per diluted share, respectively.
combined ratio of 94.4%.
q2 operating earnings per share $2.85.
q2 earnings per share $3.52. | 1 |
The slides for today's call can be found on the Investors section of our website, along with the news release that was issued today.
These uncertainties include economic conditions, market demands and competitive factors.
Also, the discussions during this conference call may include certain financial measures that were not prepared in accordance with generally accepted accounting principles.
Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the slide deck for today's call, which is posted on the Investors section of our website.
Turning to slide three.
As expected, the COVID-19 pandemic led to challenging market conditions in Q2.
Despite these circumstances, strong execution during the quarter enabled Rogers to deliver solid financial results.
Before discussing our results in more detail, I'll provide an update on our ongoing response to the COVID-19 pandemic.
As I highlighted during our last earnings call, our priorities are to manage through the current macroeconomic environment, while building upon our strategic positions and strengths for Rogers' future success.
From an operations standpoint, all of our manufacturing facilities continue to operate in Q2 as essential businesses and did not experience any significant disruptions related to COVID-19.
Our factory teams continue to do an excellent job of managing the current situation and adapting to robust health and safety protocols.
Our nonmanufacturing employees have transitioned seamlessly to remote work arrangements.
They are maintaining effective collaboration with their colleagues and with our customers, where we continue to secure design wins and support customer needs.
For example, an OEM customer was at risk of missing a critical milestone in the development of their new EV technology after returning from a forced shutdown.
Rogers' employees acted with a sense of urgency, engaging on design support and delivering the critical components needed to keep the customer on schedule.
This dedication, in addition to our balance sheet, market positions and product portfolio gives Rogers a strong foundation to overcome current market dynamics.
Turning to slide five.
I'll next discuss our financial results in more detail.
Q2 net sales of $191 million were down 4% from the prior quarter and were within our guidance range.
Second quarter gross margin of 36.6% and adjusted earnings per share of $1.13 per share exceeded our guidance.
Gross margin gains were driven by strong operational execution and favorable product mix.
As Mike will discuss in more detail, we are very encouraged by the progress we are making on our cost improvement road map.
We have built considerable momentum, and we will continue to drive this initiative forward as a top priority.
The 23% increase in adjusted earnings per share from the prior quarter was due to the gross margin performance and our timely actions to manage operating expenses.
As the current market challenges are expected to extend into the third quarter, we will continue to carefully manage manufacturing costs and operating expenses.
We generated robust free cash flow of $39 million in the second quarter, and our balance sheet remains strong, enabling us to navigate the current macro environment, while also investing in our future growth.
From a market perspective, the quarter finished largely as anticipated.
Sales in our ACS business increased from stronger defense demand and higher wireless infrastructure sales, which were driven by 5G deployments in China.
The strength in these markets was offset by the significant impacts of COVID-19 pandemic on most other markets, especially general, industrial and automotive.
One market we typically don't highlight, but it is certainly a strength is aerospace and defense, where recent defense design wins drove sequential sales growth of more than 25%.
I'll discuss more about the longer-term opportunity in this market later.
Also, as highlighted, advanced mobility and advanced connectivity continue to comprise nearly 50% of total revenue.
Both focus areas continue to be important to Rogers, but we are seeing an evolution in the relative opportunity within each of these areas, which we'll look at in greater detail on the next two slides.
Turning to slide six.
All three of our business units are focused on opportunities in advanced mobility, which includes EV/HEV and ADAS markets.
It has become increasingly clear that the momentum behind vehicle electrification is accelerating despite the near-term challenges brought on by COVID-19.
Recent statements from a number of European, Asian and U.S. automakers point to the rapid progression toward fleet electrification.
On a broader scale, recently enacted government stimulus programs in Europe are providing an additional catalyst for electric vehicle growth.
Given this outlook, we are intensifying our focus to prioritize capital investments and dedicate resources to the expanding opportunities in advanced mobility.
First, in the PES segment, we are well-positioned to take advantage of the 35% plus CAGR expected in this market over the next five years.
Rogers' leading substrate technology for power semiconductor packaging is used across the spectrum of mild hybrids, plug-in hybrids and full electric vehicles.
We have a strong product portfolio to address the entire market, including our new silicon nitride substrates, which enable us to participate in the growth of silicon carbide power modules for EVs.
As a general reference point, although our content opportunity per vehicle can vary based on vehicle type and power levels, our substrate content ranges from $5 in a 48-volt mild hybrid to around $40 in a full electric vehicle.
Power interconnects provide an additional content opportunity for this market.
And like our substrate solutions, the dollar content can range broadly.
We have secured design wins with a number of promising entrants to the EV market and see this as another avenue of growth.
In our EMS business, we continue to be encouraged by our strong pipeline of design activity and wins with leading automakers and battery suppliers.
Our content opportunity spans most electric vehicle types and battery technologies with an especially strong opportunity in battery pressure pads, vibration dampening pads and battery pack sealing solutions provide additional content opportunities.
Similar to our PES business, our content opportunity can vary based on battery size, battery type and other factors.
However, as an example, Rogers' content opportunity in battery pressure pads for plug-in HEVs and EVs can be greater than $30 per vehicle.
In ACS, we have a leading position in the ADAS market where there is significant long-term growth opportunity.
Although the near-term outlook for auto sales is challenging, only around 35% of vehicles manufactured today contain ADAS features.
As these safety features increasingly become more standard in new vehicles, the market is expected to grow at an 18% CAGR over the next several years.
Longer-term trends toward autonomous driving are also expected to increase the average number of sensors per vehicle.
We see these markets in advanced mobility as opportunities that are extremely well-suited to Rogers' strengths, which are developing solutions for applications that demand high-performance and high reliability and providing expert engineering support.
We are well-positioned across each of these markets, and we'll continue to invest in our capabilities to take advantage of the growth opportunities ahead in advanced mobility.
Our advanced connectivity focus includes the wireless infrastructure and portable electronics markets, along with other emerging opportunities.
In wireless infrastructure, trade restrictions and political tensions as well as an ongoing decline in 4G deployments are creating challenges and limiting visibility.
While this creates uncertainty, industry experts continue to point to the potential for global 5G deployments in excess of one million base stations per year for the next few years beginning in 2021.
Although the longer-term 5G market outlook is positive, trade and competitive factors continue to moderate this opportunity for us.
We expect that we will have minimal share with Huawei.
Also, we are seeing some other OEMs adopt lower content antenna designs that are less technically demanding.
5G content of high-frequency circuit materials varies based on OEM design and ranges from approximately $100 to $200 per base station for the combined antenna and power amp systems.
The weighted average content opportunity is closer to the low end of that range, as Chinese OEM customers have adopted lower content designs.
Turning to portable electronics.
The overall market has been impacted by the effects of COVID-19 in 2020.
However, we see a good growth opportunity in 5G handsets, which utilize our elastomeric solutions.
Sales of 5G phones are expected to grow to around 15% of total units this year and then increase to roughly 30% of the market in 2021.
Design changes incorporated in 5G handsets are creating greater content opportunity for Rogers' advanced materials in the range of 10% to 15% versus 4G phones.
High-performance tablets, which contain our circuit materials, are a relatively smaller opportunity, but recent demand has been strong, driven by remote working and education.
In addition to the other opportunities discussed, we also continue to pursue growth opportunities for high-frequency circuit materials used in low earth orbit Internet service, next-generation advanced antenna materials and high-speed data applications.
ACS net sales for the second quarter were $71 million, an increase of 10% sequentially.
Strong growth from the defense market and higher 5G wireless deployments in China were partially offset by an expected decline in ADAS demand due to automotive factory shutdowns.
Looking ahead to Q3, we expect sales in the defense market to remain strong due to the previously mentioned design wins.
In the ADAS market, current expectations point to a potential rebound in demand late in Q3, but it remains uncertain when auto sales may return to pre-pandemic levels.
In wireless infrastructure, we anticipate a decline in Q3 sales from expected lower base station builds and decontenting.
Recent data from Chinese officials indicates that more than half of the planned 2020 5G installations were completed by the end of June.
The effects of trade tensions, lower 5G base station content and the ongoing decline in 4G deployments are creating a great deal of uncertainty around our outlook for wireless infrastructure.
As a result, we believe the growth opportunity in wireless infrastructure is substantially reduced going forward.
In defense, we have seen a number of significant design wins for multiyear projects.
This is supporting the outlook for a double-digit growth rate in 2020 and a high single-digit rate going forward.
In ADAS, although there are near-term challenges, as discussed earlier, the medium to long-term growth projections for this market remain robust with a 5-year CAGR of 16%.
PES net sales in the second quarter were $45 million, a decrease of 3% as compared to Q1.
The decline was due to lower sales in the traditional automotive market where demand was significantly reduced by COVID-19.
Market demand for electric vehicles continues to be strong, but we did see a decline in Q2 sales from EV factory shutdowns.
We saw moderate increases in industrial power and mass transit market sales, primarily related to customer inventory management rather than stronger end market demand.
Looking ahead to Q3, we anticipate an improvement in EV/HEV market demand as manufacturing disruptions have now subsided.
Recent sales of electric vehicles in Europe have also been increasing as COVID-19 restrictions continue to be lifted.
Offsetting the expected growth in EV sales is a lower outlook for mass transit demand due to ongoing effects from COVID-19.
Improvements in PES operations contributed significantly to our Q2 gross margin performance.
Continuing the trend from prior quarters, we again saw improvements in yields and reductions in material usage.
We are pleased with the improvements, but remain focused on additional opportunities identified in our ongoing cost improvement road map.
Q2 EMS net sales were $72 million, a sequential decrease of 14%, primarily due to the economic impact of COVID-19.
The largest decline was in our general industrial and consumer markets, including portable electronics.
Sales of battery pads and battery pack sealing solutions for the EV/HEV market was a bright spot in the quarter and was driven by stronger demand from Europe.
For Q3, we expect demand for portable electronics and EV/HEV battery applications to increase.
Portable electronics is expected to grow in Q3 from both normal seasonal patterns and increased sales of 5G handsets.
Sales in the general industrial market are anticipated to be similar to Q2 levels.
While we are seeing some signs of recovery, current visibility remains limited.
Our sales in this market are correlated with capital spending levels, and given the current economic uncertainty, many companies are delaying investments.
Lastly, I'll summarize the key messages before passing the call over to Mike.
First, we took actions to protect our employees' health and well-being, while also continuing to meet our customer needs.
Second, we managed through a dynamic quarter to deliver solid Q2 results.
As evidenced by our gross margin and earnings improvement, we maintained focus on our cost improvement road map and took timely actions in response to the current environment.
We generated strong free cash flow, and our balance sheet remains healthy.
Lastly, even as near-term visibility is limited, we have maintained a long-term view of the market opportunities.
We are focused on accelerating our plans to take advantage of the significant opportunities in advanced mobility and pursuing opportunities in 5G technologies in advanced connectivity.
By leveraging our strong product portfolio and investing in innovation and growth markets, we are positioning the company for the long term.
In the slides ahead, I'll review our second quarter results, followed by our third quarter guidance.
Turning to slide 13.
Second quarter revenues, as previously noted, were $191.2 million, 4% lower than Q1, but within our guidance range of $190 million to $205 million.
Weak demand in most automotive applications, consumer applications, including portable electronics and general industrial applications were responsible for the lower revenues in Q2.
Strong demand in the second quarter for materials serving the defense market as well as the anticipated increase in materials for 5G base station deployments, mainly in China, mitigated the revenue decline in the quarter.
Our gross margin for the second quarter was 36.6%, an increase of 360 basis points compared to the Q1 margin and well above the top end of our guidance range of 32.5% to 33.5%.
In the quarter, we experienced a more favorable product mix as the higher-margin ACS revenues represented a higher percentage of total revenues.
In addition, our focus on operational excellence, including improved manufacturing yields, material cost savings and matching our revenues with our demand profile is reflected in the higher gross margin.
Lastly, we benefited from a China trade legislation decision in the second quarter, which will reimburse Rogers for increased tariffs paid in past quarters.
This tariff refund of $3.3 million, which we did not anticipate, more than offsets the $3 million for COVID-19-related expenses incurred in the second quarter.
GAAP operating income for Q2 of $21.1 million included $3.9 million of accelerated amortization for certain intangible assets acquired in the DSP acquisition in 2017.
As the DSP demand has significantly decreased, we determined that certain of the acquired intangible assets have an economic life that will expire at the end of 2020.
Accelerated amortization for these intangibles will be $11.7 million in both Q3 and Q4.
The incremental amortization of $27.4 million through December 31, 2020, will be excluded from our adjusted results, consistent with all amortization for intangible assets acquired in acquisitions.
Adjusted operating income for Q2 2020 was $29.5 million or 15.4% of revenues, a meaningful increase from Q1 of $22.6 million and 11.3% of revenues.
The increase in the second quarter was driven by the improved gross margin, as discussed earlier, as well as significantly lower operating expenses, driven both by cost saving activities to mitigate the decrease in revenues and lower travel related expenses resulting from the pandemic.
GAAP net income for the second quarter of $14.5 million is $1.2 million higher compared to Q1.
The effective tax rate for the second quarter of 30.6% was significantly higher than the first quarter effective tax rate of 20.6% due primarily to an increase in the reserve for uncertain tax positions in the quarter, resulting from routine audits in foreign jurisdictions.
GAAP earnings per share for the second quarter was $0.78 per fully diluted share at the top end of our guidance range of $0.58 to $0.78.
On an adjusted basis, the company delivered earnings per share of $1.13 per fully diluted share in the second quarter, above the top end of our guidance range of $0.80 to $1 per share.
Turning to slide 14.
Our Q2 revenues of $191.2 million decreased $7.6 million compared to the first quarter of 2020.
As Bruce mentioned, EMS revenues decreased 14%, PES revenues decreased 3%, while ACS revenues increased 10% sequentially.
Currency exchange rates unfavorably impacted second quarter revenues by $1.1 million compared to the first quarter.
The sequential ACS revenue increase resulted primarily from a 28% increase in wireless infrastructure revenues and a 27% increase in aerospace and defense revenues.
The increase in 5G was anticipated as China resumed its 5G rollout late in Q1 and continued into the second quarter.
The 5G demand increase peaked mid-quarter and slowed at the end of the quarter, consistent with the end of the first wave of deployments in 2020.
The increase in aerospace and defense application revenues came mostly from defense, as we continue to deliver on existing program and capture new programs.
As expected, ADAS revenues were down significantly compared to Q1 as our customers built inventory in the first quarter and automakers shutdown lasted well into the second quarter.
We expect demand for ADAS applications to remain weak in the third quarter, even as the auto industry starts to recover as our customers need to work off inventory purchased in the first half.
Revenues in our EMS segment decreased in Q2 compared to Q1 in all applications with a lone bright spot being EV/HEV battery pad applications, which grew 38%.
We continue to be encouraged by our engagement in the development and design process and adoption of our materials into new design wins with battery makers for significant OEMs. Revenues for portable electronics, which comprise approximately 25% of the segment revenues, declined 7% in the quarter due to consumer demand softness for handheld devices, exacerbated by the coronavirus pandemic.
As we exited Q2, we started to see some budding demand for handhelds driven by 5G handsets and increased content in certain 5G phones.
Revenues for general industrial applications, covering many diverse markets, comprise over 45% of the segment revenues.
These revenues declined 16% sequentially due to lower demand in areas such as oil and gas and general manufacturing and industrial applications.
PES revenues decreased in the second quarter compared to Q1 due to weak demand in our automotive applications, both vehicle electrification and EV/HEV applications, including power semiconductor substrates as well as laminated busbars for power distribution.
Vehicle electrification applications decreased 35% in Q2 due to soft consumer demand for and automaker shutdowns, as discussed earlier.
The semiconductor substrate revenues for EV/HEV, which account for approximately 25% of the segment revenues, decreased 12% compared to the first quarter; and the laminated busbar revenues for EV/HEVs, which account for less than 10% of the segment revenues, decreased 65% sequentially.
Both of these sequential declines were primarily due to the production shutdown of a significant EV OEM in the quarter, resulting from the coronavirus threat.
Revenues for power semiconductor substrates for general industrial applications, which comprise over 30% of the segment revenues, were up close to 6% compared to Q1.
Spot orders of laser coolers and certain customers for industrial power applications drove the increase.
But in general, these applications remain relatively weak in the quarter.
Turning to slide 15.
Our gross margin for the second quarter was $70 million or 36.6% of revenues.
The increase in gross margin percentage was due to a favorable product mix and improved manufacturing execution efforts, as mentioned earlier.
In the quarter, the company spent approximately $3 million associated with the coronavirus pandemic and accrued a benefit of $3.3 million for a refund of increased tariff costs in China.
The tariff benefit is not expected to repeat in Q3, and the coronavirus pandemic costs are expected to be minimal in the third quarter.
Gross margins increased significantly for ACS in the second quarter as product mix, cost reduction efforts and the accrual of the tariff refund benefited the margin.
The higher wireless product revenues, specifically for power amp applications resulted in the more favorable product mix.
The EMS gross margin was down compared to the first quarter due to lower volumes, resulting in lower absorption of fixed overhead and an increase in inventory reserves for slow-moving products resulting from the lower demand levels.
In the second quarter, we continued to execute on the PES recovery plan and saw the good results in the improved gross margin.
We remain encouraged by continued signs of progress made in the quarter for manufacturing yield, continued material cost reduction and optimizing the resources for the demand levels.
The second quarter progress resulted in a 400 basis point improvement in gross margin for PES in the second quarter.
Over the past three quarters, through focus on operational execution, we have improved the PES gross margin by over 800 basis points.
We are encouraged and confident we will capture an incremental 200 to 400 basis points of improvements in the business, subject, however, to increased volumes.
We continue to focus on operational execution as a key component of gross margin expansion.
As evidence of the improvement the company has made over the past year, in the second quarter of 2019, the company generated a gross margin of 35.3% on revenues of $243 million.
In the second quarter of 2020, we generated a gross margin that is 130 basis points higher on $52 million less revenue.
The improvement is equivalent to approximately 450 basis points of gross margin conversion on equivalent product mix.
slide 16 details the changes to adjusted net income for Q2 of $21.1 million compared to adjusted net income for Q1 of $17.2 million.
As discussed earlier, the adjusted operating income for Q2 of $29.5 million and 15.4% of revenues was meaningfully higher than Q1's adjusted operating income.
Adjusted operating expenses for Q2 of $40.4 million or 21.2% of revenues were $2.7 million lower than Q1 operating expenses of $43.1 million.
The lower expenses resulted from disciplined cost management to adjust for reduced revenues as well as reduced travel-related expenses resulting from the coronavirus pandemic threat.
As previously mentioned, Rogers' effective tax rate for the second quarter increased to 30.6%, as a result of recording significantly higher reserves for uncertain tax positions accrued to address certain routine audit findings in foreign jurisdictions.
We now expect our effective tax rate for 2020 will be 26% higher than our previously communicated expected tax rate of 24% to 25%.
Turning to slide 17.
In the second quarter, the company generated strong free cash flow of $39.3 million and ended the second quarter with a cash position of $298.7 million.
In the quarter, we generated $46.3 million from operating activities, including a $22.3 million reduction in working capital and repaid $50 million on our revolving credit facility.
We ended the second quarter with a net cash position defined as cash and equivalent balances in excess of the amounts owed under our revolving credit facility of $75.7 million.
In Q2, the company spent $7 million on capital expenditures.
We spent $18.2 million year-to-date through June.
We communicated a capex spending range of $40 million to $45 million for 2020 and expect to come in at the lower end of the range, while continuing to invest to fund growth opportunities in EV/HEV applications.
We paid down an additional $125 million on our revolving credit facility on July 29.
The paydown resulted in an outstanding balance on our revolver of $98 million.
The company ended the second quarter with a strong balance sheet, is well-positioned to withstand the current economic challenges and will look to invest in opportunities to accelerate growth out of the downturn.
Taking a look at our Q3 2020 guidance on slide 18, we see both opportunities and challenges.
The opportunities include continued strength in defense for ACS, the portable electronics market preparing to launch 5G handsets benefiting EMS, renewed strength in power semiconductors and laminated busbars for EV and HEV applications in PES with the resumption of manufacturing at a significant OEM and continued progress in the EV/HEV battery pad applications in EMS. The challenges in Q3 included a demand slowdown in wireless infrastructure revenues, as Bruce discussed in his remarks.
In addition, we anticipate applications selling into the traditional automotive market will be down sequentially in the third quarter, even as signs of a broader automotive recovery become evident as many of our customers will work down inventory levels.
Lastly, we have not seen many signs of a general industrial recovery early in the third quarter and expect revenues from these applications to be flat compared to the second quarter.
Our revenue guidance is provided with the assumption that our supply chain will continue to supply critical materials, and we will continue to produce and deliver products for our customers with minimal disruptions from the coronavirus pandemic.
Therefore, revenues for Q3 are estimated to be in the range of $175 million to $190 million.
We continue to monitor and flex our spending for manufacturing infrastructure, SG&A and capital expenditures to address the anticipated demand levels.
Likewise, we continue our pursuit of operational excellence and efficiency.
Even with these actions, an unfavorable product mix and lower volumes will negatively impact our gross margins in Q3.
As a result, we are guiding gross margin in the range of 35% to 36%.
We guide GAAP Q3 earnings in the range of $0.19 to $0.39 per fully diluted share.
On an adjusted basis, we guide fully diluted earnings in the range of $0.90 to $1.10 per share for the third quarter. | compname reports q4 2020 net income available to common shareholders of $189.8 mln, or $3.74 per diluted share.
compname reports fourth quarter 2020 net income available to common shareholders of $189.8 million, or $3.74 per diluted common share.
operating loss attributable to common shareholders of $77.1 million, or $1.59 per diluted common share.
q4 operating loss per share $1.59.
q4 earnings per share $3.74.
qtrly total revenue $1.4 billion versus $1.11 billion. | 0 |
I've already scheduled time with many of you after the call to fill in the gaps.
A quick bit of housekeeping before we start.
Cory and I will be participating in two investor conferences during the week of March 7.
The first is the Raymond James annual institutional investors conference at the Grand Lakes Resort in Orlando.
We'll travel to Boston to present the next day at the UBS annual global consumer and retail conference.
With that, let's move on to today's call.
Investors should familiarize themselves with the full range of risk factors that could impact our results.
Those are filed in our Form 10-K, which is filed with the Securities and Exchange Commission.
I want to remind everyone that today's call is being recorded, and an archived version of the call will be available on our website.
The first quarter may comprise a small percentage of the year, but it doesn't mean things are slow around here.
In fact, there are several important storylines coming out of Q1 that are worth exploring in more detail.
Among them: a continued high level of consumer engagement that led to a second straight year of Q1 profitability in the U.S. Consumer segment, with strong momentum as we ended the calendar year; the announcement of a third pricing action in the consumer business that will take effect in the second half of the year; an increase in our full year sales guidance for the segment; some moderation, finally, in commodity prices; continued restrengthening of our supply chain and has us well positioned to meet the demands for the upcoming season; restructuring efforts in Hawthorne that will make the business even stronger; and plenty of activity, including two more Hawthorne acquisitions in what is the most robust M&A pipeline we've had in 25 years.
Yes, there's a lot to cover.
Before I jump into the details, I want to share a story that helps us put context around the strategy I outlined on our last call and its potential to drive value for our shareholders.
As most of you know, my brothers and sisters and I own roughly 25% of the company.
As part of our recent meeting with our advisors, we discussed the financial return on the family's investment since the merger of Scotts and Miracle-Gro in 1994.
Just like other long-term shareholders, we've done well.
The most important part of the discussion, however, was centered around the simple question, why?
Why have we done so well?
And that's the part of the story that matters to all shareholders.
One of the benefits, I believe, from strong family ownership in a public company is that we take a long-term view, and we're not afraid to think like an activist and recognize the need to reimagine the company from time to time.
This is one of those times.
On our last call, I said we're pursuing five pillars of growth that could double the size of Scotts Miracle-Gro through both organic and acquired growth over the next five years.
I also said we would explore the possibility of dividing the company into two pieces.
Obviously, those things won't happen overnight.
But the progress we've made already this fiscal year demonstrates just how seriously we're focused on this journey and how bold we're willing to be.
So let's jump in.
I usually leave the numbers to Cory, but I want to start by touching on the P&L.
If you're only looking at the year-over-year comparisons, I'd say you're looking at things the wrong way.
Look at it with a historical context.
While it remains the smallest quarter of the year, Q1 has become increasingly important on a full year basis.
We've moved more shipments into the quarter to better serve our retailers, a change that has improved the performance of the business significantly.
You'll miss that fact if you just compare the year-over-year results.
For example, Q1 volume is down from last year, but up 107% over fiscal '20 and significantly higher when compared to the average in the four years before COVID.
This feels like a base we can grow from.
The year-over-year gross margin rate is down 2%, but the segment's margin is up more than 1,300 basis points compared to the average of the four years prior to COVID.
And that's true in the face of sharply higher commodities.
The same story holds with segment income, which was a positive number for only the second time in our history.
On average, the bottom line result was $50 million better than in each of the four years prior to COVID.
And as we look ahead, there's good reason to believe that the first quarter of U.S. Consumer segment on an EBITDA basis could remain profitable going forward.
If we look at consumer activity, it's another good story.
In Q1, POS, as measured by consumer purchases at our largest retailers, was up 3% in units.
It was up 9% in dollars.
Both numbers were against a plus-40 comp a year ago.
Normally, I caution against reading too much into our Q1 POS, and that caution still applies.
What's different this time, however, is the December quarter marks a continuation of a trend dating back to spring of last year that shows a level of consumer engagement that consistently has outpaced our expectations.
The COVID impact on POS continues to complicate the pure year-over-year comparison.
But if you look at POS units over the past four quarters, we're up 22% compared to two years ago.
More importantly, that two-year comparison has grown stronger with time, suggesting that the COVID benefit may be more permanent than we first expected, which would result in a much higher base from which to grow.
I'm not going to predict whether POS for the March quarter will be positive because we continue to have difficult comps.
But our most recent consumer sentiment data, which we received just last week, tells us consumers continue to see gardening as important to their lifestyles.
It also tells us they plan for their spending levels to be consistent with last year, an important fact given the overall amount of inflation in the economy.
And while we continue to expect a modest decline in overall participation levels, more than two-thirds of consumers who do plan to participate in gardening this year said they expect to buy more plants and have bigger gardens.
Everything we're seeing and everything our retail partners are sharing with us is cementing our optimism as we move closer to the peak of the season.
We've increased our sales guidance for the U.S. consumer business to a range of minus 2 to plus 2% on a full year basis, an increase of 200 basis points from our previous range.
This increase does not require us to change our view of the balance of the year.
We're able to increase the range for two reasons.
First, the Q1 result was better than expected and should be a permanent benefit for the year.
Also, we have communicated to our retail partners another price increase for the second half that will impact our full year results by 1%.
The difficult decision to take a third price increase in a single year, while unprecedented for Scotts Miracle-Gro, was necessary in the face of continued cost increases that created a bigger headwind than we expected.
The additional point of pricing, which takes effect in Q3, will get us back in line with our goal to offset commodity increases that have been a challenge for the past year.
Fortunately, we've been seeing a few key commodity inputs peak over the past month, and it's beginning to feel like the worst may be behind us.
Like others, we're still seeing higher distribution costs, but I'll leave it to Cory to discuss that in more detail.
The additional round of pricing is not merely rooted in protecting our margins.
It's about supporting our retailers and protecting our competitive advantages.
Over the years, we've built a market-leading position and driven strong returns for our retail partners by investing strongly behind innovation as well as sales and marketing support.
These competitive advantages drove both consumer engagement before and during the COVID crisis.
We didn't outperform our competitors during COVID due to dumb luck.
We won because consumers trusted our brands to deliver the results they are seeking.
We won because our marketing team created relevant messages that resonated with those consumers and drove them to the stores.
And we won because retailers knew they could count on our sales force to help manage their lawn and garden departments during the height of the crisis.
Given the current challenges in the labor market, our in-store sales force is more important than ever in supporting our retailers, and we need to protect that investment.
That's also true of our supply chain, which has been able to meet retailer demand when others could not.
I said in the last call, we don't like this level of pricing, and I don't.
But the actions we've taken allow us to protect those competitive advantages and strengthen our relationship with consumers and retails even further.
Speaking of relationships, I want to provide an update on the performance of Bonnie Plants and our strategy for live goods.
There is good news on both fronts.
First, Bonnie POS is in line with our core legacy brands, and we're expecting another strong season in the edible gardening space.
Over the past few months, there have been significant improvements to the Bonnie supply chain, both in the way of process improvement and a new influx of talent.
We're also seeing continued integration of our sales and marketing efforts.
This should result in better in-store experience for consumers and more cross-selling opportunities for our core brands, especially Miracle-Gro.
As you know, we see live goods as an important gateway to the relationship with consumers.
Our relationship with Bonnie has already improved the category, and we believe there's more we can do to enhance the range of choices available to consumers.
Together with the Bonnie team as well as our partner, Alabama Farmers Coop, we have been actively exploring additional M&A opportunities that could significantly strengthen our live goods portfolio and bring a higher level of consumer-driven innovation and retailer support to the industry.
While it's too early to share any details, we're excited by the prospects, and we'll be sharing more with you as these discussions play out.
From nearly every angle, I'm extremely bullish about the potential in the core lawn and garden business right now.
And I'm equally optimistic about the steps we're taking to further strengthen our franchise and transform what it means to be an industry leader.
We knew before COVID hit, demographic trends were starting to work in our favor.
We saw that millennials were becoming interested in this space and in our brands.
But once their lives became centered around their homes, they turned to gardening in numbers we never expected.
A decade ago, this group was barely evident in our results.
Today, they're driving our results.
Our job is to keep them engaged to have them see gardening as relevant to their lives and to see our brands as critical to their success.
Throughout the entire business, we're taking the right steps and making the right investments to ensure this happens.
So yes, I'm optimistic as we prepare for the season.
That's true not just for fiscal '22 but in the years to come.
And I know Mike Lukemire and his entire team see it the same way.
Let's shift to Hawthorne.
I'll start with the obvious.
It's clear this year is going to be a challenge, and we'll see a decline in sales.
I'll let Cory cover the numbers, but we already laid out much of what needs to be said in our announcement on January 4.
While the current market reality is frustrating, we're not discouraged.
We continue to believe in this space and its long-term potential.
And over the past several months, there's been a lot of activity occurring that is designed to make the business even stronger when the market returns to growth.
As many of you know, Hawthorne experienced a tough downturn in 2018.
And it was on one of these calls that I publicly criticized the team for being paralyzed by the stress of the moment and said they needed to step up.
You're not going to hear that this time.
The learnings from 2018 have helped us tremendously, and the way the team is managing this situation couldn't be more different.
First, the team saw the market decline coming as far back as June, and that allowed us to prepare.
Second, they knew they couldn't change the reality of the situation, so there was not a panicked effort to chase sales that weren't there.
Third and most importantly, they put on their activist hat and said, "How can we use this downturn to make our business better"?
I have no doubt their answers to that question will, in fact, make Hawthorne better.
So I'm going to pause for a few moments and ask Chris to give you an update.
Let me start by taking a quick moment to update you on current industry trends.
It's beginning to feel like we've seen the bottom of the market.
We haven't bounced off the bottom yet, but daily sales trends have been consistent for about a month, and that makes it a bit easier to navigate.
Also, we're beginning to see some slightly better results in consumable categories, like nutrients and growing media, which is also an encouraging sign.
You guys know the nature of the industry's challenge right now, so I don't need to elaborate.
As I said in our January 4 announcement, we expect to see growth again in the second half of the year, but I'm not going to speculate on exactly when that will happen or to what extent.
What I can tell you is that our business will be significantly stronger once the downturn ends.
We've made key acquisitions, have taken steps to restructure our manufacturing footprint and realigned the management team based on the future needs of the business.
You probably saw our announcement last month about the acquisition of Luxx Lighting and True Liberty Bags, but let me give you some more context.
There is no doubt that Gavita is the premier lighting brand in the indoor cultivation space.
It has been a home run for Hawthorne and is critical to our long-term success.
And Sun System, the private label brand we acquired from Sunlight Supply, is a solid opening price point fixture.
Lighting is the most important category in our industry.
It's a category where we made a commitment to innovation and to being a leader.
For growers, lighting is where they spend the most money, and it's the category that has the biggest impact on their crop.
The right lighting strategy creates a relationship with those growers that opens the door for us to sell a full portfolio of solutions.
Over the last two years, our R&D and supply chain teams have helped drive our success in the critical area of LED lighting.
We created the best products in the market, which has helped accelerate the industry's move to LEDs and strengthened our market share.
Even though that's true, we still knew that we needed more than we had.
We looked at all the available options in the market and decided that Luxx was the brand with the greatest potential.
Luxx is unique because it was designed by cannabis growers and is widely used by commercial cultivators who know its history and trust its performance.
The current market conditions made the economics of the Luxx acquisition extremely attractive, especially when you consider the synergies it allows us to capture.
The Luxx deal makes this the perfect time to begin to consolidate our lighting manufacturing to a single location.
We announced last week that we will move our current lighting production, mostly HPS lights, from Vancouver, Washington to Southern California.
We'll move other LED assembly we've been doing it there too.
This move will significantly reduce our inbound and outbound distribution costs, better leverage our labor force and take advantage of one of the best manufacturing plants in the SMG network.
Those savings will allow us to take substantial costs out of each fixture and significantly improve our already market-leading position, especially in the critical LED market.
As part of this restructuring effort, we're also closing the manufacturing facility for HydroLogic, which we acquired last year.
We are moving that work to our Santa Rosa facility, which is the original home of General Hydroponics.
And we're consolidating distribution on the East Coast to a facility we recently built in New Jersey to meet the expected demand from new markets in the years to come.
The other acquisition we announced, True Liberty Bags, is a much smaller deal but speaks to our strategy of putting the grower at the center of everything we do.
True Liberty's products are used in the post-harvest process to freeze, store, and transport large harvest quantities.
The products are designed to prevent cross-contamination and preserve the quality of the plant.
It is a niche category but a critical one.
True Liberty is the clear leader in the space and a brand that commercial cultivators trust.
The acquisitions in the last six months of Luxx, True Liberty, HydroLogic, and Rhizoflora don't just add the P&L.
These brands make Hawthorne more critical to cultivators who continue to see us as far more than just a distributor.
They see us as a trusted provider that understands the nuances of their business and one that continues to invest to bring them better product solutions and generate higher returns.
The other changes that we've made is a realignment of the team to focus on the needs of the business once the market returns.
The restructuring has resulted in the elimination of roughly 200 positions.
While the business decision was easy, it's never a good day when you have to part with valued members of the team.
We did everything we could to provide them a soft landing, and I sincerely wish them well moving forward.
We also made some changes in Hawthorne management.
Tom Crabtree joined the team a few months ago to lead our sales effort.
Tom has a great background.
He started off in the SMG supply chain and then moved to sales, including a stint in which he transformed the Home Depot sales team.
And more than anything else, Tom is a great leader.
He knows how to build teams, how to motivate them and how to design programs that drive results.
As we look to the future, it was clear to me that Tom was the right person to be the chief operator of Hawthorne, and he was recently promoted into that role.
As you can see, while sales have slowed for the time being, we haven't.
Every one of these changes makes our business stronger and will help further distance Hawhorne from our competitors.
I'll be around for Q&A.
But for now, let me turn things back over to Jim.
You'll remember that the fifth pillar of our growth strategy is to explore opportunities in the emerging areas of the cannabis industry that are more consumer-facing.
While SMG can invest directly in that space right now, we can build optionality that we can capitalize on later.
The creation of the Hawthorne Collective and the convertible loan we made to RIV Capital are part of that strategy.
But recall that we do have three feet on their board, which is very active in setting the strategy and vision for what comes next.
It is through that lens that I can tell you to expect some important developments over the next quarter.
As a result, we may choose to infuse more cash into RIV over the balance of the year that would increase our ownership stake if we converted the loan to equity.
But we would still maintain a noncontrolling and non-ownership interest, and the magnitude of any additional cash would not approach the initial investment we made last year.
On the topic of Hawthorne and the Hawthorne Collective, I want to make one more comment.
I know the discussion we had in the call last year regarding a possible split of the company got a lot of attention.
Jim King has told me he had literally dozens of conversations about this issue with current or potential shareholders.
I want to reiterate that we've made no firm decision about whether to proceed down this path, and it will take a while before we do.
Since our last call, however, we've established an internal team to study this issue and help explore the right courses of action.
There are arguments to be made for splitting and equally compelling arguments to be made to continue operating as one company.
We don't feel any pressure to lean one direction or the other, but we'll rely on the facts and analysis to guide our decision-making.
Before I wrap up and turn things over to Cory, I want to close with this thought, and it brings me back to the meeting with my family.
Our business is sitting in a pretty good place right now, and it would be easy to sit back and just harvest the fruits of our labor over the next few years.
But the opportunities in front of us are simply too obvious and to consequential to ignore.
If we're successful in executing our strategy, this will be a much bigger and more profitable business that will drive meaningful value for our shareholders.
I'm not going to tell you we won't have challenges along the way.
The degree of difficulty associated with some of our efforts is high, but any path worth pursuing can be slippery at times.
I'm confident those who choose to travel with us in the years ahead will be glad they did.
We have a lot of exciting pieces coming together in the months and quarters ahead, and I look forward to tracking our progress with you along the way.
For now, I'm going to turn things over to Cory to cover the first quarter financials.
But there are a few key themes I want to cover, specifically about the adjustments we've made to our guidance, the current trends with cost of goods and how we're thinking about capital allocation as we look ahead.
On the P&L, there were no real surprises on the top line.
Total company sales were down 24%, against a 105% comp a year ago.
U.S. consumer sales were down 16% on a 147% comparison.
And Hawthorne was down 38%, against 71% growth a year ago.
In U.S. consumer, we saw good POS, as Jim already mentioned.
And retailers finished the quarter with inventory in line with where they were a year ago.
That was the best-case scenario for us.
They remain committed to the category through the fall season and kept appropriate levels of inventory in their stores as we approach the slowest weeks of the year.
That leaves them well positioned as we pivot into our key selling season, and the shipments we saw through January leave us optimistic.
The midpoint of our increase in our sales guidance for the segment assumes an eight-point decline in volume for the full year, offset entirely by pricing.
The trends through four months suggest this might be a conservative estimate.
But as Jim said, were less than 10% of the way through the year, and it's way too early to predict what will happen in the spring.
The sales decline was due primarily to the slowness of the broader cannabis market.
The supply chain challenges we've mentioned previously are difficult to precisely quantify, but we believe they caused around 5% of the downward pressure in the quarter.
Those challenges, primarily in the LED lighting space, have been remedied and we are back in stock with the components we need to once again be manufacturing and shipping LED lights, which remain in strong demand.
Let's move on to gross margins because this is an area that's important to understand.
As you know, Q1 results often fall prey to the law of small numbers, and that's exactly what happened with gross margin.
The adjusted rate was down 570 basis points in the quarter driven by the year-over-year decline in volume and its impact on manufacturing, distribution, and other fixed costs.
Commodity prices were also a headwind in the quarter but offset by a 400 basis point improvement from pricing actions.
Jim mentioned the importance of looking at the gross margin rate in historical context, and I totally agree.
The result in the quarter was more than 600 basis points better than in fiscal '20 and more than 850 basis points better than fiscal '19.
Over the past several years, we have effectively moved business into Q1 to ensure retailers are properly set for the season, which should keep us at a level of profitability that is higher going forward.
As I look at the balance of the year, we are maintaining our gross margin rate guidance for a decline of 100 to 150 basis points.
Right now, I'd expect us to be at the lower or worse end of that range.
Margins for the balance of the year should be relatively flat but could vary a bit each quarter, positively or negatively, based primarily on timing and mix.
In total, we are 70% locked on commodities for the year, which is slightly behind normal.
We would normally have all of our costs locked right now on pallets, but we're only at 30% because vendors are not currently entering into long-term contracts due to the volatility of lumber prices.
On everything else, we're actually in good shape, including urea, where we're nearly 80% locked for the year.
The better news is that we're starting to see some relief.
Resin has been retreating for a couple of months now.
Urea has begun to do the same.
No one has been accurately predicting input costs for the last year, so I want to be cautious.
Still, I'm increasingly optimistic that the pricing moves we've taken should offset these commodity headwinds on a full year basis.
SG&A was down 2% after a sharp increase last year.
Recall that our guidance calls for SG&A to decline up to 6% for the year, and it's an area we're keeping an eye on as we move closer to the season.
The only other issue on the P&L that merits your attention is the $7 million loss on the equity income line, which is related to our 50% ownership in Bonnie.
Remember, we did not have that ownership stake a year ago, and Q1 is a seasonal loss quarter for Bonnie.
As Jim said, the business has had a solid start for the year, and we're optimistic about the upcoming season.
On the bottom line, our seasonal loss on a GAAP basis was $0.90 a share, compared with income of $0.43 last year.
Adjusted earnings, which excludes restructuring, impairment, and nonrecurring charges, was a loss of $0.88, compared with earnings a year ago of $0.39.
You might recall that fiscal '21 marked the first time in company history that we reported a first quarter profit.
Chris mentioned in his remarks the realignment we've made at Hawthorne.
We expect those actions to result in a restructuring charge of up to $5 million in the second quarter.
That charge will be excluded from our full year guidance.
Let me briefly touch on the balance sheet, specifically focusing on inventories, which are up about $590 million from last year.
First, recall that inventory levels were lower than we had wanted a year ago as we were shipping product nearly as fast as we could build it in both major segments.
Second, recall that we consciously built an inventory cushion last year to ensure we are able to keep our retailers at the appropriate levels throughout the season.
And finally, about 25% of this increase is due to the higher input costs we've been experiencing over the past year.
We remain comfortable with inventory at this level and continue to see it as a competitive advantage.
We expect to see some competitors continue to struggle to meet demand this year, which we believe will work to our advantage.
Finally, I want to focus on capital allocation.
We are still planning for capex to be approximately $200 million for the year as we continue to improve our supply chain and invest in our e-commerce infrastructure.
Remember, we had been investing based on the assumption that our U.S. consumer segment would grow at a point or two per year.
Since fiscal 2019, it's up around 40%, and we've pushed our capacity to its limit.
So these investments are necessary.
Jim commented several times about the M&A opportunities in front of us.
So let me provide some context.
We are currently budgeting slightly more than $200 million for future transactions over the balance of the year.
The opportunities that remain on the table, if executed, should be immediately accretive to earnings and go a long way in advancing our strategy.
In terms of returning cash to shareholders, we repurchased $125 million of our shares in Q1 and have a 10b5-1 in place for another $50 million in our Q2.
We currently do not have a 10b5-1 in place for the second half of the year and would expect that any share repurchase activity during that period would occur in the open market.
Additionally, we have no current plans for a special dividend this year.
Given our current outlook for the business and our expected outlay of capital, we could slightly exceed our leverage target of three and a half times by the end of the fiscal year.
We were at 3.3 times at the end of Q1.
If we exceed our three and a half times target, we expect to get back below that level within a quarter or two, and we will still be well within our current debt covenants.
We know we have some near-term challenges in Hawthorne, but we are focusing on the demand that we can't control.
What we're focusing on is what we can control, and that is what we look like when the growth does return.
I'm convinced we'll be better positioned than ever with a better margin profile and competitive advantages that have been strengthened over the past several months.
consumer, I share Jim's optimism.
There's no need to make further adjustments in our guidance right now, but the trends are certainly tilting in our favor for the upcoming season and beyond.
And finally, on a personal note, I've recently completed my first full year in this role.
My engagement with all of you was a new experience for me, and it's given me a better appreciation of the issues on the minds of our shareholders.
Through this new lens, I'm working closely with my colleagues to ensure we're acting as proper stewards of our capital and focusing on driving value for all of you.
And while I've also grown to appreciate the importance of this quarterly discussion with all of you, it's also reinforced my view that we can't run the business on a quarter-to-quarter basis.
Value is driven over the long term, and I'm convinced that the steps we're taking to strengthen the business will do exactly that. | revising its earnings guidance ranges. | 0 |
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.
I am pleased to report another outstanding quarter.
It has been a very active quarter on a number of fronts.
First, I am pleased to announce that we celebrated a significant milestone during the quarter when we crossed the 1,000 store threshold.
Second, I am proud to announce that for the fourth consecutive year, Newsweek has recognized our team for best customer service among storage centers.
And third, we continue to perform at record levels with record occupancy for this time of year and exceptionally strong pricing power.
With regards to external growth, we are on pace to achieve record acquisition volume with over $1.7 billion of wholly owned acquisitions, either closed this year or currently under contract and expected to close by year-end.
This represents 115 additional stores and nearly 20% growth in our wholly owned portfolio.
These acquisitions represent a nice mix of both markets and maturity with roughly 1/3 still in lease-up and approximately 75% in the Sunbelt states.
We continue to expand in key markets such as Austin, Atlanta, Tampa, Miami, Phoenix, San Diego, Seattle and Greater New York City.
Despite 1/3 in lease-up, we still expect the blended year one cap rate to be in the mid-four range as we remain focused on finding both strategic and FFO accretive opportunities.
Our third-party managed portfolio totaled 357 stores at quarter end and is proving to be the robust acquisition pipeline that we anticipated.
Specifically, 27 stores acquired this year were managed by Life Storage, representing 30% -- 36% of our closed acquisition volume so far this year.
And we continue to onboard additional managed stores at a rapid pace, including 30 in the third quarter alone 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.
With this strong performance, we are once again increasing our guidance for 2021.
We have raised the midpoint of our estimated adjusted funds from operations per share to $4.94 this year, which would be a 24% growth over 2020.
We have also nearly doubled the upper end of our acquisition guidance from $1 billion to nearly $2 billion.
This report highlights our many ESG initiatives, including our expanded solar, diversity and inclusion and community engagement programs.
The report is available on the Sustainability page of our Investor Relations website.
So 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 $1.37 per share for the third quarter, an increase of 35.6% over the same quarter last year.
Third quarter same-store revenue accelerated significantly again to 17.4% year-over-year, up from 14.7% in the second quarter.
So we've begun to see somewhat of a return to normal seasonal trends in the past couple of months.
We remain highly occupied with average same-store occupancy up 220 basis points compared to the same quarter last year.
This elevated occupancy has allowed us to continue to be more aggressive with rates on new and existing customers, which has driven a significant increase in our in-place rates per square foot, which were up 14% year-over-year in the third quarter, representing substantial acceleration from the 8% in the second quarter and the 1% in the first quarter.
Same-store operating expenses grew only 3.5% for the quarter versus last year's third quarter.
The largest negative variances occurred in repairs and maintenance and real estate taxes.
The increases were partially offset by a 5% decrease in Internet marketing expenses and slightly lower payroll and benefits.
The net effect of the same-store revenue and expense performance was a 390 basis point expansion in net operating income margin to 70.7%, resulting in 24.3% year-over-year growth in same-store NOI for the third quarter.
Additionally, we increased our dividend 16% in October as we continue to share growth in FFO with our shareholders.
This increase follows our 4% dividend bump this past January, and the 7% growth in our dividend last year.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing equity securities and pricing a bond offering during the third quarter.
Specifically, we completed an underwritten public offering of common stock, generating approximately $350 million and issued an additional $130 million of common stock via our ATM program.
The company also issued roughly $90 million of preferred operating partnership units as part of the consideration for our portfolio acquisition during the quarter.
Finally, we issued $600 million of 10-year 2.4% senior unsecured notes that priced in late September and closed in early October.
Our net debt to recurring EBITDA ratio was 3.9 times at quarter end and 5.1 times following the completion of the notes offering in October.
Our debt service coverage increased to a healthy 6.3 times at September 30, and we had $500 million available on our line of credit at quarter end.
We have no significant debt maturities until April of 2024 when $175 million becomes due.
And our average debt maturity is 6.3 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 increased our same-store forecast again driven primarily by higher expected revenues and slightly reduced expense expectations.
Specifically, we expect same-store revenues to grow between 12.5% and 13.5%.
Excluding property taxes, we expect other expenses to increase between 1.75% and 2.75% while property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 17% to 18% growth in same-store NOI.
We have also increased our anticipated acquisitions by $900 million to between $1.7 billion and $1.9 billion.
Based on these assumption changes, we anticipate an adjusted FFO per share for 2021 to be between $4.92 and $4.96. | q2 adjusted ffo per share $1.20. | 0 |
These uncertainties are detailed in documents filed regularly with the SEC.
We use adjusted constant dollar amounts as lead numbers in our discussion, because we believe they more accurately represent the true operational performance and underlying results of our business.
You may also hear us refer to reported amounts, which are in accordance with U.S. GAAP.
During the fourth quarter of 2020, the company determined that the occupational workwear business met the held-for-sale and discontinued operations accounting criteria.
Accordingly, the company has reported the related assets and liabilities of the occupational workwear business in discontinued operations as of the date noted above and included the operating results of this business in discontinued operations for all periods presented.
As always, I hope our comments today find you and your loved ones healthy and safe.
As we put behind us, we've unfortunately experienced a tumultuous start to 2021 highlighted by the political and ideological divide in our nation as well as ongoing challenges presented by the pandemic across the US, UK in other countries around the world.
Even so I remain optimistic about the year ahead and to improvements in our geopolitical, macroeconomic and pandemic related situations and I'm confident in VF plan to accelerate growth, continue advancing our business model transformation and deliver on our commitments to our shareholders and stakeholders around the world.
VF performance during the third quarter was largely ahead of expectations despite additional COVID related disruption to our business.
Consumer engagement with our brands remains strong and we have conviction that the secular trends related to casual externalization, health and wellness and the desire to get outdoors will be enduring.
Our business is on track to return to growth in the fourth quarter and I am confident that the strategy we have in place positioned us well to accelerate growth as we head into fiscal 2022.
At that time, our business had essentially fully reopen across the globe and underlying business trends have continued to stabilize.
We saw strong momentum in China and across our digital platform, which we continue to view as leading indicators for our business.
Confidence from this momentum, as well as early signs of stability and recovery across our portfolio more broadly, supporting our preliminary outlook for fiscal 2021 and the decision to raise our dividend.
Further, in early November, we announced the acquisition of Supreme.
Our willingness to execute the transaction during the pandemic was a function of the resiliency of Supreme's business model, our early and decisive actions to ensure liquidity as well as our increased confidence in the trajectory of our organic portfolio.
Fast forward to today, our business has continued to perform ahead of expectations and our confidence and visibility heading into fiscal 2021 [Phonetic] continues to improve.
While the environment has proven to be somewhat more difficult than expected, the performance of our business demonstrates the resilience of our portfolio.
While the full extent of these headwinds was not contemplated in our initial fiscal 2021 outlook, we were able to more than absorbed these impacts as a result of the continued strength of our digital and China businesses as well as better than expected performance from our North Face and Timberland brands globally.
As a result of the momentum we see building across our portfolio, fueled by our business model transformation, coupled with the closing of the Supreme transaction, we are raising our fiscal 2021 outlook.
Scott will impact the details in a moment.
Before getting into the highlights for the quarter, I'd like to provide an update on our progress against our business model transformation.
Understanding and focusing on our consumer connectivity is at the heart of our transformation journey.
Our teams continue to activate capabilities to better understand and build more intimate relationships with our consumers.
Digitize the go-to-market process and enhance and integrate the online and offline consumer experience.
The continued impact of the pandemic has forced an ongoing reaffirmation of our priorities and we remain committed to both the near-term brand specific initiatives and long-term enterprise wide platform investments.
Continued investment behind our transformation is critical to our success and long-term growth aspirations, I'm pleased with the significant progress we've made throughout 2020 as evidenced by the resiliency of our performance during this past holiday season and the momentum that is building across our portfolio as we head into fiscal 2022.
A recent proof point of these accelerated initiatives has been enabling our brands to build omni-channel consumer journeys and optimize supply chain efficiency.
On our last call, we shared that ship from store functionality was activated across the majority of our Vans and North Face full price stores, ahead of the holiday season, specifically within our EMEA platform.
Our teams engineered homegrown solutions to deliver buy online pickup in store, ship from store and reserve online buy in the store right before lockdown down measures applied across the region.
These businesses were able to utilize retail inventories and leverage ship from store capabilities when the stores were forced to shut down, supporting an 80% increase in digital revenue.
Phase 2 of this project is currently under way with the plan to go live in the coming months, including save the sale functionality, which will allow our brands to leverage retail inventory when an item is out of stock online.
Turning to our brand highlights from the quarter.
Vans revenue continued to sequentially improve declining 8% as 48% growth in Digital was more than offset by brick and mortar store reclosures in the Americas and EMEA markets.
The brand accelerated to 9% growth in APAC, led by 58% digital growth and 20% growth in China.
From a product standpoint, all-weather MTE styles increased at a double-digit rate and the Ultra range increased high single digits as Vans consumers turn to more outdoor and active oriented franchises.
Vans ranked number one among the largest brands during the Singles' Day on Tmall getting 700,000 new consumers.
Also in November Vans customs launched on Tmall becoming the first global brand offering a full customization engine on this platform, the collaboration with Dave drove the launch generating 870,000 unique visitors on the customer site that day.
The Vans family member base continues to grow globally with membership approaching 14 million consumers.
Although the headline number for Vans reflects the challenging brick and mortar operating environment in the US and Europe, we remain confident in the underlying trajectory of the business and expect at least low double-digit growth in the fourth quarter on a reported basis.
Continued momentum in China and across the digital platform normalized inventory levels across all regions and strong consumer growth and engagement support the brand's return to growth beginning in the fourth quarter.
Moving on to the North Face.
Revenue declined 2% with continued sequential improvement in the Americas and double-digit growth in Europe and Asia.
Europe remains a bright spot for the brand with 17% growth, including a 112% digital growth, offsetting the impact of significant store closures in the region.
Global TNF digital increased 61% with accelerated growth across all regions driving a return to positive growth in D2C.
In North America, the VIP loyalty program drew 40,000 sign ups, a more than 90% increase versus last year.
TNF continue to drive a significant increase in consumer engagement through authentic and purpose led marketing activations.
Core off mountain icons such as the New-C [Phonetic] franchise performed well and the TNF Gucci Ecolab generated tremendous brand energy with over 15 billion media impressions since its December launch.
Yes, you heard that right over 15 billion media impressions since its December launch.
On mountain product also performed well highlighted by future like to expansion deeper into the product assortment leading to triple-digit growth versus the prior year.
The new footwear platform Vective [Phonetic] has been well received exceeding our initial sell and targets for this spring's launch.
We are pleased with the performance of the North Face and encouraged by the brand strong momentum heading into next year.
On a reported basis, we now expect fiscal 2021 revenue for the North Face to declined less than 10% including greater than 20% growth during the fourth quarter.
Timberland revenue declined 17% relative strength from apparel and positive growth in both outdoor footwear and the pro-business were more than offset by softness in classic footwear, which was significantly impacted by limited inventory availability.
Timberland continues to drive brand energy with key influencers and retailers to high profile collaborations and the launch of new franchises.
The new work Summit boot was launched this quarter contributing to record traffic to Timberland pros digital site, which saw more than a 100% growth.
We're encouraged by the opportunity for true cloud.
A new innovative eco-friendly franchise made from renewable and recycled materials and green straight a new franchise anchored in outdoor.
While still early, and I'm pleased with Timberlands progress in the evolution and diversification of Timberlands new and innovative product portfolio.
Continued momentum from Timberland Pro, apparel and non-classics footwear coupled with improving demand and inventory levels for core classics position the Timberland brand for continued progress heading into fiscal 2022.
Dickies revenue increased 7% with strong demand across all regions and growth across all channels.
The work inspired lifestyle product portfolio continues to develop at a rapid pace increasing at a double-digit rate across all three regions.
Work inspired lifestyle product now represents about a third of global brand revenue.
Brand interest accelerated in the quarter-over-indexed toward the key 18 to 24-year-old consumer demographic supported by the United by Dickies global campaign and focus on the brands icon stories.
Finally, we are thrilled to have closed on the acquisition of Supreme.
This move is further validation of the actions we've taken over the past four years to position our portfolio into those parts of the market where there is strong consumer engagement in demand.
We are confident that the Scream transaction will serve as a spark for another layer of transformative growth and value creation for VF and our stakeholders.
In early January we announced the transformation plan for APAC operations.
This represents the first significant action under Project enable.
Highlights include the following.
We will transition our brands center of operations to Shanghai.
We will transition the Asia product supply hub to Singapore, I'll also redeploying some of the product supply talent and resources throughout primary sourcing countries to work more closely with key suppliers and drive greater efficiency.
We will establish an additional shared services center in Kuala Lumpur, Malaysia, to serve as the home for central activities within our enterprise functions.
As you would expect we will take great care as we move through the transition process during the next 12 to 18 months.
And as always, we are committed to supporting the personal needs of all impacted and relocating associates and their families.
I'm encouraged by the recent performance and resilience of our business and optimistic about the growth outlook for our brands as we move into fiscal 2022 and beyond.
As we said from the onset of the pandemic with great change comes great opportunity.
I am confident VF will emerge from this pandemic an even stronger position ready to build upon our storied history an established track record of delivering strong returns to all stakeholders.
What a year beginning with the unprecedented enterprise preservation actions at the onset of the pandemic to the acquisition of Supreme this has been an unbelievable period for VF and I'm grateful for the work that's been done by our teams around the globe to position us for growth and success moving forward.
To recap our quick and decisive actions to ensure liquidity have allowed us continued invested throughout this disruptive period highlighted by our ability to acquire Supreme a perfect complement to our portfolio and accelerant to our long-term strategy and transformation agenda.
Our aggressive control of inventory while prioritizing newness has allowed us to maintain brand momentum while positioning us for a return to profitable growth from the beginning of the fourth quarter and into the next fiscal year and our sharp control on discretionary spending and the launch of project enable presents a tailwind toward operating leverage moving forward, and the ability to direct more dollars to our highest priority growth investments.
So while the near-term environment remains noisy including lock downs, store closures and inventory constraints I could not be more pleased with the overall health of our enterprise and the composition of our portfolio heading into next year.
I'll open with a quick update on Supreme which I know is of interest to many of you.
As announced on December 28, we closed the acquisition for an aggregate purchase price of approximately $2.1 billion subject to customary adjustments.
We expect Supreme to contribute about $125 million of revenue and $0.05 of adjusted earnings to the fourth quarter of fiscal 2021.
As disclosed that announcement, we expect Supreme to contribute at least $500 million of revenue and at least $0.20 of adjusted earnings in fiscal 2022.
We're now moving into the integration phase and carefully on boarding Supreme into the VF family.
Focused on applying the appropriate amount of governance and oversight where needed while maintaining a light touch approach in other areas to avoid over burdening the brand.
We're committed to keeping it business as usual for the brand and its teams, while at the same time understanding how we can begin to enable the brand's growth and strategic vision while activating synergy opportunities where appropriate.
While it's early days, there is a lot of excitement about the future among both the VF and Supreme teams and we're off to a great start.
Moving on to an overview of the operating environment across the regions.
Starting with the Americas continued virus related lock downs and disruption present near-term challenges.
With that said, the outdoor and active categories continue to outpace overall apparel performance and demand trends have remained resilient.
Retailer inventories appear to be well positioned to exiting the holiday season but do remain abnormally low in certain categories and channels.
Despite continued traffic headwinds our Americas business sequentially improved with nearly 50% digital growth offset by store closure headwinds.
Moving on to the EMEA region where we've seen a second wave of the virus introduce more severe lockdown measures than previously anticipated.
As a result the broader EU economy has been among the hardest hit by the pandemic this quarter.
As the vaccine rollout is starting across Europe.
The region is bracing for another wave of COVID 19 and the UK recently extended more restrictive locked downs until February.
There are reasons for optimism however with digital acceleration continuing throughout the region, as we've seen across our own brands and with our digital partners such as Zalando and Asos.
VF EMEA digital business grew more than 80% in the quarter despite half of our brick and mortar stores being closed for a large portion of the quarter, the EMEA region, saw a meaningful sequential improvement and returned to positive growth on a reported basis.
Finally, the APAC region continues to offer greater stability than any other even as the effects of the pandemic leaner.
China has seen a pickup in consumer spending with positive growth in apparel and footwear categories.
We continue to view APAC is the leading indicator of the larger macroeconomic environment.
Our Mainland China business grew 15% led by strength at Vans which grew 21%.
The D2C business in Mainland China accelerated to percent growth led by 24% growth in digital.
China retail partner inventory continues to improve and our partner, comp sales return to growth this quarter.
We're excited by the continued momentum in China and have high confidence in our outlook of 20% growth this year.
Now turning to highlights from the quarter.
Total VF revenue declined 8% in line with our expectations.
International declined 4% as a 4% decline in EMEA was offset by 1% growth in APAC, including 11% growth in Greater China.
Our D2C business also declined 4% driven by store closures and continued soft traffic in the Americas and EMEA.
Our digital business grew 49% with strong performance across virtually every brand in the portfolio.
Including our pure play digital wholesale partners, our total digital business represented about one third of total revenue in the quarter.
We now expect D2C digital revenue growth to exceed 50% for fiscal 2021 on a reported basis and including our digital wholesale business, we expect total digital penetration to approach 30% for the year.
Gross margin contracted 150 basis points to 57%, the third consecutive quarter of sequential improvement aided by moderating promotional activity.
The decline versus last year was primarily driven by higher levels of promotion and 90 basis points from FX transaction partially offset by 90 basis points of favorable mix benefit, while the promotional environment remains a headwind, it has slightly better than our expectations.
As we move into the fourth quarter and into fiscal 2022.
We expect the impact of promotions and discounting to continue to moderate.
Our SG&A spending decline about 4% relative to last year as we return to more normalized levels of strategic investment spending, including demand creation, approaching historical levels of investment.
As expected, we did experience cost pressure from higher freight and distribution expenses, although these were more than offset by reductions in discretionary spending and leveraged elsewhere throughout the cost base.
We expect to continue to invest in our strategic priorities in the fourth quarter as we return to growth.
Inventories were down 14% at the end of the third quarter, consistent with our prior expectations.
We expect to exit our fiscal year end March with inventories at equilibrium in support of our forward growth outlook.
We also see relatively clean inventory levels at retail globally positioning our brands for a return to more profitable growth heading into next year.
As expected, service and in-stock levels improved as COVID related disruptions had less of an impact in the quarter.
Our liquidity position remains strong.
We ended Q3 with approximately $3.9 billion of cash and short-term investments in addition to roughly $2 billion remaining undrawn on our revolver.
After funding the Supreme acquisition, we expect to exit fiscal 2021 with more than $1.5 billion in cash and nearly $2 billion remaining undrawn on our revolver.
Our capital allocation priorities remain consistent supported by our robust liquidity position.
We remain fully committed to growing our dividend, which continues to be an integral part of our TSR model.
Our share repurchases program remains on hold as we focus on deleveraging the balance sheet following the acquisition of Supreme.
So now turning to our updated outlook.
We are raising our fiscal 2021 outlook and now expect full-year revenue to be between $9.1 billion and $9.2 billion and full-year earnings per share of approximately $1.30.
The increase in our outlook includes the accretion from Supreme in the fourth quarter results, implying a modestly higher outlook for the organic business.
We're also raising our free cash flow outlook to approximately $650 million.
I know many of you are eager to understand our initial expectations for fiscal 2022.
While it's too early to provide a preliminary outlook at this time, I will provide a few high-level comments to help you understand how we're thinking about the evolution of our business as we head into next year.
Overall, we see an improving consumer backdrop, particularly in our core categories, along with brand momentum across our largest properties globally.
The accelerated shift toward digital in China are beneficial to our fundamentals and recent portfolio actions are immediately accretive to our revenue growth and margin profile.
We continue to see encouraging signs of stabilization in the retail marketplace and a normalization of inventory flows from a healthier supply chain.
We intend to continue to distort investment toward our strategic priorities and business model transformation in support of our powerful brand portfolio.
Taken together, I remain optimistic about the strength of our growth algorithm going forward and I'm confident in our ability to emerge from this crisis in an advantaged position.
The portfolio actions we've taken over the last five years have left us well positioned to continue delivering superior returns to our shareholders. | sees fy revenue about $12 billion.
sees fy adjusted earnings per share about $3.20.
qtrly revenue from continuing operations increased 23 percent to $3.2 billion.
full year fiscal 2022 adjusted earnings per share is expected to be around $3.20.
qtrly adjusted earnings per share from continuing operations $1.11.
majority of vf's supply chain is currently operational.
port congestion, equipment availability and other logistics challenges have contributed to increasing product delays.
vf is working with its suppliers to minimize disruption and is employing expedited freight as needed.
as covid-19 uncertainty continues, vf expects ongoing disruption to its business operations. | 0 |
We would like to allow as many of you to ask questions as possible in our allotted time.
So we would appreciate you limiting your initial questions to one.
In the event you have additional questions that are not covered by others, please feel free to requeue and we will do our best to come back to you.
Looking at Q4 and the full fiscal year we just concluded, our strong business results proved yet again NIKE's unique competitive advantage.
Our relentless focus on our objectives is clear and our strategy is working.
We're excited by the momentum we continue to see.
In Q4, we saw growth of over 95%, which translates to 19% growth for the fiscal year.
This full-year growth was led by our owned digital business, which is now more than double versus fiscal '19, prior to the pandemic.
I've said before, these are times when strong brands can get stronger.
And each quarter this reality becomes even more clear.
Today, we are better positioned to drive sustainable long-term growth than we were before the pandemic.
Our team has proven their ability to be unrelenting and executing against the macro complexities while also building the future.
We saw broad-based growth this quarter, led by North America at over 140%.
Greater China's currency-neutral growth of 9% was impacted amid marketplace dynamics with improving trends as we exited the quarter.
One of NIKE's strengths is our diverse global portfolio.
And through the power of that portfolio, we once again over delivered on our expectations for the quarter.
As we look ahead to fiscal '22, the opportunity ahead of us is significant.
We remain very confident in our long-term strategy and our growth outlook.
The structural tailwinds we discussed before, including the return to sport and permanent shifts in consumer behavior toward digital and health and wellness continue to create energy for us.
And we remain focused on our largest growth drivers, including our women's business, apparel, Jordan and international.
NIKE sets the pace through a continuous flow of new innovation, the world's greatest roster of athletes and compelling experiences for consumers that create lifelong relationships with our brand.
Our strengths and proven playbook give us the confidence to move even faster to invest even a more accelerated pace against the opportunities we see ahead.
As the world's largest athletic, footwear and apparel brand we take seriously our leadership position to promote sport participation and an active lifestyle through inspiration and innovation.
Our goal isn't merely to take market share.
Our goal is also to grow the entire market.
NIKE's growth has been and will continue to be the result of three areas I'll walk through today.
Connecting with consumers through compelling brand experiences across NIKE Jordan and Converse, driving product innovation against our greatest growth opportunities and expanding our digital advantage.
First, let's discuss how we serve consumers.
As sport continues to return, NIKE leads with our unique rich heritage and our deep roster of global superstars and up new comers who connect us with consumers everywhere.
Euro 2020 started two weeks ago with Cristiano Ronaldo becoming the leading scorer in Euros history.
England, France, Portugal and the Netherlands are among the teams with great momentum heading into the tournament's next stage.
And we're proud that more goals have been scored thus far wearing NIKE boots than all other brands combined.
On the club side, Chelsea won the Champions League on the men's side and Barcelona was the top team on the women's side.
In the US, the WNBA season is under way with the Seattle Storm in first place led by Sue Bird and Jewell Loyd.
And in the NBA, a captivating playoffs showcased our unmatched rosters of the game's greatest players across NIKE and Jordan including KD, LeBron, Luka, Jokic and several who are still in the hunt like Giannis, Chris Paul, Devin Booker, and Paul George.
And earlier this week, I was in Eugene for the US Track and Field trials and got to see incredible performances from Sha'Carri Richardson, Michael Norman, Ryan Crouser and many others.
We remain excited for the power of sport on full display during the Olympics and Paralympics in Tokyo this summer and in Beijing next year.
This authentic connection with consumers is also fueled by our belief in redefining how we open access to sports for consumers everywhere.
Our recent campaign Play New, launched in May kicking off our largest ever invitation to Gen Z and marking the ignition point of a month long rally around finding joy and movement in play.
We focus Play New on TikTok and Snapchat to show Gen Z apps, in their words sport is a change accelerator.
And their response has been remarkable.
The apps augmented reality lenses featuring yoga, dance, and [Indecipherable] led to more than 600 million Gen Z impressions in just the first two weeks.
Earlier I mentioned our goal to grow the market well by inspiring people to try something for the first time, we vastly expand the community of athletes.
And we continue to bring the emotion and power of our brand to life through our digital ecosystem, which is led by the sneakers out.
In Q4 sneakers grew over 90% in demand and saw nearly 80% growth in monthly active users.
We're now offering this growing audience of high-value members in almost daily flow of compelling content and product launches.
For Air Max Day in March, six different live stream events gave sneakers live its highest viewership ever.
So whether it's through sneakers live or user generated style inspiration, sneakers is the perfect intersection of content, community and commerce.
Moving to my second point, our relentless pipeline of innovative product continues to create separation between us and our competition.
Our product is fueled by sharp consumer insight supported by marketing data and analytics as we continue to invest in our digital transformation.
And through our new operating model, we are bringing more precision to the art of product creation as we blend the heart and science of innovation.
For Q4, let me touch on two great examples of how we're investing in our top growth opportunities, our women's business and Jordan brand.
We're investing and focused across the entire value chain to unlock the vast opportunity we see for women's.
For the full year, our women's business drove outsized growth of 22% versus the prior year.
And despite the tremendous momentum we're seeing in women's, we know that there is even greater growth ahead as we move even faster with our new organization structure and invest far more resources in serving women end-to-end.
For instance, in the marketplace, we continue to provide more compelling retail environment through our NIKE Live format.
In fact, this past year, we opened nine new NIKE Live doors, which offer personalized experiences and services for female consumers.
Our investments also mean a larger sharper focus on women's only insights, services and product innovation.
And we're already seeing this work come to life.
Consumer insight from our female consumer drove the new Pegasus 38, which kept the best cushioning innovations from this popular franchise while improving and tailoring comfort and fit that she wants.
The Peg 38 has sold extremely well and we continue to be energized by the potential we see in footwear for her.
For WNBA's 25th season this year, we created the most comprehensive player, team, and fan apparel collection in league history.
The new WNBA uniforms were completely reengineered to deliver the exact fit, movement, and comfort players said that they want from their Jersey and sport.
The players love them and consumers have agreed, with sales growth well above our expectations.
And that heightened demand extended to the larger product assortment with the WNBA 25th anniversary T selling out in one day.
This is just one example of how we drive energy for women's sport across the marketplace, as we remain excited by this enormous opportunity looking forward.
Next, let's discuss Jordan brand whose momentum continues to be driven by its unique blend of heritage and innovation as well as its deep connections to consumers and communities around the globe.
In fiscal '21, Jordan brand grew 31% propelling the business to nearly $5 billion.
This growth was driven by continued energy for Jordan's most coveted icons including the AJ1 and AJ11 as well as new product dimensions.
For example, Jordan's women's business nearly tripled in Q4, fueled by compelling product such as the flight essentials apparel collection.
We are also increasingly are excited about our delivery of exclusive access for women through [Indecipherable] AJ1, which drove over 40% female buyers, more than 10 points higher than average AJ1 buyer profile.
In Q4, Jordan also launched Zion Williamson's first signature shoe, the Zion 1 as well as the apparel collection.
As the first Gen Z signature shoe in Jordan brands history, Zion offers both transcended athletic possibility as well as a deep personal connection with fans.
The strong sell-through of Zion signature shoe collection demonstrates the continued love for Jordan brands roster of athletes all over the world.
Quickly looking to the summer in Tokyo.
In the next few weeks, we will be officially launching more of our Olympic product including our USA women's basketball and football uniforms, our four skateboarding Federation kits, and a new medal stand shoe featuring our hands-free FlyEase technology.
We're excited by the strong reaction we've seen for our Olympic product thus far.
And we're also thrilled to see our innovation continue to separate us.
In running, this includes our Vaporfly NEXT% 2 for distance runners as well as our best-in-class track spikes.
As you probably heard, our spikes are creating dominant performances at the US track and field trials, not just for NIKE athletes but competitor athletes as well.
From performance to the medal stand, to sustainability, we're excited for the world stage this summer in Tokyo to put a global spotlight on our advantage and innovation.
One final observation on innovation.
I recently got the chance to see the long-term product plans that our teams are developing against our new consumer construct of women's, men's, kids and Jordan, with sharpness against poor performance and sport lifestyle and I could not be more excited.
It's safe to say that we're more confident than ever in our product pipeline, as our focus on the consumer of the future drives our relentless innovation engine.
And as we start welcoming employees back to work in our new state-of-the-art design and innovation centers, I know that our innovation pace will only quicken as we reinvent what's possible.
My third and final point is increasing our digital advantage.
As I said earlier, our owned digital business has more than doubled over the past few years to over $9 billion.
And at the center of our digital ecosystem is our suite of apps, which in Q4 reflected over 40% of our owned digital business.
This is the result of deeper consumer connections fueled by compelling product and content.
A key differentiator for us is membership.
It has proven to be a compelling driver of repeat engagement and buying across digital and physical retail.
In Q4, we continue to see growth and member demand outpace total digital growth hitting a new record of $3 billion.
This member demand growth was underscored by strong results across the consumer funnel including member engagement, average order value and buying frequency.
In this fiscal year, we met the goals we set at our last Investor Day around membership of full year early and now have more than 300 million NIKE members.
More importantly buying member growth is outpacing new member growth, signaling progress on a deeper member led commerce funnel.
We're always looking to elevate our unique member proposition, whether that means expanding the number of member exclusive products or creating new and meaningful retail experiences through Member Days, our NIKE only retail moments.
And this engaging membership experience fuels a virtuous cycle feeding insight to product creation, inventory optimization and more.
Knowing and serving our members drives greater competitive separation.
Today, we're the clear leaders in our industry and we continue to see digital as our leading channel for growth in fiscal '22.
The combination of owned and partner digital revenue is now nearly 35% of our total business, more than three years ahead of our prior plan.
And we see no sign of this shift slowing.
In fact, we believe we will achieve 50% digital mix of business across owned and partnered in fiscal '25.
As part of our overall One Nike Marketplace, we are also actively engaged with our strategic wholesale partners who share our vision.
Today, we're working closely with large strategic partners like Dick's Sporting Goods, Foot Locker, and JD Sports, as well as compelling local neighborhood partners who are authentic to sport performance and lifestyle.
Together, we are driving change to create a new more connected and seamless experience for consumers around the world, which is exactly what consumers want.
It's a shift that speaks to our belief that the strong get stronger.
We're super charging how we serve consumers with convenience, innovation, content and services.
This is how we stay ahead of the pack and expand our lead.
We've all been through a lot this past year.
And at NIKE that's included store closures, supply chain challenges, digital transformation, a new accelerated strategy and more.
And throughout it all our team has delivered for our consumers and communities.
You've demonstrated creativity, teamwork, and resilience and you are the reason NIKE leads.
I've said it before and I'll say it again, the people of NIKE are our greatest competitive advantage.
They've delivered extraordinary results over the past year.
I also want to take a moment and recognize Andy Muir, this will be her last earnings call as Vice President of Investor Relations after recently becoming CFO of our Jordan Brand.
I wish you the best of luck in your new role, I know you'll do great.
And backfilling Andy in this role as Paul Trussell, who many of you already know.
Paul joins us from Deutsche Bank.
Now I'd like to begin today's call with a baseline on where we are in our recovery.
Just as we anticipated, NIKE is emerging from the pandemic stronger and better positioned to serve the consumer.
And the reason for this is clear.
NIKE's Consumer Direct Acceleration is fueling a deeper consumer connection with our brands and driving business results, although highlighting in greater strategic and financial opportunity ahead.
Over the past 15 months we have navigated through this challenging environment with outstanding execution of our operational playbook.
We have faced every challenge head on, focused on what we could control, all while keeping the consumer at the center.
These actions had help set a strong foundation for sustainable growth and profitability with business performance, now exceeding pre-pandemic levels.
In the fourth quarter, we delivered over $12 billion of reported revenue, our largest quarter ever.
Our NIKE Direct business is now approaching 40% of total NIKE brand revenue.
NIKE Digital represents 21% of total NIKE brand revenue, a milestone we have reached several years ahead of our prior plan.
And finally, our fiscal '21 EBIT margin reached 15.5%, reflecting more than 300 basis points of expansion when compared to fiscal '19.
These metrics now become the new baseline from which we expect to grow.
As we recover from the global pandemic, it is clear that our Consumer Direct Acceleration strategy is transforming NIKE's financial model.
So later on the call, I will share our financial outlook through fiscal year '25, reflecting a more direct member-centric business model.
However, first I would like to provide additional detail on our extraordinary fourth quarter results and operating segment performance.
NIKE Inc. revenue increased 96% and 88% on a currency neutral basis.
This was driven by strong wholesale shipments and NIKE owned store performance as we anniversary pandemic related store closures.
Even as physical retail reopened, we continue to see strong growth in NIKE Digital of 37% versus the prior year.
Gross margin increased 850 basis points versus the prior year, driven by favorable NIKE Direct margins and the anniversary of higher costs including actions taken to manage supply and demand in the face of the COVID-19 pandemic.
SG&A grew 17% versus the prior year due to higher levels of brand activity connected to return of sport.
Digital marketing to drive digital demand, technology investments to support our digital transformation and higher wage related expenses.
Our effective tax rate for the quarter was 18.6% compared to 1.7% for the same period last year due to decreased benefits from discrete items in the prior year and a shift in earnings mix primarily related to pandemic recovery.
Fourth quarter diluted earnings per share was $0.93 and full year diluted earnings per share was $3.56, up 123% versus the prior year.
Now let's move to our operating segments.
In North America, Q4 revenue grew 141%.
This also marked the first ever $5 billion quarter for North America, driven by notable improvements in full price sell through as the marketplace reopened and sport activity returned.
Demand for NIKE remained incredibly strong.
And as we expected, delayed revenue from the global supply chain disruption in the third quarter was recaptured during the fourth quarter.
NIKE Direct grew over 120% as NIKE owned stores returned to positive sales growth versus pre-pandemic levels.
More importantly, NIKE Digital grew over 50% while physical traffic continued to improve across the marketplace.
NIKE Direct performance was propelled by our members across both digital and physical retail.
Member demand nearly doubled versus the prior year and the number of buying members grew roughly 80%.
Across the total marketplace, we continue to see strong retail sales growth and consumer demand for our brands exceeding marketplace supply, with marketplace inventory down double digits versus the prior year.
NIKE owned inventory declined 7% with double-digit declines in closeout inventory.
In transit full price inventory remains elevated as we continue to experience longer end to end lead times for supply.
We expect supply chain delays and higher logistics costs to persist throughout much of fiscal '22.
In EMEA, Q4 revenue grew 107% on a currency neutral basis with strong growth across the region, including the UK and Ireland, France, Germany and Italy.
NIKE Direct grew 57% despite government restrictions requiring nearly half of our NIKE owned stores to remain closed for the first two months of the quarter.
In May, as restrictions eased, we saw a strong consumer response with incredible pent-up demand and this momentum has continued into June.
NIKE Digital grew nearly 30% versus the prior year.
Through our Member Days, we saw strong engagement with member demand outpacing total NIKE Direct revenue growth with all-time highs for female active members during Air Max week.
In the fourth quarter, we also expanded the NIKE mobile app to more than 10 new countries across the region.
During our last earnings call, I shared our expectation that inventory in EMEA would normalize in the first quarter of fiscal '22.
We have exceeded that goal due to stronger-than-anticipated consumer demand, ending fiscal '21 in a healthy and normalized inventory position.
In Greater China, Q4 revenue grew 9% on a currency neutral basis.
For the full year, Greater China delivered its seventh consecutive year of double-digit growth, demonstrating our consistent brand strength and commitment to serving the consumer.
NIKE Direct grew 2% in Q4, with strong growth in NIKE owned stores, partially offset by declines in NIKE Digital.
As John mentioned earlier, Q4 business results were impacted by marketplace dynamics.
After a strong March, our business in Greater China was impacted in April and we adjusted our operations by suspending marketing activities and product launches.
We then began to see a recovery trend improving to a single-digit decline in May and sequentially improving into June with month-to-date retail sales trends approaching prior year levels.
And for the 6.18 consumer movement, our flagship store on Tmall ranked number one driving the highest demand across the sports industry.
Building on our 40-year history in Greater China, we continue to invest in serving consumers with the best products NIKE has to offer in locally relevant ways.
We also continue to invest in the creation of a premium seamless consumer digital experience.
And supply chain capabilities and we plan to open a new digital technology center in Shenzhen to better serve Chinese consumers.
We have an experienced local team in Greater China who helped create our operational playbook at the beginning of the pandemic.
They have proactively managed marketplace supply and demand in order to navigate through these dynamics.
And we expect inventory to be normalized by the end of Q2.
Now moving to APLA.
Q4 revenue grew 76% on a currency neutral basis with growth across all territories led by Japan, SOKO and Mexico.
And Korea, grew double-digits this quarter on top of the 8% growth they delivered in the fourth quarter of last year.
NIKE Digital grew more than 50% enabled and amplified by our membership offense.
This was highlighted by Member Days, which drove all-time highs for member demand.
This momentum also extended to our marketplace partners in APLA as they returned to growth versus pre-pandemic levels and achieved their highest level of full price realizations, since the beginning of the pandemic.
During Golden Week in Japan, the Express Lane assortment was heavily influenced by member insights and delivered a sell-through rate that was two times the rate of the rest of NIKE Digital in Japan, showcasing the power of blending art and science that John referenced earlier.
APLA was the last geography to launch our Express Lane offense and we see significant opportunity to leverage these capabilities to drive deeper authentic consumer connections across the region.
Now, as we look ahead to fiscal '22 and beyond, I want to provide a new financial outlook through fiscal '25.
As we emerge from the pandemic accelerate our Consumer Direct Strategy and transform the operating model of the company.
First of all NIKE is a growth company and we expect to sustain strong revenue growth going forward.
This is based on the significant market opportunity that we see for our brands across the portfolio.
As well as our accelerated shift to a more direct member-centric business model.
As a result, we expect revenue growth to inflect upwards to a range of high single-digit to low double-digit growth on average.
With outsized marketplace opportunities in women's, apparel, Jordan, digital and international.
Growth will be led by NIKE Direct and our strategic marketplace partners.
Earlier I mentioned NIKE Direct is approaching 40% of our brand business today.
And we expect it to represent approximately 60% of the business in fiscal '25, led by growth in digital.
And as John said earlier, we expect owned and partnered digital to achieve 50% business mix in fiscal '25 with NIKE own digital to represent 40% of the business.
We will continue reshaping our wholesale business portfolio which includes divesting from undifferentiated retail, while investing in our strategic wholesale partners for healthy growth.
Overall, we expect wholesale revenue to remain roughly flat versus fiscal '21.
We will support partners who continue to authenticate our brand as well as those who have the scale to create a consistent premium digitally connected experience for consumers across the marketplace.
Our longer-term revenue outlook reflects higher growth expectations across several operating segments.
We will continue to leverage the power of our diverse global portfolio.
And we expect on average, North America to grow mid-single to high-single digits.
EMEA to grow high single-digits and APLA to grow low double-digits.
And with respect to Greater China, while marketplace dynamics still exist, we are optimistic that we can continue to grow low to mid-teens over the long term.
We remain committed to investing in the local consumer experience and inspiring the next generation of athletes in China.
We will continue to serve consumers with NIKE performance innovation and sports style product franchises, while also increasing local customization of style and fit for consumers.
For several quarters now, I've highlighted that the strategic and financial benefit of shifting to a higher mix of business through NIKE Direct led by digital and leveraging enhanced data and analytics capabilities to optimize inventory, drive higher full-price realization and lower digital fulfillment costs.
We now see gross margin rate reaching the high 40s by fiscal '25.
We will continue to reallocate resources and invest to enable our digital transformation and fuel the long-term growth and profitability opportunities that we see.
Having said that we expect to invest in SG&A at a rate that drives leverage versus pre-pandemic levels, which averaged roughly 32% to 33% of revenue.
As a result of all of this, we see our EBIT margin reaching high teens by fiscal '25 with earnings-per-share growth of mid to high-teens on average over this period.
As we drive toward a more direct business model we remain committed to create long-term value for our shareholders through serving consumers and sustaining our disciplined financial management.
We expect to deliver strong growth in free cash flow, maintain annual capital expenditures at roughly 3% of revenue, drive returns on invested capital above prior guidance at the low 30% range.
And deliver consistent returns to shareholders through dividends and share repurchases.
Now that I've discussed our updated financial outlook through fiscal '25, I will provide guidance for fiscal '22.
As I've already said, we entered the fiscal year, strong confident that our deep consumer connections and brand momentum will continue, despite being in a dynamic operating environment.
Our confidence is rooted in the fact that consumers in key cities rate NIKE as their favorite brand.
As retail sales continue to grow strongly on lean marketplace inventory and our organization is aligned against our new consumer construct, which will help us accelerate even faster against our largest growth opportunities.
In fiscal '22, we expect revenue to grow low double digits and surpassed $50 billion, reflecting strong consumer demand across our operating segments, as we lead with digital, scale NIKE owned physical retail concepts and grow with our strategic partners.
It's important to note as we normalize our post-pandemic business and continue to reshape the marketplace, we do not expect quarter-by-quarter growth to be linear.
Therefore, we expect first half growth to be slightly higher than second half growth.
We expect gross margin to expand 125 basis points to 150 basis points, reflecting our continued shift to a more profitable NIKE Direct business and sustained strong full price realization, partially offset by higher product costs, supply chain investments and the annualization of certain one-time benefits in fiscal '21.
Foreign exchange is estimated to be a tailwind of roughly 70 basis points.
We expect SG&A growth to slightly outpace revenue growth as we normalize spend with return to sport and more consistent store operating schedules as well as investments focused against our largest growth opportunities, which I've shared previously.
However, we do expect leverage relative to pre-pandemic rates of investment.
And last, we expect the fiscal '22 effective tax rate to be mid-teens.
As we begin our next fiscal year, NIKE continues to navigate through a dynamic and rapidly changing environment.
At the same time we are on the offense and accelerating our strategy to serve more consumers personally and at scale.
Our unmatched innovation continues to enable world-class athletes to reach new levels of performance has sport returns to the main stage.
Our product pipeline is strong, and we are even more deeply connected to consumers than before the pandemic.
We are building upon the strong foundation we set in fiscal '21 and accelerating our pace for the next leg of the race.
We have a clear vision for our brand, long-term future and we are focused on what it will take to get there. | nike q4 earnings per share $0.93.
q4 earnings per share $0.93.
gross margin for q4 increased 850 basis points to 45.8 percent.
q4 revenue growth was led by higher wholesale shipments.
q4 reported revenues were $12.3 billion, up 96 percent compared to prior year.
during q4 of 2021, nike, inc. resumed share repurchase activity. | 1 |
Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer.
I will first provide an overview of our quarterly results and how we are managing the business in this current economic environment, and then Dale will walk you through the bank's financial performance.
The continued growth in Western Alliance's national commercial business strategy drove financial results and balance sheet growth through record quarterly highs to kick off 2021.
Barring the company's strong fourth quarter performance and underlying fundamental trends, WAL earned net income of $192.5 million and earnings per share of $1.90 for the quarter, up $108 million year-over-year and nearly flat to Q4.
Net revenue expanded 4.5 times the rate of expense as improvement in asset quality and economic conditions drove a $32.4 million relief in loan loss reserve this quarter.
Our focus continues to be on PPNR growth, which rose approximately 31% year-over-year to $202 million while marginally lower than last quarter due to two fewer days.
Regarding the acquisition of AmeriHome, I am pleased that the closing took place approximately three weeks ahead of schedule.
While personnel and technology integrations are minimal, we have begun to focus on balance sheet and funding synergies with the paydown of external credit lines.
Additionally, we signed agreements with the sale of approximately $750 million of mortgage servicing rights to strong counterparties that will allow Western Alliance to retain substantially all the custodial deposits.
We expect this to be completed in early May.
AmeriHome was an attractive strategic acquisition, expanding Western Alliance's fee income and lowering the company's reliance on spread income while providing growth optionality to our commercial portfolio of businesses.
Turning to the first quarter balance sheet trends, outstating quarterly loan and deposit growth of $1.7 billion and $6.5 billion respectively, lifted total assets to $43.4 billion, up 49% from the prior year.
Our near-term focus on growing loans in low-risk asset classes was on display as loan growth was primarily driven by warehouse funding, residential loan purchases and increased activity throughout our traditional banking and regional footprint.
Our deposit growth was broad-based across our franchise, which pushed down our loan-to-deposit ratio of 75% and creates a strong funding foundation for ongoing loan and earnings growth from our commercial loan pipeline and the AmeriHome acquisition.
The continued excess liquidity from our improving deposit franchise is at the expense of short-term NIM compression, but it's a trade-off we are willing to accept for long-term value creation.
This impressive loan growth drove net interest income of $317.3 million, or $2.5 million higher than last quarter and up 18% on a year-over-year basis.
Quarterly net interest margin was 3.37%, down 47% from the fourth quarter as we continued to deploy excess liquidity into loans and investment securities.
Non-interest income totaled $19.7 million for the quarter, aided by $7.3 million of warrant income from Bridge Bank.
Asset quality remained stable this quarter as the economic recovery gained steam.
For the quarter, net loan charge-offs were $1.4 million or 2 basis points on an annualized basis.
Credit losses may not appear in any meaningful way as prior and proposed stimulus packages continue to positively impact consumer spending habits and many businesses were provided the liquidity to weather the pandemic.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $33.02, or 23.5% year-over-year -- or 23.5% year-over-year growth.
We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.93% and 24.2%, respectively.
This strong momentum, coupled with economic reopening, positions Western Alliance well for an industry-leading 2021.
At this time, I'll let Dale take you through the financial performance.
For the quarter, Western Alliance generated net income of $192.5 million or $1.90 per share, each down about 1% from the prior quarter.
This is inclusive of a reversal of credit loss provisions of $32.4 million due to continued improvement in economic forecasts relative to year-end 2020 and continued loan [Phonetic] -- in [Phonetic] loan segments with historically very low loss rates.
Additionally, merger expenses related to the AmeriHome acquisition of $400,000 were recognized.
We expect total merger charges to be approximately $15 million, preponderance of which will be incurred in Q2 as integration continues.
Net interest income grew $2.5 million during the quarter to $317.3 million, an increase of 18% year-over-year, primarily as a result of our significant balance sheet growth.
However, while average earning assets grew $5.7 billion, the relative proportion held in cash and lower-yielding securities increased to approximately 32% in Q1 from 22% in Q4, which temporarily muted our interest income growth as we prepare to deploy excess liquidity into AmeriHome-generated assets and higher-yielding commercial loans.
Quarter-over-quarter, our loan-to-deposit ratio fell to 75% from 85% in Q4 as we proactively look to grow low-cost deposits as dry powder for future loan growth.
Non-interest income fell $4.1 million to $19.7 million from the prior quarter, mainly driven by smaller fair value gain adjustments in our securities measured at fair value, but partially offset by $7.3 million in the warrant income.
Non-interest expense increased $2.8 million, mainly due to higher deposit costs as lower rates were offset by higher average balances.
Continued balance sheet growth generating superior net interest income drove pre-provision net revenue of $202 million, up over 30% from a year ago.
Turning now to net interest drivers.
As our strong core deposit growth continued throughout the quarter, we look to redeploy excess liquidity into the investment portfolio and loans.
Total investments grew $2.4 billion for the quarter or 43% to $7.9 billion compared to an average balance of $6.5 billion.
Investment yields declined 24 basis points from the prior quarter to 2.37% due to lower reinvestment rates in the current environment.
Similarly, on a linked-quarter basis, linked -- loan yields declined 8 basis points following ongoing mix shift toward residential loans and asset class with generally lower yields than the remainder of the portfolio and lower credit risk.
This was partially offset by modestly higher PPP fees, strong loan growth and liquidity deployment toward the end of the quarter.
Significantly, quarter-end balances for loans and investments were $3.3 billion higher than the average balances and yielded 3.5% more than our Fed account.
Higher income from this already-deployed liquidity positions us well for Q2.
Interest-bearing deposit costs were reduced by 3 basis points in Q1 to 22 basis points, due to ongoing repricing efforts and maturities of higher cost CDs.
The spot rate for total deposits, which includes non-interest-bearing, was 11 basis points.
We expect funding costs have generally stabilized at these levels.
Net interest income increased $2.5 million to $317.3 million during the quarter or 18% year-over-year as higher loan and investment balances offset net interest margin compression.
NIM declined 47 basis points to 337 basis points as our purposeful strong deposit growth in advance of closing the AmeriHome acquisition negatively impacted the margin by 43 basis points.
To put this in perspective, average securities and cash balances to interest-earning assets increased meaningfully in Q1 32% from 22%.
Given our higher end of quarter loan balances, healthy loan pipeline and ability to deploy this excess liquidity over the coming quarters into higher-yielding earning assets, we expect this margin drag to moderate while net interest income declines [Phonetic].
Additionally, a PPP loan yield of 4.9% benefited the NIM by 8 basis points, which was similar to the fourth quarter benefit.
Cumulatively, over the remainder of 2021, we expect to recognize $15.4 million of BBB fees.
Our efficiency ratio rose 90 basis points to 39.1%, an increase from 38.2% in Q4.
This higher efficiency ratio was driven by a modest decline in non-interest income and an increase in expenses, partially offset by increased net interest income.
Non-interest expense linked quarter growth increased by 2.1%, driven by higher deposit fees related to the 82% annualized rise in deposit balances.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 41%.
Inclusive of AmeriHome, we expect the efficiency ratio to rise to the mid-40s this quarter.
Pre-provision net revenue declined $4.4 million or 2.1% from the prior quarter, but increased 31% from the same period last year.
This results in PPNR and our ROA of 2.03% for the quarter, a decrease of 21 basis points compared to 2.24% for the year-ago period, partially impacted by a much larger asset base.
This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet credit demands.
Balance sheet momentum continued during the quarter as loans increased $1.7 billion or 6.1% to $28.7 billion and deposit growth of $6.5 billion brought balances to $38.4 billion at quarter end.
Inclusive of the second round of PPP funding, loans grew 24% year-over-year, while deposits grew approximately 55% year-over-year, with our focus on low loan loss segments and DDA.
In all, total assets have grown 49% year-over-year as we approach the $50 billion asset level, including AmeriHome.
Finally, tangible book value per share increased $2.12 over the prior quarter to $33.02, an increase of $6.29 or 23.5% over the prior year, attributable to both net income and the common stock offering of 2.3 million shares completed during Q1 in anticipation of the AmeriHome acquisition.
Our strong loan growth continues to benefit from flexible national commercial business strategy.
The majority of the $1.7 billion in growth was driven by an increase in C&I loans of $746 million.
Loan growth was also strong in residential real estate loans of $675 million, supplemented by construction loans of $337 million and CRE non-owner-occupied loans of $27 million.
Residential and consumer loans now comprise 10.9% of our loan portfolio, an increase from 9.9% a year ago.
Within the C&I growth for the quarter and highlighting our focus on low-risk assets, mortgage warehouse loans grew $562 million and Round 2 3P [Phonetic] loans, originations were $560 million, which were nearly offset by $479 million from Round 1 of payoffs.
We continue to believe our ability to grow core deposits from diversified funding channels is our key to firm's long-term value creation.
Given the ability to deploy funds into attractive assets in the near term, we purposefully looked to expand balance sheet liquidity in Q1.
Deposits grew $6.5 billion or 20% in the first quarter driven by increases in non-interest-bearing DDA of $4.1 billion, which now comprise 46% of our deposit base and the savings in money market of $2.9 billion.
Market share gains in mortgage warehouse continued to be a significant driver of deposit growth during the quarter, along with robust activity in tech and innovation and seasonal inflows from HOA banking relationships developed during 2020.
Our asset quality remains strong, and borrowers are stable, liquid and supported by strong sponsors.
Total classified assets increased $57 million in Q1 to $281 million due to migration of a few borrowers and COVID-impacted industries, such as travel, leisure and entertainment as reopening continues but at an uneven pace.
We see the potential for these credits to be upgraded as travel and events increase in the coming quarters.
Our non-performing loans plus OREO ratio declined to 27 basis points to total assets and total classified assets rose 4 basis points to total assets up to 0.65% compared to the ratio at the end of 2020.
Special mention loans increased $23 million during the quarter to 1.65% of funded loans.
As we've discussed before, SM loans are a result of our credit [Indecipherable] litigation strategy to early identify, elevate and apply heightened monitoring to loans or segments impacted by the current COVID environment and fluctuate as credits migrate in and out.
We do not see credit losses emerging from special mention volatility.
Regarding loan deferrals, as of quarter end, we had $68.5 million of deferrals, all of which are in low LTV residential loans.
Quarterly net credit losses were modest to $1.4 million or 2 basis points of average loans compared to $3.9 million in the fourth quarter.
Our loan ACL fell $36 million from the prior quarter to $280 million due to improvement in macroeconomic forecast loan growth in portfolio segments with low expected loss rates.
In all, total loan ACL to funded loans declined 20 basis points to 97 basis points or 1.03% when excluding PPP loans.
For comparison purposes, the loan ACL to funded levels was 84 basis points at year-end 2019 before CECL adoption.
We continue to generate capital and maintain strong regulatory ratios with tangible common equity to total assets of 7.9% weighed down this quarter by strong asset growth, and the common equity Tier 1 ratio of 10.3%, an increase of 40 basis points during the quarter, mainly driven by our common stock offering and growth in low-risk assets.
Inclusive of our quarterly cash dividend payment of $0.25 a share, our tangible book value per share rose $2.12 in the quarter to $33.02, an increase of 23% in the past year.
I'll now hand the call back over to Ken.
Western Alliance is one of only a handful growth banks in the industry with double-digit loan growth, liquidity to fund the growth, strong improving net interest income that generates consistent peer-leading ROA and return on average tangible common equity with steady asset quality and low net charge-offs.
Going forward, based on our current pipelines, we expect loan and deposit growth of $1 billion to $1.5 billion per quarter, which will drive higher net interest income and PPNR growth.
We expect NIM pressure to subside through the deployment of liquidity into attractive asset classes.
One of the characteristics of AmeriHome that we found very attractive is that it provides a natural solution to WAL's excess liquidity.
AmeriHome will be expanding its product ray to include higher-yielding non-QM and jumbo loans that fit our established credit box.
Placing and holding these loans on our balance sheet enhances our existing residential mortgage purchase program, and is a worthy credit solution for the swift deployment of excess liquidity.
To keep pace with balance sheet performance, our risk management programs and technology platforms are evolving and expenses will rise, but will be offset by the revenue generated from excess liquidity deployment.
There will be no drag on PPNR or earnings per share from these investments.
Inclusive of AmeriHome, the efficiency ratio will rise to the mid-place [Phonetic].
Finally, our long-term asset quality and loan loss reserves are informed by the economic consensus forecast incorporating risk for tail economic events, which is consistent going forward, could imply a steady reserve balance.
Depending on the timing and pace of the recovery, there could be some loan migration into the special mention category, but we do not expect material migrations into substandard.
We believe the provisions in excess of charge-offs since the pandemic began are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that have implied material losses are on the horizon.
To conclude, Western Alliance is well positioned for balance sheet growth with steady asset quality.
PPNR should continue its upward trajectory from Q1, along with industry-leading return on assets and equity. | western alliance bancorp q1 earnings per share $1.90.
q1 earnings per share $1.90.
q1 revenue fell 0.5 percent to $337 million.
net interest income was $317.3 million in q1 2021, an increase of $2.5 million from $314.8 million in q4 2020. | 1 |
These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated.
Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements.
We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner.
nuskin.com for any required reconciliation of non-GAAP numbers.
And with that, I'll turn the time over to Ritch.
We really appreciate that you join us today.
I'm so pleased with our progress in becoming a customer-obsessed, socially enabled business that has generated record results in this first quarter.
Our strategy has positioned us well for success amid powerful macro trends and associated shifts in consumer behaviors.
I want to recognize our amazing and talented sales leaders and dedicated and loyal employees who are responsible for the great results we are reporting today.
We made critical enhancements to our business as we implemented our strategy over the past few years.
For example, we refined the cadence of our product launches.
We increased our focus on attracting and retaining customers.
We aligned our sales compensation structure to enable social commerce.
And we invested in manufacturing companies to secure our supply chain.
These and other strategic enhancements helped us drive 31% revenue growth and 153% earnings-per-share growth in the first quarter.
As a result, we're reporting the best first quarter in Nu Skin's history for both revenue and earnings per share.
And we are raising our guidance for the year.
As Ryan and I continue to work closely together on developing and leading the execution of this strategy, the transition of leadership responsibilities is progressing well.
I am so confident that the business is in great hands.
This is the right team to build on the existing foundation and drive continued growth and success in the future.
I would like to highlight progress on a few of our key initiatives.
First, we continue to build upon our 37-year history of developing world-class beauty and wellness products that help people look and feel their best.
For example, as people look for ways to enjoy a spa-like experience at home, our beauty devices, including ageLOC LumiSpa and Boost, continue to grow in popularity.
In fact, Euromonitor recently named Nu Skin the world's #1 beauty device systems brand for the fourth consecutive year.
As consumers become increasingly mindful of what goes into the products they use, we extended our product philosophy with Nutricentials Bioadaptives that feature clean formulas and sustainable packaging.
Next, even as the world moves toward a new normal, our social commerce strategy is here to stay.
We recognize the trend of consumers moving to digital platforms long before COVID-19, which accelerated this transition.
Our triple-digit growth in the West is a result of our brand affiliates embracing our social commerce model.
We're reaching a larger and younger demographic, and the business continues to gain momentum, with 34% customer growth and 22% and sales leader growth in the first quarter.
I'm encouraged also by our improving geographic balance, which Ryan will speak to in more detail in a moment.
I would like to highlight the growth in our manufacturing segment, which achieved record results and reported 69% revenue growth.
We continue to lean into our sustainability efforts with ongoing initiatives to reduce the environmental impact of our business operations, provide more ecofriendly packaging and strengthen our commitment to responsible sourcing, including our investments in controlled environment agriculture.
Given our first quarter performance, increasing sales leader interest in our planned new product introductions and strong customer and sales leader growth, we are raising our 2021 guidance.
The midpoint of our adjusted guidance points to growth of about 10% for revenue and 15% for earnings per share.
We are confident in our strategy, and we're optimistic about our future.
I've loved partnering with Ritch over the past few years as we've refined our vision to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform.
This vision builds on our foundational product philosophy and the strength of our person-to-person business model, infusing digital, social and mobile capabilities that are shaping us into a leading social commerce company.
Our ultimate aspiration is to become the world's leading beauty and wellness platform.
We are witnessing seismic global shifts in consumer behaviors.
From digital, social and mobile connections to the expansion of the gig economy, our world is changing rapidly.
Traditional advertising, retail and e-commerce are being disrupted by influencer marketing and social commerce like never before, a trend that has accelerated significantly over the last year.
These trends, combined with our strategic investments over the past years to build greater digital capabilities, have positioned us well to realize today's opportunities and accelerate our own pace of change.
This strategy has resulted in strong customer and sales leader growth and record first quarter results in both revenue and EPS.
Before I go into more detail about the quarter, I want to run through the three key components of our strategy to grow: our innovative products, our unique affiliate channel and our powerful platform.
First, regarding innovative products, we've refined our cadence of bringing innovative beauty and wellness products to market.
We play in the fastest growing product categories in beauty and wellness, including beauty devices.
This category is nearly $7 billion and is projected to grow more than 20% annually between now and 2030.
As Ritch mentioned, this is the fourth consecutive year Euromonitor has ranked Nu Skin as the world's #1 beauty device systems brand.
This further validates our scientific rigor as a unique strength and competitive advantage in the beauty industry.
Our next step to expand our dominant position will be to add connectivity to our devices as part of our Empower Me personalization strategy that we introduced to all of you at Investor Day.
The way people engage with beauty and wellness has changed as shopping behaviors and personalized product experiences have become increasingly digital.
For us, this shift has resulted in more than 90% of our revenue coming from online transactions, with approximately half our revenue coming from recurring customer subscription and loyalty programs.
I'm excited about the recent product launches of ageLOC Boost and Nutricentials Bioadaptives, which generated more than $35 million for the quarter in a limited number of markets.
We'll continue to strengthen our industry-leading position with our robust product pipeline in 2021 and beyond.
Later this year, we'll introduce two new products through our proven global launch process, leveraging our robust R&D capabilities in both beauty and wellness.
First, we'll introduce a unique beauty-from-within product line, beginning with Beauty Focus Collagen+ with our proprietary formula aimed at disrupting the burgeoning $50 billion beauty supplement market.
This product is clinically proven to help improve skin health and complement other Nu Skin products, including our LumiSpa beauty system.
Second, we'll introduce our next major Pharmanex innovation, ageLOC Meta, a metabolic health supplement.
A recent study of U.S. adults indicated that 88% are metabolically unhealthy.
And this product helps us address this acute wellness dilemma.
Additionally, we plan to begin introducing connected devices in early 2022 and beyond.
Connected devices will further personalize and enhance the customer experience while providing additional insight into consumers' needs.
These powerful beauty device systems and innovative products, combined with our global subscription and loyalty programs, create a unique opportunity for us that increase customer acquisition and lifetime value as we continue to meet the needs of beauty and wellness customers.
Next, our flexible and powerful affiliate channel is evolving to support social commerce business.
In essence, we're taking the best of our face-to-face person-to-person model, including a passionate sales force, personal touch, trusted product recommendations and a connected community.
And we're evolving it into a digital-first affiliate marketing engine that's powered by our socially enabled global sales force.
In many ways, our historically unique style of influencer and affiliate marketing is now the approach that many companies and brands around the world are trying to replicate.
This approach has always been at the core of our business and is now being amplified by our social commerce strategy.
Our first quarter results throughout the West and parts of the East are further evidence that social commerce is an emerging model that will transform the beauty and wellness industry.
Third, our powerful affiliate opportunity platform connects consumers with people or -- sorry, people who are seeking innovative beauty and wellness products with brand affiliates who help them navigate their personal journey.
And it all happens within a digital ecosystem that enables our affiliates to attract, connect, transact and service consumers in nearly 50 markets.
In our opportunity platform, affiliates and leaders can effectively serve their customers' personal needs by accessing hundreds of beauty and wellness products.
We continue to introduce new digital and social tools to make running a powerful and personalized social commerce business more simple and effective These tools include Vera, our personal product recommendation tool that is currently being rolled out around the globe; MySite, our personal product storefronts available in most of our markets; WeShop, China's personal storefront model to be introduced in the second half of this year; and digital training tools to expand the reach and capability of our brand affiliates.
So when combined, our flexible Velocity sales compensation program, our global footprint of nearly 50 markets, our best-in-class manufacturing capabilities and our significant digital transformation, all come together with an unmatched products to empower our affiliates to build their own socially enabled beauty and wellness businesses.
Across Nu Skin, we're focused on driving consumer growth and loyalty and creating entrepreneurial opportunities for brand affiliates as we expand social commerce around the globe.
I've known Connie for years as an industry colleague.
She's an amazing business leader with a long track record of successfully guiding global organizations.
She'll lead our global markets and customer experience office as we further expand social commerce.
I look forward to introducing you to Connie in future calls.
Turning now to our global markets.
We continue to take steps to improve our geographic revenue balance.
This will create more sustainable growth moving forward and make us less susceptible to individual market fluctuations and geopolitical issues.
Beginning with the Americas/Pacific, our accelerated performance continues to be driven by the expanding adoption of social commerce.
This region posted first quarter constant currency revenue growth of 97% with growth in every market.
This region is now roughly the size of our Mainland China business and on pace to become our largest business unit.
Customers and sales leaders both grew significantly, demonstrating sustainable growth across all key metrics as they prepare to launch Beauty Focus Collagen+ and ageLOC Boost in the second half.
Europe, Middle East and Africa also posted significant constant currency revenue growth of 98% year-over-year as leaders embrace social commerce throughout the region.
The U.K., Germany, France and Poland led the way as we partnered with sales leaders for the launch of Nutricentials Bioadaptives and on effective product promotions.
EMEA achieved the highest growth in customers and sales leaders of any region, providing momentum as we move into Q2 and beyond.
Mainland China grew 1% in local currency this quarter with customers up 16%.
We continue to invest in new social commerce technologies in this market, including our own WeShop initiative in partnership with Tencent, which begins to roll out in the second half of this year.
This will further reduce our dependency on in-person meetings, which we believe will better enable our sales leaders to adopt social commerce within China's own robust digital ecosystem.
Hong Kong and Taiwan recorded a 3% constant currency decline, with Taiwan's growth being offset by continued macro challenges in Hong Kong.
South Korea remained even with the prior year's quarter, with sales led by our TR90 weight management system and the introduction of ageLOC Boost.
Customers declined 12% due to promotional activities last year, while sales leaders grew by 7% in the quarter.
South Korea is focused now on adopting social commerce throughout the market.
Southeast Asia's constant currency revenue declined 5%, impacted by lingering effects of COVID in certain markets.
But we anticipate increased social commerce adoption across the region, which will generate renewed growth in time.
I'd also like to highlight Japan's 11% growth in local currency during the quarter.
Our business there is starting to capture gear as new and younger consumers discover our beauty and wellness products, including our recent ageLOC Boost and Nutricentials Bioadaptive launches.
We've raised guidance for the year based upon the optimism we're seeing in our aggregate global business.
So let me wrap up by saying that our future looks brighter today than it ever has.
We are fully leaning into our mission to empower people to improve lives and our vision to become the world's leading innovative beauty and wellness company that's powered by our dynamic affiliate opportunity platform.
Our strategy, investments and commitment to operational excellence are aligned to this goal and will drive even greater value for our customers, affiliates, employees and shareholders throughout the remainder of 2021 and beyond.
And with that, I'll turn the time over to Mark to go over financial results for the quarter and to update guidance.
I'll provide some additional color regarding our financial results, give Q2 guidance and update our full year 2021 outlook.
First quarter revenue and earnings per share came in above the top end of our prior guidance.
Q1 revenue increased 31% to $677 million, with a positive foreign currency impact of 5.7%.
Earnings per share for the quarter increased 153% to $0.91.
Gross margin for the quarter improved sequentially 80 basis points to 74.8% due to product mix and easing of air freight charges versus the past few quarters.
Gross margin was 75.7% in the prior year quarter.
Nu Skin Q1 gross margins were 77.8% against 78.1% in the prior year.
Our gross margin continues to be impacted by growth in our West markets and our manufacturing segment.
However, this growth benefits us by lowering our overall tax rate.
Speaking of our Manufacturing segment, a primary purpose of those acquisitions was to secure our supply chain.
One of the most significant challenges of COVID-19 has been widespread supply chain disruptions.
The agility and flexibility of our supply chain has allowed us to maintain our product launch schedule and, for the most part, keep our key products in stock.
Selling expense as a percent of revenue was 40.4% compared to 39.8% in the prior year.
For the Nu Skin business, it was 43.4% compared to 42%.
As a reminder, selling expenses fluctuate quarter-to-quarter and often increase during strong revenue growth as more of our sales leaders qualify for incentives.
General and administrative expense as a percent of revenue was 25.1% compared to 28.9% year-over-year.
We continue to leverage our infrastructure to support revenue growth and improve operating margin, accelerating earnings growth.
I am very pleased with our operating margin for the quarter, which improved to 9.3% compared to 7.1% in the prior year quarter.
This is another strong step toward our stated goal of 13% operating margin.
The other income expense line reflects a $1.6 million gain compared to a $6.2 million expense in the prior year.
The improvement was driven by foreign currency, reduced interest expense and investment income.
Consistent with expectations and first quarter historical trends, cash from operations was an outflow of $18.9 million.
We paid $19.3 million in dividends and continued our focus on generating shareholder value by repurchasing $50.4 million of our stock with $275.4 million remaining in authorization.
Over the past five quarters, we have repurchased more than six million shares.
Our tax rate for the quarter was 26.5%, benefited by increased profits in the West, as I mentioned earlier.
Due to our strong first quarter results, strengthening trends and robust 2021 planned product introductions, we are increasing the top end of our annual revenue guidance by approximately $60 million and our earnings per share by $0.20.
Our 2021 annual revenue guidance is now $2.8 billion to $2.87 billion, with earnings per share of $4.05 to $4.30.
This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 26% to 32%.
Our second quarter revenue guidance is $680 million to $705 million, assuming a positive foreign currency impact of approximately 5%.
Q2 earnings per share guidance is $0.97 and to $1.07 and assumes a tax rate of 27% to 30%. | average scrap and scrap substitute cost per gross ton used in q3 of 2021 was $511, a 84% increase.
expect profitability of steel mills segment to improve in q4 of 2021 as compared to q3 of 2021.
expect continued strong results for q4 of 2021, potentially exceeding net earnings record set in q3 of 2021.
q3 earnings per share $7.28.
demand remains robust across most end-use markets, a trend we expect will continue well into 2022.
backlogs in our steel mills and steel products segments remain elevated compared to historical levels.
raw materials segment's earnings in q4 of 2021 are expected to decrease compared to q3 of 2021. | 0 |
Today, we will discuss our operational and financial results for the three months ended March 31st, 2020.
Avi Goldin, our Chief Financial Officer, will follow my discussion with a deeper dive into the quarter's financial results.
My remarks today will focus on our operational results.
I will also review the effects of the restrictions imposed, due to the COVID-19 pandemic, which had its first full month of impact in April following the quarter close.
Finally, I'll touch on some of our promising growth opportunities.
Genie Energy achieved very strong first quarter results.
Robust growth in our customer base and strong electricity margins here in the US helped us achieve record levels of revenue and gross profit.
Our global customer base surpassed both the 400,000 RCE and 500,000 meter milestones, powered by expansion in both our domestic markets and overseas books.
Here in the US, Genie Retail Energy added a net 20,000 RCEs and 15,000 meters during the quarter.
The RCE over meter ratio has increased from our historical levels, reflecting our recent focus on adding high-quality, high consumption meters.
GRE closed the quarter serving 330,000 RCEs comprising 384,000 meters.
Overseas, where more of our customer base resides in apartments and average consumption is significantly lower, GRE International added 7,000 RCEs and 20,000 meters to close the quarter serving 72,000 RCEs comprising 148,000 meters.
By March 31st, we had increased our global customer base to 401,000 RCEs served and 532,000 meters.
During the trailing 12 months, we increased our RCEs served by 20% or just over 68,000 and increased global meters served by 33% or 133,000 meters.
Part of our success, growing our customer base is attributable to improvements in domestic customer churn profile that we have achieved over the past couple of years.
We have put into place initiatives across our business to mitigate churn, including customer service processes, acquisition and offering mix.
Customer churn in the first quarter decreased again to 4.7% per month from 5.3% per month in the first quarter of 2019.
For additional perspective, our average churn over the past 12 months is 5.4% versus 6.6% in the 12 months proceeding.
At Genie Energy Services, our Prism Solar unit delivered most of its outstanding orders to JP Morgan Chase.
As the solar market continues to evolve, we've begun to rightsize overhead and streamline Prism's operations.
Diversity, meanwhile, continues to progress toward profitability after delivering the most successful year in its history in 2019.
At GOGAS, we still hope to complete the final well test in Northern Israel, as early as the close of the second quarter.
We have reduced cost and overhead to the bare minimum in the interim.
Turning now to the impact of the coronavirus.
Due to the timing of the impact, COVID-19 and associated public health measures did not significantly affect customer acquisition activities this quarter.
We suspended all door-to-door customer acquisition toward the end of March, at about the same time as most, if not all, other retail providers who use that channel.
We then pivoted to focus more resources on our other acquisition channels.
In April, after the quarter closed, the near-term impact of the pandemic became clear.
With quarantines in place in all of our markets, we nevertheless had a strong month highlighted by three developments.
First, we benefited from an increase in per-meter electricity consumption, compared to the seasonally adjusted averages.
Residential customers who comprise the great majority of our book are spending more time at home and consequently using more electricity.
Second, suspension of door-to-door customer acquisition across all of our geographic markets reduced our customer acquisition expense in April.
Door-to-door is typically our most expensive acquisition channel in the US and the alternative channels that we have transitioned to have lower costs.
And finally, because one of the most potent drivers of the customer churn is door-to-door customer activity, engaged in by our competitors, the industrywide suspension of door-to-door programs further reduced our churn rate in April.
On the downside, the rate of gross customer additions here in the US has slowed somewhat, and the UK and Japan has virtually stopped.
The pandemic impact on customer acquisition is evolving rapidly, but we may see net meter attrition in the coming months.
In addition, we are closely monitoring the margin strength of the meters we have been adding through alternative channels.
Overall, the near-term impact of the pandemic has demonstrated the resilience of our business.
We have made rapid adjustments to the evolving marketplace, and our steps are bearing fruit.
That said, like almost all businesses, we will do better over the long-term when our customers are prospering.
But we are well positioned to meet the challenges ahead and pursue our growth opportunities.
Historically, Genie Energy's growth has been driven primarily by access to new markets.
We are fortunate to have recently entered the large and dynamic electricity market in Texas, and our customer acquisition program there is performing well.
We've already added approximately 10,000 in our seasonal Lone Star State.
Outside of Texas, we are looking at entering several new utility territories in the second quarter.
And later in the year, two new states, Michigan and Georgia.
Overseas, through our finish-based REP Lumo, we entered the electricity market in Sweden last month and have only just begun to scratch the surface of our two largest international markets, the UK and Japan.
To wrap up, the first quarter was exceptional with robust RCE and meter growth, lower churn, and as Avi will detail, strong financial results.
We have taken decisive action to calibrate our operations to address the early challenges of the pandemic and have abundant opportunities for growth, particularly in new markets.
As a result, our outlook remains positive.
Our geographically diversified markets, liquid balance sheet and very low level of long-term debt put us in a great position to build on the first quarter's momentum.
Genie's Board of Directors has been vigilant about returning value to shareholders.
Last year, in addition to paying $0.30 in aggregate dividends to our common stockholders, we repurchased $5.6 million of common stock.
Today, in light of the resilience of our business, its underlying strength and the abundant growth opportunities, Genie's Board of Directors has increased our quarterly dividend to $0.085, a 13% increase.
Now with more on this quarter's financial results, here is our Chief Financial Officer, Avi Goldin.
My remarks today will cover our financial results for the three months ended March 31st, 2020.
Throughout my remarks, I compare the first quarter 2020 results to the first quarter of 2019, focusing on the year-over-year rather than sequential comparisons removes from consideration the seasonal factors that are characteristic of our retail energy business.
The first quarter includes the peak heating season and is typically characterized by relatively high levels of electricity consumption, the highest level of natural gas consumption of any quarter of the year.
The first quarter's financial results were strong and included record levels of revenue and gross profit.
As the timing of events were skewed toward the second half of March, the COVID-19 pandemic did not significantly impact our first quarter financial results.
Consolidated revenue in the first quarter increased $17.4 million to $104.1 million.
$12.7 million of the increase was contributed by our Genie Energy Services division.
Revenue jumped to $18 million on the fulfillment of outstanding solar panel orders by our Prism Solar subsidiary.
Going forward, we do not anticipate comparable order volumes or revenue.
And as Michael indicated, we are taking steps to reduce costs and position that business for the future.
Genie Retail Energy contributed $79.1 million in revenue, an increase of $2.6 million, compared to the year ago quarter.
Robust growth in our electric meter customer base over the past 12 months drove a 17% increase in kilowatt hours sold, more than offsetting a slight decrease in per unit revenue.
This was partially offset by a decline in revenue contribution from the gas book as we experienced lower consumption and pricing per therm.
At Genie Retail Energy International, revenue totaled $7 million, an increase of $2.1 million from the year ago quarter.
The increase reflects customer base expansion at both Lumo and Finland and Genie Japan.
And its results of operations are not consolidated in our revenue, gross profit or SG&A.
Consolidated gross profit in the first quarter increased $3.3 million to $28.9 million, also a record for the company.
GRE contributed $27.6 million of that total, an increase of $2.9 million from the year ago quarter, predominantly reflecting the increase in kilowatt hours sold, a modest increase in margin per kilowatt hour and a decrease in cost per therm sold.
Increased rates of customer acquisition at GRE drove an increase in consolidated SG&A expense to $19.5 million in the first quarter, $3.7 million higher than the year ago period.
Equity and the net loss of investees, which is comprised of our investments in Orbit Energy and our minority stake in Atid, decreased to $379,000 from $797,000 in the first quarter of 2019, as we made no additional investments in either entity during the quarter.
We now expect to provide Orbit with some additional growth capital later this year.
Our consolidated income from operations came in at $9.2 million, compared to $9.8 million in the year ago quarter, as the increase in customer acquisition expense narrowly offset the gain in gross profit.
Adjusted EBITDA was $10.3 million, effectively even with the year ago quarter.
EPS was $0.20 per diluted share, $0.01 below the year ago quarter.
Our balance sheet remains very strong.
At March 31st, we reported $157.2 million in total assets, including $36.4 million in cash, cash equivalents and restricted cash.
Liabilities totaled $71.5 million, of which just $2.2 million were non-current.
And net working capital totaled $51.5 million, an increase of $10.3 million from our total three months ago.
Cash used in operating activities was $2.7 million in the first quarter of 2020, compared to cash provided by operating activities of $7 million in the year ago period.
The first quarter's operating cash flow is negatively impacted by the deliveries of Prism Solar, as we received payment for this activity upfront at the end of 2019, as well as the posting of cash collateral in support of certain hedge positions at GRE.
To wrap up, the strong financial results this quarter reflect the impact of our sustained investment in meter acquisition over the past year.
Looking ahead, and as Michael discussed, though the COVID-19 pandemic creates uncertainty, its impact is likely to be mixed in the near-term with certain factors, improving performance and others working against it.
While the long-term holds a greater uncertainty, we are confident that Genie is well positioned to continue to realize value for shareholders.
As Michael mentioned, supported by a strong outlook, the Board of Directors has approved an increase in the quarterly dividend to $0.085 a share, a 13% increase.
The indicative annual dividend rate is now $0.34 per share. | qtrly loss per share $ $1.39. | 0 |
I'd like to open the call by expressing my appreciation to the entire FNB team, who produced highly impressive results despite continued challenges presented by the pandemic.
First quarter net income totaled $91 million or $0.28 per share, resulting in an upper quartile return on tangible common equity of 15%.
I'm so proud to state that the first quarter results are on par with pre-COVID-19 levels, an extraordinary accomplishment given the significant changes in interest rates and a less favorable economic environment during the last 12 months.
Our company remains well capitalized, with increased risk-based capital ratios and an allowance for credit losses, excluding PPP loans, at 1.57%.
FNB demonstrated strong fundamental performance.
Its total revenue increased both on a year-over-year and linked-quarter basis.
We established a new record for noninterest income at $83 million, supported by strength in mortgage banking, record wealth management and insurance revenues and solid contributions from Capital Markets.
During the quarter, we originated nearly $1 billion of PPP round 2 loan.
On a linked-quarter basis, tangible book value per share increased $0.13 to $8.01, as we continue to -- our commitment to paying an attractive dividend by declaring our quarterly common dividend of $0.12 last week, while executing on $36 million of share buybacks during the quarter, at an average price of $11.91.
In addition, our CET1 ratio increased to 10% as we continue to prioritize our options for capital deployment in the manner that produces the highest risk-adjusted returns for our shareholders.
Diligent expense management remains a top priority, and we are on track to meet this year's $20 million cost savings target, completing our three-year $60 million expense reduction initiative.
The efficiency ratio totaled 58.7%, improving 36 basis points compared to the first quarter of 2020, with both quarters reflecting seasonally elevated expenses.
Today, I'll take a deeper dive into three areas discussed in our annual letter to shareholders, where we've successfully gained scale, strengthened our risk profile and diversified our revenue streams.
First, I will cover the successful expansion of our fee-based businesses and how we've continually expanded our suite of value-added products and services.
Next, I want to highlight FNB's new digital capabilities and provide updates about our de novo strategy within the clicks-to-bricks initiative.
Lastly, after Gary reviews asset quality and Vince provides details on financials, I will wrap up with a summary of how we differentiate ourselves and deliver value to all of our stakeholders.
One of the main areas emphasized in our 2020 annual report was our goal of diversifying our overall revenue mix.
Over the last several years, we've been consistently growing value-added fee-based businesses, many of which generated double-digit annual growth rates that have led to a more granular fee-based revenue stream.
In what has been a challenging interest rate environment over the last 12 months, we have successfully leveraged these investments in our fee-based businesses to mitigate net interest margin headwind, specifically through significant growth in capital markets, mortgage banking, wealth management and insurance revenues.
During the first quarter of 2021, we've continued to build on last year's success as those businesses have increased $16 million or 56% compared to the first quarter of 2020.
If you recall, we laid out our long-term strategy to invest and scale our fee-based businesses to offer core products and services to our clients, namely mortgage banking and capital markets.
As we transformed our footprint and expanded into attractive markets such as Baltimore, Maryland, Washington D.C. and the Carolinas, FNB continues to grow the scope and depth of client relationships.
In 2021, we are adding capacity to mortgage banking operations and servicing as production levels continue to set records each quarter.
As of this week, mortgage pipelines are at record levels in relation to both production and held for investment origination.
Our mortgage banking business had a record-breaking year in 2020 with more than $3 billion in total production and $50 million in fee income.
Even as rates have risen, we are confident that a broader geography and a more favorable economic environment for purchase money mortgage loans will support healthy production levels and become a greater portion of our total volume.
Turning to our capital markets platform.
We've expanded our capabilities significantly through building our syndications, derivatives and international banking platforms organically, with those businesses now contributing revenues from just over $1 million to more than $30 million annually.
Additionally, we have expanded the breadth and reach of our capital markets platform with enhanced debt capital markets capabilities geared toward our upper middle market and large corporate clients.
Looking ahead, we are also focusing on specific opportunities in public finance and other specialty verticals that will provide broader revenue opportunities with the issuance of corporate and municipal debt.
As we've advanced our fee-based businesses, our consumer bank is making important decisions relative to evolving overall consumer preferences and how we deliver products to our clients.
Consumers can now utilize FNB's e-style checking designed to prevent overdraft and NSF fees completely.
FNB continues to expand its digital capabilities through launching new products.
We recently rolled out a number of new features, such as e-signature and offering credit scores, with plans for embedding the solution center e-store into our robust mobile application.
This will provide clients with the opportunity to directly purchase loan products within the mobile application as well as deposit products.
The next phase is to finalize our single omnichannel online application so the customer can apply for multiple products with a single application while utilizing our shopping card experience.
Along with our digital investments, we continue to streamline elements of the physical delivery channel through implementing dynamic appointment setting capabilities and a comprehensive data-driven sales management platform to better identify value-added products and services when clients conduct business in the branch.
Additionally, we are focused on bringing the application process online for more of our loans and our other consumer products in the coming quarters so that consumers are able to seamlessly manage and add FNB products and services using online or mobile channels as we continue to make progress within applications for end-to-end delivery of digital products and services.
In addition to investing in technology, we continue to make targeted investments in our physical delivery channel to position our company for accelerated growth and efficiency.
Charleston, South Carolina is an example of our successful de novo strategy to enter a higher growth market.
This year, we will have five retail branch locations and a regional hub that permits us to offer a complete set of fee-based products complementing the consumer and commercial team that are firmly established in the market.
Our South Carolina bankers were recruited from some of the largest financial institutions in the country.
The commercial team has originated more than $150 million in funded assets since inception, and the retail locations ranked among the upper quartile of branches relative to their key performance indicators during 2020.
Looking ahead, near-term commercial pipeline are at an all-time high, and South Carolina was the fastest-growing commercial market companywide on a percentage basis for both full year 2020 and first quarter 2021.
There are many exciting things happening with our investments in de novo growth market and digital technology.
Another area we are proud of is our risk management and credit performance.
And with that, I will transition the call over to Gary to discuss our progress.
We continued to see positive performance across our credit portfolio during the first quarter of the year.
Our key credit metrics improved across the board and remained at very solid levels, with better-than-expected results across a number of consumer portfolios as well as the favorable positioning of our commercial book following the actions taken last quarter to proactively reduce exposure to the most challenged industries.
I would now like to review some highlights for the quarter, followed by a brief overview of our current deferral levels.
The level of delinquency improved over the prior quarter to end March at 80 basis points, representing a 22-basis point improvement linked-quarter, which was driven by positive macroeconomic trends and some seasonally lower past due levels in the consumer portfolio, as is typical in the first quarter.
Excluding PPP loan volume, delinquency stands at 89 basis points.
The level of NPLs in OREO ended March at 65 basis points, an improvement of 5 bps on a linked-quarter basis, while at non-GAAP level, excluding PPP loans, stands at 72 basis points.
The improvement was largely driven by a reduction in nonaccrual loans of $12 million during the quarter, with nearly half of our NPLs continuing to pay on a contractually current basis.
Net charge-offs for the first quarter came in at a very solid level of $7 million or 11 basis points annualized and 13 bps on a non-GAAP basis, with provision expense totaling $6 million, resulting in an ending March reserve position at 1.42%.
Excluding the PPP portfolio, the non-GAAP ACL stands at 1.57%, up 1 basis point over the prior quarter.
Inclusive of the remaining acquired unamortized discount, our total reserve coverage stands at 1.78%, with our NPL coverage position also remaining favorable at 230% following the previously noted improvement in NPL levels during the quarter.
I'd now like to provide you with a brief update on our loan deferral levels.
At the end of March, our deferrals are down to 1.2% of our core loan portfolio and the number of new requests from commercial borrowers have essentially ceased at this point.
We continue to monitor these smaller credits actively, as we have done throughout the entire pandemic, with the expectation that the numbers will continue to reduce as the economy opens up.
Additionally, we continue to track our portfolio mix and performance trends to stay ahead of any potentially sensitive asset classes that could show signs of stress toward the tail end of the pandemic.
As is consistent with our approach to risk management, we will continue to proactively identify any potential areas of risk and take action if opportunities arise that are strategically and financially beneficial to the company.
In closing, we are very pleased with the solid start to the year and the continued progress we've made in the book to work down our limited exposure to the more sensitive industries.
As the broader economy continues to evolve, we are focused on managing our book through our core credit principles of disciplined underwriting across our footprint, attentive risk management and the proactive workout of credits to keep our portfolio well positioned as we look forward to the anticipated activity from an accelerating economy in the second half of the year.
Today, I will discuss our financial results and some of our current expectations.
As noted on Slide 5, first quarter earnings per share was solid at $0.28, up significantly on a year-over-year basis, as the first quarter of 2020, a significant reserve built at the onset of the pandemic.
At a high level, results for the quarter included record levels of noninterest income translating into revenue growth, well-managed expenses and significantly lower provision for loan losses given recent asset quality trends, partially offset by the continued impact of this low interest rate environment.
Let's review the balance sheet on Page 8.
Average balances for total loans increased 8.3% on a year-over-year basis and decreased 0.8% from the fourth quarter.
On a spot basis for the first quarter of 2021, total loans were up 0.3% as PPP balances increased $330 million on a net basis, with $900 million of round 2 PPP loans funded during the quarter partially offset by $500 million of PPP forgiveness.
Commercial line utilization rates remain at record lows in the low 30s, which translates into about $0.5 billion in funded balances at a normalized utilization rate.
This level creates upside for loan growth, as reflected in the strength of our long-range commercial pipelines, which are near all-time highs.
Average deposits grew 19.3% on a year-over-year basis and increased 5.7% annualized on a linked-quarter basis.
On a spot basis, for the first quarter of 2021, total deposits increased $1.2 billion or 16.9% annualized, led by strong growth in noninterest-bearing and interest-bearing demand deposits, partially offset by a managed decrease in time deposits.
This continued deposit growth bolsters our ample liquidity and strengthens our deposit mix, with a loan-to-deposit ratio at 84%, with 33% of our deposits being noninterest-bearing at the end of the quarter.
Turning to the income statement.
Net interest income declined $11.5 million or 4.9% compared to the fourth quarter.
The reported net interest margin narrowed 12 basis points to 2.75% as higher average cash balances were a 6-basis point negative impact on the margin compared to last quarter.
Additional drivers to the lower margin were a 7-basis point reduction in PPP contribution and a 2-basis point reduction in the benefit from purchase accounting on acquired loans.
Excluding these impacts, the underlying margin increased 5 basis points from the fourth quarter, with benefits from continuing to manage down interest-bearing deposit costs which improved 12 basis points to 31 basis points for the quarter.
With the cost of these deposits ending the quarter at 27 basis points on a spot basis, 4 basis points lower than the average, we expect further reductions in our cost of funds moving forward.
Let's now look at noninterest income and expense on Slides 10 and 11.
Noninterest income totaled a record $83 million as mortgage banking income remained strong at $16 million, with expanded gain on sale margins and strong sold production volume that was up 69% on a year-over-year basis.
Wealth management increased 14% from the fourth quarter to record levels due to the expanded footprint and positive market impacts on assets under management.
Solid contributions from capital markets and insurance also supported the record fee income result for the quarter.
Looking on Slide 11.
Noninterest expense totaled $184.9 million, relatively flat with the prior quarter and year ago quarter.
On an operating basis, compared to the fourth quarter of 2020, salaries and employee benefits increased $2.7 million or 2.5%, primarily related to $5.6 million of expense in the first quarter of 2021 due to the timing of normal seasonal long-term compensation recognition, similar to last year's first quarter.
Occupancy and equipment on an operating basis increased $2.5 million or 8.1% due to investments in digital technology, expansion in key growth markets across the footprint and seasonal expenses related to adverse weather.
Our CET1 ratio improved to an estimated 10%, up from 9.1% last March, even with $75 million of buyback over this period, reflecting FNB's strategy to optimize capital deployment.
Turning to our outlook.
We expect reported net interest income to be generally flat from first quarter '21 levels, as we expect a pickup in loan activity to be weighted toward the second half of the year and the net interest income contribution from PPP to be similar to the first quarter.
For the full year of 2021, our mid-single-digit loan and transaction deposit growth assumptions, ex-PPP, remain unchanged from our prior guidance.
We expect continued strong contributions in mortgage banking, given the pipelines Vince mentioned, with total noninterest income expected in the high $70 million range for the second quarter.
For provision, our current outlook is down from our expectations in January, subject to loan origination activity in the second half of the year.
We are on-track to achieve our expense savings target of $20 million for 2021 and expect operating expenses for the second quarter to be down from seasonally higher expenses in the first quarter, based on our current forecasted level of mortgage commissions.
For the full year of 2021, we still expect revenues to be stable compared to 2020 and expenses to be down slightly year-over-year.
Lastly, we expect the full year effective tax rate to be around 19%, assuming no change to the statutory corporate tax rate of 21%.
We've covered a lot of ground today, and I want to wrap up with how successfully executing our long-term growth strategy differentiates FNB moving forward.
First and foremost, FNB is in a unique position as a regional bank with a top market share in many attractive growth markets across a broad geography.
Given this position, our local product specialists and decision-makers, dedicated to serving our markets, can provide a high-touch, relationship-based personal service level that consumers and middle market borrowers prefer.
We have an exceptionally talented team of bankers, the necessary funding and optimal capital levels to pursue relationships across the footprint to accomplish our growth objectives and provide our shareholders with peer-leading returns on tangible common equity.
As an organization, we've consistently and prudently invested in technology, data analytics and risk management to better the customer experience, improve profitability and enable FNB to maintain superior asset quality throughout varying cycles while maintaining a top quartile efficiency ratio relative to peers.
We have been recognized for our mobile and digital offerings that have improved the customer experience by positioning the company for shifting preferences and providing FNB with a sustained competitive advantage.
Our culture of risk management and disciplined approach to underwriting and local decision-making allows us to maintain our lower risk profile.
We are unique in that we can maintain a lower level of cumulative losses while driving mid- to high single-digit loan growth because of our diversified granular approach to credit.
As it relates to the quality of people and strength of our culture, FNB has received more than 65 Greenwich Excellence and Best Brand Awards, including specific recognition for excellence in client advisory services and for its commercial banking client experience during the past decade.
The company further built on these honors in 2020 with three consecutive quarters of recognition as a Greenwich Associates Standout Commercial Bank amid crisis for our COVID-19 response.
And just last week, FNB was named to Forbes 2021 ranking of the World's Best Banks based on consumer feedback.
FNB is one of only 75 banks in the United States to be recognized on the list, which includes a total of 500 banks from around the globe.
In closing, we are focused on continuing our commitment to advance our market position by gaining scale and operational efficiency and by cultivating meaningful lasting relationships with our clients and communities while simultaneously creating value for our shareholders. | compname reports q1 earnings per share $0.28.
q1 earnings per share $0.28. | 1 |
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm pleased to share we've delivered another strong quarter and continue to be ahead of plan for the year.
I'll walk through the specifics in a moment, but I couldn't be more pleased with the strong execution demonstrated by the team, both operationally and financially.
We continue to deliver every day for our customers, coworkers and for you, our investors.
Earlier this month, we completed the sale of EnerBank, grossing over $1 billion in proceeds.
The sale of the bank simplifies and focuses our business model squarely on energy, primarily the regulated utility, an important step as we continue to lead the clean energy transformation.
The proceeds from this sale will fund key initiatives in our utility business related to safety, reliability, resiliency and our clean energy transformation.
As shared in previous calls, we have eliminated our equity needs from 2022 through 2024.
The keyword there, continued.
As we double down on the clean energy transformation, I'm also pleased to share that we received approval for our Voluntary Green Pricing program, which would add an additional 1,000 megawatts of owned renewable generation to our growing renewable portfolio.
This program is in high demand and currently oversubscribed.
And more importantly, it's what our customers are asking for, an important step in offering renewable energy solutions for our customers.
As we prepare for the grid of the future, we have a highly visible and detailed capital plans outlined in our recently filed electric distribution infrastructure investment plan.
This plan provides a 5-year view of the projects down to the circuit level where we plan to invest to ensure the reliability and resiliency of our electric infrastructure and aligns with our operational and financial plans.
As always, we balance these investments with customer affordability.
Our prices remain competitive as the average residential customer pays about $2 a day to heat their home and $4 a day to keep the lights on.
And because we know our most vulnerable customers still struggle, our team has mobilized resources at the state and federal levels to ensure their protection.
In fact, as we approach the winter heating season, our 90-day arrears are back to prepandemic levels with an 80% reduction in our uncollectible accounts.
Our commitment to identifying and eliminating waste means that we keep our prices affordable.
This commitment is evident in our results.
In the first nine months of this year, we surpassed our full year cost reduction target of more than $40 million.
The CE Way is in our DNA, and we continue to deliver savings in the near term and well into the future.
Speaking of the future, this year, we grew our EV program with PowerMIFleet.
This is part of our long-term planning in collaboration with Michigan businesses, governments and school systems looking to electrify their vehicle fleets.
Within just a few months of the program introduction, we were working with nearly 20 different customers on their fleets and have another 50 who have indicated interest in the next tranche, exceeding our expectations.
This is an important contribution to our long-term sales growth.
And finally, one of my favorites which speaks to our culture, our coworkers and our ability to attract the best talent.
Our commitment to diversity, equity and inclusion continues to be recognized nationwide and most recently by Forbes, where we were ranked the #1 utility in the U.S. for both America's best employers for women and #1 for diversity, delivering excellence every day continues to position the business for sustainable long-term growth.
Strong execution leads to strong results.
but two are linked.
One drives the other.
In early August, we experienced one of the worst storms in our company's history.
Our team established and into command structure to deploy resources and took decisive action to restore customers.
We had a record number of crews on our system.
The speed of our response led to the highest positive customer sentiment we have ever received during a major storm.
During the storm, we had more than 3,700 members of our team working around the clock to safely restore customers.
Like we do every year, through storms, pandemics, and on seasonal weather, we continue to deliver.
And when there's upside, we reinvest.
This is the CMS model of responding to changing conditions that allows us to deliver consistently year after year.
Year-to-date, we've delivered ahead of plan with adjusted earnings per share of $2.18 for continuing operations.
Our strong performance, coupled with the completion of the EnerBank transaction and the financial flexibility that provides -- gives us further confidence in our ability to meet our full year guidance, which we've raised to $2.63 to $2.65 from $2.61 to $2.65 for continuing operations.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
And our continued strong performance in 2021 builds momentum for 2022 and beyond.
Longer term, we are committed to growing our adjusted earnings per share toward the high end of our 6% to 8% growth range as we highlighted on our Q2 call.
As previously stated, we are committed to growing the dividend in 2022 and beyond.
That's what you expect, why you own us, and we know it's a big part of our value.
As we move forward, we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time.
Many of you have asked about gas prices and the impact on our business and more importantly, our customers.
Let me tell you about our gas business.
We have one of the largest storage field in the U.S. and compressing resources to match.
That is a significant advantage.
We started putting natural gas into our storage field in April and continued throughout the summer when natural gas prices were low.
Right now, our fields are full and ready to deliver for our customers' heating needs throughout the winter months.
Most of the gas is already locked in at just under $3 per thousand cubic feet, which is well below current levels in the spot market and offers tremendous customer value.
Given the operational certainty of storage as well as the financial protection of a pass-through clause, our customers stay safe and warm all winter long and have affordable bills.
Heat in Michigan is not an option.
And we don't leave it up to the market.
We buy, store and deliver.
That's what we do.
Michigan's strong regulatory construct is known across the industry as one of the best.
It includes the integrated resource plan process, which is a result of legislation designed to ensure timely recovery of the necessary investments to advance safe, reliable and clean energy in our state.
It enables the company and the commission to align on long-term generation supply planning and provide certainty as we invest in our clean energy transformation.
Here's what I like about our recently filed IRP.
There is a win in it for everyone.
It is a remarkable plan that addresses many of the interests of our stakeholders and ensure supply reliability.
It reduces costs and it delivers industry-leading carbon emission reductions.
We continue to have constructive dialogue with the staff and other stakeholders, and we anticipate seeing their positions later today.
I'm pleased to offer the details of another strong quarter of financial performance at CMS, as a result of solid execution across the company.
As a brief reminder, throughout our materials, we report the financial performance of EnerBank as discontinued operations thereby removing it as a reportable segment in reporting our quarterly and year-to-date results from continuing operations in accordance with generally accepted accounting principles.
Now on to the results.
For the third quarter, we delivered adjusted net income of $156 million or $0.54 per share.
The key drivers for the quarter were higher service restoration expenses, attributable to the August storms that Garrick mentioned and planned increases in other operating and maintenance expenses in support of key customer and operational initiatives.
These sources of negative variance for the quarter were partially offset by favorable weather, the continued recovery of commercial and industrial sales in our electric business and higher rate relief net of investment-related expenses.
Year-to-date, we've delivered adjusted net income of $628 million or $2.18 per share, which is up $0.19 per share versus the first nine months of 2020, exclusive of EnerBank's financial performance.
All in, we continue to trend ahead of plan and have substantial financial flexibility heading into the fourth quarter.
The waterfall chart on Slide eight provides more detail on the key year-to-date drivers of our financial performance versus 2020.
For the first nine months of the year, rate relief continues to be the primary driver of our positive year-over-year variance to the tune of $0.45 per share given the constructive regulatory outcomes achieved in the second half of 2020 for our electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs such as depreciation and amortization, property taxes and funding costs at the utility.
This upside has been partially offset by the aforementioned storms in the quarter, which drove $0.16 per share of negative variance versus the third quarter of 2020 and $0.11 per share of downside on a year-to-date basis versus the comparable period in 2020.
To round out the customer initiatives bucket, planned increases in our operating and maintenance expenses to fund safety, reliability and decarbonization initiatives added the balance of spend for the first nine months of the year, which, in addition to the August storm activity, added $0.35 per share of negative variance versus the comparable period in 2020.
As a reminder, these cost categories are still net of cost savings realized to date, which as Garrick mentioned, have already exceeded our target for the year with more upside to come.
To close out our year-to-date performance, we also benefited from favorable weather relative to 2020 in the amount of $0.07 per share and another $0.02 per share of upside, largely driven by recovering commercial and industrial load.
As we look ahead to the remainder of the year, we feel quite good about the glide path for delivering on our earnings per share guidance range, which has been revised upward to $2.63 to $2.65 per share, as Garrick noted.
As we look ahead, we continue to plan for normal weather, which in this case, translates to $0.06 per share of positive variance, given the absence of the unfavorable weather experienced in the fourth quarter of 2020.
We'll also continue to benefit from the residual impact of our 2020 rate orders, which equates to $0.07 per share and is not subject to any further MPSC actions.
And we'll make steady progress on our operational and customer-related initiatives which are forecasted to have a financial impact of roughly $0.07 per share of negative variance versus the comparable period in 2020.
Lastly, we'll assume the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance.
All in, we are pleased with our strong execution to date in 2021 and are well positioned for the remainder of the year.
Turning to Slide 9.
I'm pleased to highlight that this year's financing plan has been completed ahead of schedule.
In the third quarter, we issued $300 million of first mortgage bonds at a coupon rate of 2.65%, one of the lowest rates ever achieved at Consumers Energy.
We also remarketed $35 million of tax-exempt revenue bonds earlier this month at a rate of under 1% through 2026.
Due to the strong execution implied by these record-setting issuances coupled with the EnerBank sale, which provided approximately $60 million of upside relative to the sale price announced at signing, we now have the flexibility to reduce our equity needs for the year even further, which will now be limited to the $57 million of equity forwards we have already contracted.
Our simple investment thesis has stood the test of time and continues to be our approach going forward.
It is -- it's grounded in a balanced commitment to all our stakeholders, enables us to continue to deliver on our financial objectives.
As we've highlighted today, we've executed on our commitment to the triple bottom line through the first nine months of the year.
We're pleased to have delivered strong results.
We're positioned well to continue that momentum into the last three months of the year as we move past the sale of the bank and continue progress to the IRP process.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A. | sees fy adjusted non-gaap earnings per share $2.63 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q3 adjusted earnings per share $0.54 from continuing operations.
q3 earnings per share $0.54 from continuing operations.
sees fy 2021 adjusted earnings from continuing operations in the range of $2.63 per share to $2.65 per share.
raised its full-year 2021 adjusted earnings from continuing operations guidance to $2.63 to $2.65 per share.
reaffirmed 2022 adjusted earnings guidance of $2.85 - $2.87 per share. | 1 |
On the call today to discuss our quarterly results are our CEO, Mick Farrell; and CFO, Brett Sandercock.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions; however, our actual results may differ.
Since this COVID-19 pandemic began in January, ResMed has produced hundreds of thousands of ventilators, providing the gift of breath to people in need in 140 countries worldwide.
We continue to support frontline respiratory medical professionals, healthcare providers, patients and our teammates, ResMedians, so they are all safe and healthy.
We also continue to provide ventilators as local state and national healthcare providers are facing second and third waves of COVID-19 cases and associated hospitalizations.
In our core markets, the patient diagnosis trends in sleep apnea, COPD, asthma and beyond are steadily increasing as well as prescription therapy flow from those diagnoses.
Growing numbers of people are returning to healthcare systems, including primary care as well as specialist care.
We are seeing more healthcare systems come back online through telehealth and in-person visits.
Overall treatment capacity as well as capacity utilization rates of those systems are both increasing.
We have seen a steady sequential, what we would call U-shape recovery of patient flow to primary care physicians as well as then to specialist physicians across the 140 countries that we serve.
This is just as we forecast 90 days ago on our Q4 earnings call.
We expect this same patient flow growth trend to continue throughout fiscal year 2021.
In my remarks today, I'll provide a high-level overview of our Q1 business results, and then I'll hand over to Brett to walk us through further detail.
I will also review progress toward our ResMed 2025 strategic goals, including execution of highlights against our quarterly as well as our annual operating priorities.
Today, we have reported high single-digit growth in top-line revenue and strong double-digit growth in both net operating profit as well as earnings per share.
These results speak to our team's ability to nimbly pivot to meet short-term needs for emergency ventilators while also investing for the long-term growth in our core markets of sleep apnea, COPD, asthma, and out-of-hospital medical software.
Our investments in research and development for digital health technology have accelerated these last nine months as we see increasing demand from patients, physicians, providers as well as healthcare systems as they embrace digital health through remote patient engagement as well as population health management technology.
During the first quarter of fiscal year 2021, we generated over $144 million of cash, allowing us to return $57 million of cash as dividends to our shareholders.
At the same time, though, we have increased our research and development investments at double-digit rates, including investments in digital health clinical research as well as hardware and software innovation across both our med tech and our Software as a Service businesses.
We have a very full pipeline of innovative solutions that will generate both medium and long-term value for customers with an industry-leading intellectual property portfolio of over 6,000 patents and designs.
Our digital health ecosystem is an important competitive advantage for ResMed that offers integrated care to drive superior clinical outcomes, to drive better patient experiences and to drive lower total healthcare system costs.
We now have over 7 billion nights of respiratory medical data in our cloud-based Air Solutions platform.
We've provided over 12.5 million 100% cloud-connectable medical devices to customers.
And we have over 14 million patients enrolled in our AirView software solution.
During our last earnings call, I discussed how COVID-19 has accelerated the rapid adoption of digital health technology around the world, including a recognition of the value of remote patient monitoring, virtual diagnosis, and the rapid evolution of digital reimbursement models.
We have seen much greater collaboration between the med tech industry and governments globally, not just in ventilators, but well beyond.
An encouraging example of this was just a few days ago when the U.S. Centers for Medicare & Medicaid Services, or CMS, announced that it will be maintaining current reimbursement rates in our product categories in January 2021.
This is great news.
And in part, it is due to industry feedback that it was inappropriate to make unnecessary changes, particularly during an ongoing COVID-19 public health emergency, and really importantly, that current rates were appropriate for the services being provided.
We've also seen governments in Germany, France, Japan, and across the U.S. adopt models to facilitate digital health and remote care that will be important, not only during this pandemic but well beyond.
This is better healthcare at lower costs, leveraging technology.
These trends support ResMed's 2025 strategy, and we believe that the accelerated adoption of digital health solutions represents a significant medium and long-term tailwind for our business.
These three trends: one, the increased importance of respiratory medicine; two, the increased importance of digital health; and three, the increased importance of out-of-hospital healthcare, will all help ResMed meet and beat our goal of growing volume at double digits from 2020 through 2025 and improving over 250 million lives by 2025.
Let me now highlight a few examples of innovation and execution in support of our strategic priorities.
Just a recap of our strategy priorities: a, to grow and differentiate our sleep apnea, COPD and asthma businesses; b, to design, develop, and deliver world-leading medical devices and digital health solutions; and c, to innovate and grow the world's-best software solutions for care delivered away from the hospital.
In our core market of sleep apnea, we introduced our latest mask innovation in September.
It's called the AirTouch N20.
This innovation is the first nasal mask with a memory foam cushion.
As a patient myself, I'm happy to say that this is ResMed's softest nasal mask ever.
The memory foam technology of the AirTouch N20 adapts to the curves and contours of the person's face, creating a personalized fit that is designed to increase comfort and to make it easier for the patient to adhere to sleep apnea therapy.
The adherence rates for ResMed solutions are the best in the industry.
And it is innovation and technology like this new AirTouch N20 that helps get us there.
Our mask portfolio is crafted to offer physicians market-leading options for prescribing for each patient.
To enable home care providers to successfully fit the patient the first time every time and to satisfy the desires of the ultimate customer.
That's the person who suffocates each night with sleep apnea.
Our focus on innovation to meet customer needs will never end.
We are innovating with smaller, quieter, more comfortable, more connected and more intelligent solutions every day.
We have an exciting pipeline ahead.
Let me now turn to a discussion of our respiratory care business, focusing on our strategy to deliver better care for COPD and asthma patients worldwide.
During the June quarter, we launched, in Europe, an upgraded version of our AirView cloud-based remote monitoring software, specifically designed for our ventilation solutions.
This solution called AirView for ventilation provides remote monitoring capability, allowing clinicians to quickly access clinical data from ResMed ventilation devices wherever they are, and to allow them to more easily triage and prioritize both chronic needs and acute needs for ventilated patients.
This completely reimagined platform transforms the management of ventilated patients, allowing doctors, nurses and all clinicians and care providers to ascertain powerful patient insights from huge respiratory medical data sets.
Adoption of the AirView for ventilation solution has been rapid and strong.
Our team was really thrilled to deliver for our customers during the COVID emergency with this solution, but the value that is being provided by AirView for ventilation is ongoing for physicians and healthcare systems.
We are making digital health part of the standard of care.
During the quarter, we expanded the reach of our market-leading Propeller Health technology, specifically through our partnership with pharmaceutical company, Novartis.
During the quarter, Novartis announced the launch of two new once-daily medications to treat uncontrolled asthma in Japan.
These products are called Enerzair and Atectura Breezhaler.
In this market, patients using either the Enerzair or the Breezhaler manage their uncontrolled asthma will be able to acquire a Propeller technology sensor from physicians and then enroll in our Propeller digital health platform.
The benefits of the platform are tremendous.
The offering is a simple and convenient way to better live with sleep apnea with a fully integrated digital experience, with no incremental cost to the patient.
It's great to see our Novartis partnership expanding to include now both Europe and Japan, leveraging our world-leading Propeller technology.
Let me now briefly review our out-of-hospital Software as a Service business.
During the quarter, our SaaS business grew in the mid-single digits year on year, driven by continued strong uptake of our HME resupply solutions.
The COVID-19 market dynamics continue to impact the patient census volumes, particularly at skilled nursing facilities, and new patient admissions have remained under pressure.
We are maintaining our forecast that the SaaS market growth rate will be in the mid-single-digit range for the portfolio of verticals that we serve for fiscal 2021.
We expect the portfolio to return to high single-digit growth as hospital and other outpatient surgery center discharge rates return to normal.
We continue to invest in research and development for our SaaS businesses so that we continuously improve on our market-leading solutions in home medical equipment, skilled nursing facilities, home health, hospice as well as private duty home care and life plan communities.
As this portfolio of SaaS verticals returns to high single-digit growth, ResMed will continue to be there with our R&D resulting in leading Brightree and MatrixCare branded technology solutions, allowing us to better serve customers and, therefore, to not just meet but to beat that market growth rate.
A year ago, we announced that ResMed would begin collaborating with Cerner Corporation to help clinicians make more informed treatment decisions to control costs and to deliver seamless care across healthcare systems, from the hospital to the home.
We have now integrated our MatrixCare branded home health and hospice platform with the electronic health record or EHR system from Cerner.
I'm excited to let you know that we've expanded our relationship with Cerner to new offerings and have now entered into a new value-added reseller arrangement with Cerner.
This establishes our Brightree technology as the preferred solution for Cerner's home medical equipment, pharmacy, and home infusion customers.
This development is the next step in the ResMed-Cerner relationship and will lead to better interoperability, it will lead to enhanced provider capabilities, and it will lead to an improved patient experience.
Overall, this partnership is performing above expectations for both ResMed and Cerner.
We anticipate opportunities to deepen and expand this collaboration to involve our core markets of sleep apnea, COPD, and asthma disease management over time.
In summary, the SaaS portfolio is performing well and remains an important driver of our digital transformation of healthcare in settings outside the hospital.
2020 has been an unprecedented year for companies across every industry.
The fundamentals of our ResMed business, however, remains strong, and we've maintained growth through this crisis through breakthrough innovation, through investments in recurring revenue businesses and effective execution in our operating excellence programs.
COVID-19 has accelerated digital health adoption as well as awareness of respiratory hygiene and respiratory health.
The importance of respiratory medicine, the importance of digital health and the importance of healthcare delivered away from a hospital.
These trends are present during COVID, but they're here to stay.
You have allowed hundreds of thousands of people around the world to get emergency ventilators and to have the gift of breath, while also keeping focus on making sure we have the best technology and solutions now and in the future for sleep apnea, COPD, asthma, and all those who need world-class care outside the hospital and preferably in their own home.
With that, I'll hand the call now over to Brett in Sydney, and then we'll go to Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2021 and some remarks on our FY '21 outlook.
As Mick noted, we had a strong quarter.
Group revenue for the September quarter was $752 million, an increase of 10% over the prior-year quarter.
In constant currency terms, revenue increased by 9% compared to the prior year quarter.
Revenues for the first quarter were favorably impacted by continued demand for ventilator devices and accessories.
We estimate that the incremental revenue benefit from ventilator devices and related accessories derived from COVID-19 demand was approximately $40 million in the first quarter.
Additionally, we experienced strong mask revenue growth in both our domestic and international markets.
However, we did observe continuing headwinds in the sleep device market.
Taking a closer look at our geographic distribution, and excluding revenue from our Software as a Service business, our sales in U.S., Canada, and Latin America countries were $403 million, an increase of 9% over the prior-year quarter.
Sales in Europe, Asia and other markets totaled $257 million, an increase of 15% over the prior-year quarter or an increase of 10% in constant currency terms.
By product segment, U.S., Canada, and Latin America device sales were $197 million, an increase of 6% over the prior-year quarter.
Masks and other sales were $206 million, an increase of 12% over the prior-year quarter.
In Europe, Asia and other markets, device sales totaled $176 million, an increase of 16% over the prior-year quarter or in constant currency terms, an 11% increase.
Masks and other sales in Europe, Asia, and other markets were $81 million, an increase of 12% over the prior-year quarter or in constant currency terms, an increase of 8%.
Globally, in constant currency terms, device sales increased by 8%, while masks and other sales increased by 11% over the prior-year quarter.
Software as a Service revenue for the first quarter was $92 million, an increase of 6% over the prior-year quarter.
On a non-GAAP basis, SaaS revenue increased by 4%.
During my commentary today, I will be referring to non-GAAP numbers.
The non-GAAP measures adjust for the impact of amortization of acquired intangibles, the purchase accounting fair value adjustment to MatrixCare deferred revenue and the fair value adjustment of equity investments.
Our non-GAAP gross margin improved by 30 basis points to 59.9% in the September quarter compared to 59.6% in the same quarter last year.
The increase is predominantly attributable to favorable product mix and foreign exchange rate movements, partially offset by increased costs associated with logistics and procurement costs, together with typical declines in average selling prices.
The cost increases largely reflect the impact of COVID-19 and our rapid ramp-up of ventilator production.
We saw elevated airfreight costs relative to the prior year, but these are tracking sequentially lower, particularly as we rebalance from air freight to sea freight.
Moving on to operating expenses.
Our SG&A expenses for the first quarter were $159 million, a decrease of 5% over the prior-year quarter, or in constant currency terms, SG&A expenses decreased by 7% compared to the prior year period.
SG&A expenses as a percentage of revenue improved to 21.1% compared to 24.6% we reported in the prior-year quarter, benefiting from cost management and reduced travel as we work through the uncertain COVID-19 environment.
Looking forward, we expect SG&A expenses in Q2 to be broadly consistent with the prior year period and then in the second half of FY '21 to increase in the low single digits relative to the prior-year period.
R&D expenses for the quarter were $55 million, an increase of 14% over the prior-year quarter, or on a constant currency basis, an increase of 12%.
R&D expenses as a percentage of revenue was 7.3% compared to 7.1% in the prior year.
We continue to prioritize our investments in innovation because we believe our long-term commitment to technology and product development will deliver a sustained competitive advantage.
Looking forward, we expect R&D expenses to continue to grow year over year in the high single digits to low double digits, reflecting our commitment to innovation through the economic cycles.
Total amortization of acquired intangibles was $20 million for the quarter, and stock-based compensation expense for the quarter was $16 million.
Non-GAAP operating profit for the quarter was $237 million, an increase of 24% over the prior-year quarter, reflecting strong top-line growth, expansion of gross margin, and well-managed operating expenses.
On a GAAP basis, our effective tax rate for the September quarter was 17.4%, while on a non-GAAP basis, our effective tax rate for the quarter was 18.5%.
Looking forward, we estimate our effective tax rate for the full fiscal year 2021 will be in the range of 17% to 19%.
Non-GAAP net income for the quarter was $185 million, an increase of 37% over the prior-year quarter.
Non-GAAP diluted earnings per share for the quarter were $1.27, an increase of 37% over the prior-year quarter.
Our GAAP diluted earnings per share for the quarter were $1.22.
Cash flow from operations for the quarter was $144 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $14 million.
Depreciation and amortization for the September quarter totaled $39 million.
During the quarter, we paid dividends of $57 million.
We recorded equity losses of $2.3 million in our income statement in the September quarter associated with the Verily joint venture.
We expect to record equity losses of approximately $3 million in Q2 and approximately $5 million per quarter in the second half of FY '21 associated with the joint venture operation.
We ended the first quarter with a cash balance of $421 million.
At September 30, we had $1.1 billion in gross debt and $635 million in net debt.
Our debt levels remained modest.
And at September 30, we had a further $1.2 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
However, I also want to highlight that in these times of uncertainty, we are maintaining a disciplined approach, and we are tightly managing expenses, cash flow, and liquidity.
Today, our board of directors declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance.
Turning now to our FY '21 outlook.
At a high level, we are now seeing a minimal COVID-19-generated demand for our ventilators and do not expect any incremental benefit in Q2 and beyond.
Additionally, we expect to see a continued year-on-year headwind for sleep devices in Q2 in response to temporary reduction in the diagnosis of new patients.
However, at this time, we continue to forecast a sequential improvement in sleep devices through the course of FY '21.
Masks and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base.
We expect to see continued year-on-year growth of our mask portfolio in FY '21.
Of course, like many other companies, we continue to experience significant uncertainty in the current environment.
And as a result, our forecast and possible future revenue outcomes remain dynamic.
And with that, I will hand the call back to Amy.
Let's now turn to the Q&A portion of the call.
[Operator instructions] Cheryl, let's go ahead and start the Q&A. | q1 non-gaap earnings per share $1.27.
q1 gaap earnings per share $1.22. | 1 |
Let me start by providing some key takeaways.
First, we continue taking share in the global contact lens market, with CooperVision being flat for calendar Q3 against the market being down 3%.
We're having success with our strong daily silicone hydrogel portfolio, with unique products like Biofinity Energys, and with several product launches.
Second, CooperSurgical outperformed with fertility, PARAGARD, and medical devices all exceeding expectations.
In particular, we're taking share in the fertility market, where we're seeing strong momentum.
Third, our myopia management portfolio comprised of MiSight and Ortho K lenses performed extremely well, including MiSight being up 73%.
So we're taking share, launching products, and investing intelligently, including helping expand the pediatric optometry marketplace.
Our teams are executing at a very high level, and we expect that to continue.
Moving to the numbers and reporting all percentages on a constant-currency basis, we posted consolidated revenues of $682 million in Q4, with CooperVision revenues of $506 million, down 3%; and CooperSurgical revenues of $175 million, down 4%.
Non-GAAP earnings per share were $3.16.
For CooperVision, the Americas were up 3%, led by strength in MyDay and Biofinity and some rebound in channel inventory of roughly $10 million.
EMEA was down 6%, which included quarter-end purchasing delays from several large accounts as the region returned to more restrictive COVID-related lockdowns in October.
Asia Pac was down 8% with COVID-related softness lingering longer into the quarter than we were expecting.
To add a little more color on Asia Pac, we're well-positioned in that region and taking share, but the market has been sluggish.
We are becoming more optimistic, though, as we saw a pickup in October and November, driven by strong MyDay sales.
Overall, for the full quarter, revenues came in roughly where we expected with COVID continuing to present challenges, but we're managing through it and taking share by executing on product launches and expanding our key account relationships.
Moving to some additional quarterly numbers.
Our silicone hydrogel dailies were up 1% in Q4, led by strength in torics and a strong rebound in MyDay sphere sales.
We're seeing daily silicones as the clear winner right now as health and wellness trends continue to drive adoption, and this bodes well for us given our strong portfolio.
Additionally, we're now fully unconstrained on MyDay, so we're able to aggressively launch the product around the world, especially the toric, which is still relatively early in its launch stage.
Biofinity and Avaira combined to be flat for the quarter, with strength noted in Biofinity toric and Energys.
Energys continues to be a strong performer, growing double digits.
It was launched a few years ago, probably a little ahead of its time.
But its innovative lens design that uses digital zone optics to help alleviate eye fatigue from excessive screen time is certainly catching on now as it's addressing an important need in today's digital world.
Moving to our product launches.
We remain incredibly busy with MyDay sphere and toric being launched or relaunched in many markets around the world.
Biofinity toric multifocal and clariti's extended daily toric range continuing their successful launches and the launch of MiSight.
One point to highlight is how incredibly active we are in the daily silicone hydrogel space right now, probably busier launching products than anyone, and we expect this to continue throughout 2021.
Given there still exists roughly $2.4 billion in traditional daily hydrogel sales worldwide, there's a significant multiyear trade-up opportunity for us and our industry.
The only FDA-approved myopia management contact lens clinically proven to slow the progression of myopia in children.
Things are going incredibly well.
We now have roughly 25,000 kids around the world wearing MiSight, including over 1,000 in the U.S., and the momentum when new fits is strong.
But we already have 2,100 optometrists certified to fit the lens and 1,400 more in the process of being certified.
We've also recently launched in Taiwan and Russia, and the early feedback is very positive.
launch, including the average age for a new MiSight wearer is 11 years old.
Getting fits in this age range is fantastic as the average age for fitting a new wearer in regular contact lenses is 17, which means we're getting an extra six years' worth of revenue.
Furthermore, 70% of kids being fit in MiSight are 12 and under.
So we're changing the overall perception of what age kids can be fit in contact lenses.
Regarding sales, even with continuing COVID challenges, our myopia management portfolio, including MiSight and Ortho K lenses, grew 39% to $13 million.
Within these results, MiSight grew 73% to $2.5 million and Ortho K grew 33%, which included $1.3 million of revenue from last quarter's acquisition of GP Specialties.
For this coming year, even with COVID impacting the market, we're continuing to target $25 million in global MiSight sales, which is growth of roughly 250%.
We're also targeting strong growth in our Ortho K franchise, driven by positive developments such as the recent receipt of European CE mark approval for our Paragon lenses.
When looking at the global myopia management market, we're at the forefront of an extremely exciting pediatric optometry category.
Myopia management is in its infancy.
But as we discussed last quarter, there's a clear path to a market that we expect will ultimately be well over $5 billion annually for manufacturers.
We still have a lot of work to do, and we're investing in sales and marketing programs, new launches, regulatory approvals, and R&D activities to really help drive the market forward.
This approach is clearly working, and it's great to keep hearing optometrists talk about MiSight as standard of care for their pediatric patients.
As trained professionals, optometrists know that reducing the progression of myopia brings many benefits, including reducing the risk of serious eye disease later in life, such as retinal detachment, cataracts, and glaucoma.
To conclude our vision, let me touch on the global contact lens market.
We're seeing optometry offices mostly open around the world, and we're frequently hearing that they're fully booked with appointments running through January.
Having said that, patient throughput remains below pre-COVID levels as offices work to get more efficient with COVID safety protocols and managing staffing challenges.
From a consumption perspective, wearers are returning to their normal wearing and ordering habits.
But new fits are running roughly 90% of pre-COVID levels on a global basis, and that's the challenge.
and in markets like China, and it's improving everywhere, but eye care professionals are still struggling to meet demand.
We're not seeing any signs that demand is disappearing, though, so we believe it's only a matter of time before new fit activity returns to pre-COVID levels and the pent-up demand is addressed.
On a longer-term basis, the underlying growth drivers for our industry remains strong and may actually be improving with the macro trend of people spending more time on electronic devices.
With roughly one-third of the world myopic, and this is expected to increase to 50% by 2050, combined with a continuing shift to daily silicone hydrogel lenses, geographic expansion, and strong growth in torics and multifocals, our industry has a very bright future.
And for CooperVision, our strong product portfolio, momentum within the myopia management space, and strong new fit data puts us in a great position for long-term sustainable growth.
Revenues rebounded faster than expected to $175 million for the quarter.
Although down 4%, we exceeded expectations in a challenging market environment and expect solid performance moving forward.
Starting with our fertility business.
Revenues rebounded nicely and were only down 2% year over year.
We're taking market share, and we're well-positioned for future gains with a strong product portfolio and improved traction with key accounts.
Within products, our consumable portfolio grew this quarter, led by our RI Witness system.
This is an RFID lab-based management system that helps fertility clinics automate their processes by identifying, tracking, and recording patient samples throughout the IVF process.
Labs are starting to use it as a cornerstone solution to improve safety, reduce errors, improve workflow management, and enhanced compliance of standard operating procedures.
The product almost doubled in revenue to $2.5 million and with a growing focus on safety and compliance within fertility clinics, we expect this product to continue growing nicely.
Our genomics business also returned to growth this quarter as testing volume picked up, and our media products also grew.
The only softness we saw was in capital equipment, which declined against a very tough comp from last year.
From a fertility market perspective, we're still seeing COVID negatively impact patient flow and some important countries like India still have clinics shut down or are operating with minimal patient volume.
But the good news is we're seeing patient flow improving, and we believe we'll see IVF cycles return to normal soon.
With this happening, we'll continue expanding our business through in-person and virtual sales and marketing activity, adding sales personnel, and expanding our product offerings.
The fertility market has extremely positive long-term macro growth trends.
And as the global leader in the space, we're intent on helping the industry return to its strong historical growth rates.
Within our office and surgical unit, we were down 5%, slightly better than forecasted.
PARAGARD continued to rebound, down 6% to $50 million against a tough comp from last year due to buy-in activity before price increase.
PARAGARD is another product that is benefiting from the positive wellness trends we're seeing in the U.S. as the only 100% hormone-free IUD on the U.S. market, it offers a fantastic long-lasting birth control option that addresses the needs and interests of women looking for a healthy alternative.
Sales of the product continued trending in the right direction through November, so we're optimistic we'll see PARAGARD grow year over year in Q1.
Elsewhere, like many medical device companies, we've seen deferred elective procedures steadily rescheduled, and our medical device sales have improved.
We're entering this year in a really nice position with some of our focus products such as INSORB, our patented surgical skin closure device, and EndoSee Advance, our direct visualization system for evaluation of the endometrium positioned to grow nicely as markets rebound.
In conclusion, let me say I'm optimistic about the future.
Our businesses are performing well, and we're taking share.
We're very active with new product launches, and we have fantastic dedicated people driving our businesses forward.
Our fourth-quarter consolidated revenues decreased 1% as reported or 3% in constant currency to $682 million.
Consolidated gross margin increased 70 basis points year over year to 67.7%.
This was driven primarily by currency at CooperVision and efficiency improvements at CooperSurgical, from our successful global manufacturing integration and consolidation efforts.
This quarter was an extremely busy one for our manufacturing teams as we work diligently to finish most of our manufacturing restructuring activity.
This now allows us to minimize costs while optimizing production to more efficiently manage inventory levels and improve margins and cash flow.
We're in a significantly better position with our manufacturing operations rightsized for the current environment, while also being well-positioned to ramp up quickly.
We still have some absorption-related inefficiencies, but we expect these to go away quickly as growth returns.
OPEX was up 4.3% year over year, largely due to planned MiSight investment activity, including sales and marketing, regulatory, and R&D costs.
This resulted in consolidated operating margins of 26.8%, down from 28.5% last year.
This performance slightly exceeded expectations as we continued to effectively managing expenses, balancing costs against investment opportunities.
Interest expense for the quarter was $6.7 million, driven by lower interest rates and lower average debt and the effective tax rate was 11.1%.
Non-GAAP earnings per share was $3.16 with roughly 49.6 million average shares outstanding.
The year-over-year FX impact for the quarter to revenue and earnings per share was a positive $10.6 million and a positive $0.15.
Free cash flow was strong at $111 million, comprised of $218 million of operating cash flow offset by $107 million of CAPEX.
Net debt decreased by $76 million to $1.68 billion, and our adjusted leverage ratio decreased to 2.15 times.
Before moving to guidance, I want to mention an item you'll see disclosed in the tax footnote in our upcoming 10-K.
In November, as part of an internal restructuring to simplify our supply chain, CooperVision's intellectual property and related assets were transferred from Barbados to the U.K. Although this will impact our GAAP financials, including a significant onetime P&L benefit in Q1, along with offsetting adjustments over the next 10-plus years, we will exclude these entries from our non-GAAP results to ensure transparency.
We do not expect this having a material impact on our non-GAAP tax rate over this period.
We were hoping to give full-year guidance but the surging COVID cases in Europe and in the U.S., make that extremely difficult.
So we're providing only Q1 guidance at this time.
This includes consolidated revenues of $642 million to $670 million, down 1% to up 4% or down 3% to up 2% in constant currency.
CooperVision revenue of $482 million to $502 million, down 1% to up 4% or down 3% to up 1% in constant currency.
And CooperSurgical revenue of $160 million to $168 million, down 1% to up 4%, both as reported and in constant currency.
Non-GAAP earnings per share is expected to be in the range of $2.66 to $2.86.
As compared to last year, we expect the midpoint of our non-GAAP earnings per share guidance to be up $0.07 due to a positive $0.21 currency impact, offset by MiSight investment activity and slightly lower gross margins tied to unfavorable manufacturing absorption.
Below the line, we expect lower interest expense to be roughly offset by a higher effective tax rate.
Lastly, on cash flow.
We made significant progress completing our multiyear capacity expansion program and expect solid improvement in free cash flow moving forward as operating cash flow improves and CAPEX reduces.
In conclusion, even with COVID, we expect to start the year off well.
We have strong product lines, solid manufacturing, and distribution capabilities, growing key account relationships, plenty of MyDay capacity, and a dynamic myopia management business.
We plan to continue taking market share, and we look forward to COVID vaccines and better treatments returning markets to normal. | compname reports q4 non-gaap earnings per share $3.16.
q4 non-gaap earnings per share $3.16.
sees q1 non-gaap earnings per share $2.66 to $2.86 including items.
sees fiscal q1 2021 total revenue $642 million - $670 million. | 1 |
Once again we are nearly alone in our normally busy corporate offices in Manhattan Beach.
In early June we added additional safety features and began allowing a limited number of personnel back with staggered work schedule, while most of our talented team continued to successfully work from home.
As always, our top priority is the health and well-being of our employees and partners around the world.
The pandemic remains a deep concern driving our everyday decisions.
We continue to actively review inventory balances and production commitments across the globe, managing both to bring them in line with forecasted demand.
With the closure of most markets, it should be clear that the pandemic significantly impacted our business during the second quarter.
However, China led the path to recovery, first by stabilizing and then moving to growth by the end of the quarter.
As a result of the pandemic, our second quarter sales decreased 42% to $729.5 million, which consisted of a 37.8% decrease in our international businesses and a 47.3% decrease in our domestic businesses.
Despite the decreases, we believe the sales we achieved during the quarter are due to the strength of our product and the determination of our teams to drive sales where possible.
The primary drivers in the quarter were Asia, led by China with a 11.5% growth and our company-owned e-commerce business with sales growth of more than 400%.
With nearly all stores open in China during the second quarter, we gained insight into how to safely and efficiently reopen during the pandemic.
Additionally, we experienced pent-up demand for our product and saw our brand resonate with a wider and younger audience in our e-commerce channels in North America, Chile and Europe.
While our international wholesale business decreased 29.9%, China offered a model of recovery, stabilization and then growth in the quarter.
Every country's progress has been at a different pace.
But we began to see similar recoveries and stabilization trends in other markets.
These include Australia, France, Germany, Indonesia, Spain, South Korea, Taiwan, among others.
Each market has reopened at different times and under distinctive guidelines, but we are seeing positive signs within each of these regions.
At this time, more than 90% of the third-party SKECHERS stores around the world have reopened.
Feedback from many of our global partners has been that SKECHERS remains a go-to footwear brand in the markets as consumers seek casual, comfort and value during this challenging time.
Our domestic wholesale business decreased 57.2% reflecting the majority of retail store closures during much of the quarter.
Many of our partners have now reopened.
The demand remains high and we are shipping at an active rate.
We believe, based on early indicators from our partners and consumer sentiment, that SKECHERS will remain a key resource for these leading accounts.
With nearly all company-owned SKECHERS stores closed for most of the quarter, our direct-to-consumer business decreased 47.1%, which includes a 428.2% increase in our e-commerce business.
Comparable same-store sales in our direct-to-consumer business decreased 45.6%, including a decrease of 35.9% in the United States and 66.9% internationally.
We saw our direct to consumer comps improve month over month with total comp store sales down low double digits and domestic comps down single digits in June.
As of today, more than 90% of our global company-owned stores have reopened under heightened safety protocols.
Traffic and sales have been strongest within our big box and outlet locations, as well as our non-tourist stores.
Our company-owned stores that remain closed are primarily in South America.
As far as new store openings, we opened seven stores in the quarter; one in Germanyand three each in the United States and Japan, all locations that were under development prior to COVID-19.
Further 102 new third-party SKECHERS stores opened across 28 countries, bringing our total store count to 3,615 worldwide at quarter-end.
The key sales driver within our direct-to-consumer channel has been e-commerce which grew by triple digits in each of our platforms in North America, South America and Europe.
This week, we launched our new online shopping platform in the United States, which we believe will provide a better customer experience.
We plan to roll out the same platform to multiple countries later this year with even more countries planned for 2021 and beyond.
Additionally, South Korea has launched an e-commerce platform this month and several of our distributors are developing SKECHERS e-commerce websites.
Also after a successful pilot program during the second quarter, we will continue the rollout of our new retail POS system, providing a more efficient checkout experience in addition to BOPIS and BOPAC capabilities.
We believe consumers are gravitating toward comfortable and casual footwear.
At SKECHERS we design and deliver comfort, innovation, style and quality at a reasonable price in every one of our collections, from our athletic lifestyle footwear and a variety of fits under our SKECHERS Sport and SKECHERS Active lines, casual slip-on styles for men and women, work footwear for men and women, including styles designed for first responders, walking and running footwear and, of course, our kids footwear, which meets the needs of growing children.
Our natural product development cycles helped us navigate these unique times as we are more flexible, can easily pivot design and production and offer a flow of fresh product to meet the needs of the buy now, wear now consumer.
The progress we have made through the second quarter from a product and sales perspective couldn't have been achieved without our faster, flexible and focused business approach.
This has included actively reviewing inventory balances and production commitments across the globe, bringing both in line based on our forecast for demand and managing our expenses, while still supporting the businesses that are performing well, including a shift toward digital advertising to support our online sales.
Several integral factors are proving beneficial during this time and are helping ensure both the stability and success of the SKECHERS brand, our comfortable casual product at a reasonable price, the diversity of our distribution channels and broad-based customer demographics, the solid relationships with our factories and wholesale partners and our exceptionally strong balance sheet and ample liquidity.
Although the near term remains uncertain as some markets are still closed and the fluidity of the pandemic continues to be a substantial concern, we believe that the SKECHERS brand will continue to have a worldwide appeal.
And now to John.
First, I hope you're all staying safe and healthy.
Despite the challenges of the second quarter, demand for our product remains strong, as evidenced by the explosive growth of our online business, a return to growth in China and the steady month-over-month improvement we saw in the quarter across most of our businesses.
Today the majority of our stores are now fully operational and SKECHERS' value proposition continues to resonate with consumers, as our core casual athletic styles are decidedly on trend in a predominantly work-at-home environment.
We also continue to make investments, notably in our digital capabilities, which included an aggressive pivot toward digital advertising this quarter and the relaunch of our web site completed just this week, which will be followed by a new mobile app and a new loyalty program over the next few quarters.
We are also modernizing our in-store point-of-sale system to better integrate engagement with our customers both online and in store.
Overall, we remain extremely confident in our ability to manage through this crisis and optimistic about the long-term future of the SKECHERS brand.
Now turning to our second quarter results.
Similar to last quarter, I will not be detailing each and every impact of the pandemic.
But it should be clear that the closure of our stores and the stores of our wholesale customers for much of the quarter, negatively impacted our results nearly everywhere.
Sales in the quarter totaled $729.5 million, a decrease of $529.1 million or 42% from the prior year quarter.
On a constant currency basis, sales decreased $516.2 million or 41%.
Domestic wholesale sales declined 57.2% or $174.6 million as operations at many of our wholesale customers were closed, particularly in the first half of the second quarter.
International wholesale sales decreased 29.9% in the quarter.
Our wholly owned subsidiaries were down 43.7% and our distributor business decreased 58.1%.
However, our joint ventures were down only 6.4% as China sales grew 11.5% for the quarter led by e-commerce, which was especially strong over the 6-18 selling period.
Direct-to-consumer sales decreased 47.1%, the result of a 35.4% decrease domestically and a 66.6% decrease internationally, reflecting the impact of temporary store closures globally, partially offset by a 428.2% increase in our e-commerce business.
Gross profit was $368.6 million, down $241.2 million compared to the prior year on lower sales volumes while gross margin increased by approximately 210 basis points to 50.5%.
The higher gross margins were attributable to a favorable mix of online and international sales.
Total operating expenses decreased by $73 million or 14.5% to $432.1 million in the quarter, reflecting the swift actions we took during the quarter to reduce all non-essential discretionary spending.
Selling expenses decreased by $53.3 million or 46.9% to $60.2 million, primarily due to lower advertising expenses globally, partially offset by an increase in digital advertising spend.
General and administrative expenses decreased by $19.7 million or 5% to $371.9 million reflecting reductions in discretionary spending and compensation related costs and despite the inclusion of an incremental $10.2 million in bad debt expense due to the expected impact of the pandemic on wholesale customers across the globe.
Loss from operations was $61 million versus the prior year earnings from operations of $111.1 million.
Net loss was $68.1 million or $0.44 per diluted share on 154.1 million diluted shares outstanding compared to net income of $75.2 million or $0.49 per diluted share on 153.9 million diluted shares outstanding in the prior year.
Our effective income tax rate for the quarter decreased to 7.2% from 18.4% in the prior year and resulted in a net tax benefit of $4.3 million.
And now turning to our balance sheet.
At June 30th, 2020, we had over $1.56 billion in cash, cash equivalents and investments, which was an increase of $524.5 million or 50.9% from December 31st, 2019 reflecting the drawdown of our senior unsecured credit facility last quarter.
Importantly, this represents an increase in net cash balances over last quarter of $189.3 million, reflecting our prudent inventory, working capital and operating expense management and including $75.9 million of capital expenditures.
Trade accounts receivable at quarter-end were $478 million, a decrease of 25.9% or $167.3 million from December 31st, 2019 and a decrease of 25.5% or $163.4 million from June 30th, 2019.
The decrease in accounts receivable was primarily due to successful collection activities during the quarter, coupled with lower global wholesale sales.
Total inventory was $1.03 billion, a decrease of 3.9% or $42.1 million from December 31st, 2019, but an increase of 20.1% or $172.1 million from June 30th, 2019.
The increase in year-over-year inventory levels is attributable to Asia where sales have largely recovered from the most serious effects of the pandemic.
We continue to aggressively manage product supply in light of anticipated demand, aiming to prudently balance our inventory to position us constructively for the back half of the year and 2021.
Total debt, including both current and long-term portions, was $763.3 million compared to $121.2 million at December 31st, 2019.
The increase primarily reflects the drawdown of our senior unsecured credit facility in the first quarter.
Capital expenditures for the second quarter were $75.9 million, of which $20.5 million related to our new China corporate office space, $13.8 million related to several new store openings worldwide, $12.4 million was associated with our new distribution center in China and $10.9 million related to the expansion of our domestic distribution center.
As we discussed on our last call, we prioritized our capital expenditures this quarter to focus only on business critical and highly strategic projects, like the launch of our new digital platform and completion of our new distribution center in China.
As mentioned previously, our new web site launched this week and several supporting digital initiatives will follow.
In China, our distribution center progress has been slowed by the impacts of the pandemic which has particularly hampered the installation and testing of our automation.
We now expect the distribution center to begin limited operations in the third quarter and to become fully operational over the first half of 2021.
As our businesses continue to recover, we expect to restart investments that have been paused like the rollout of a new global point-of-sale system and significant additional capacity at our US distribution center.
However, given the ongoing dislocation in the retail environment, we expect to continue tightly regulating our new store opening plans.
We now expect total capital expenditures over the remainder of the year to be between $100 million and $150 million.
We have also commenced the expansion of our US distribution center, which is owned and financed through a joint venture that we consolidate for accounting purposes.
We expect incremental capital expenditures related to that expansion to total between $90 million and $110 million this quarter -- this year, sorry, of which approximately $10 million has already been recorded.
As David said, while the near term remains uncertain, we are confident that we have taken the necessary actions to ensure that SKECHERS will successfully navigate this crisis.
We will not be providing revenue or earnings guidance at this time as the current environment remains too dynamic from which to plan results with a reasonable degree of certainty.
However, given the strength of our brands, our compelling value proposition and our healthy balance sheet, we believe SKECHERS is well positioned to continue growing once the situation normalizes.
We are more than halfway through what has proven to be an unprecedented year.
We have successfully embraced the new way of conducting business both at our corporate offices with safer at-home work guidelines and in our retail stores with extensive safety measures put in place for our employees and customers.
We experienced exceptionally strong demand for our brand in Europe, North America and South America with our e-commerce platforms growing more than 400%.
Similarly, we saw demand in Asia primarily within [Phonetic] China with a 11.5% growth, including e-commerce growth of 43%.
Many of our global partners have indicated that SKECHERS remains a go-to brand in their stores and we ramped up shipments to these businesses.
Nearly all the SKECHERS retail stores around the world are now open following safety protocols.
In our company-owned stores we are seeing improved month-over-month comp store sales.
As a few countries remain closed, others are reopening and consumer shopping habits are changing.
We believe the pandemic will not only continue to be a concern, but it's also changing the retail and competitive landscape.
We believe that SKECHERS is well positioned to accelerate out of the Global Health Conference when it stabilizes and that we will remain a global footwear leader.
We are optimistic with the reception of our vast product offering and a reasonable price and the loyalty of our consumers, the positive sentiment toward the safety measures we have taken in our SKECHERS retail stores and the flexibility and determination of our teams around the world. | q2 loss per share $0.44.
q2 sales $729.5 million versus refinitiv ibes estimate of $659.7 million.
qtrly company-owned e-commerce sales grew 428.2 percent.
company is not providing further financial guidance at this time.
impact of covid-19 to skechers' business was significant in q2.
china sales grew 11.5 percent in q2.
optimistic about early-stage recovery we are seeing in much of our business, including a return to growth in china.
more than 90 percent of our skechers stores re-opened. | 1 |
The last several months are unlike anything most of us have experienced in our life times.
With long overdue calls for social equality, persistent global pandemic and recovery curves, the only certainty today is uncertainty.
But amid all this change, we'd be remiss not to recognize all the heroes.
It's been truly uplifting to see the humanity around us, our healthcare workers and other first responders and all of those who are committed to making our world a safer, better and more equal plains.
I've never been more proud of our firm and how we've responded during these times.
At the beginning of this pandemic, we adopted a framework of safety, caution and agility to navigate the crisis.
That included mobilizing almost all of our global colleagues to a work from home environment in really the course of days.
And we sized our business to the current reality while preserving tremendous muscle, which we believe will allow us to accelerate through the term.
We took a strong voice in the world, hosting multiple COVID-19 webinars, which were attended by over 20,000 leaders and we led Race Matters webinars for colleagues and clients that attracted more than 100,000 leaders from global organizations.
And we're continuing to engage with clients in these discussions, given our large diversity and inclusion consulting business.
And we appointed Mike Hyter as our Chief Diversity Officer, elevating our ongoing focus on and continuing commitment to not only diversity, but much more importantly, inclusion.
Diversity is a fact, inclusion is a behavior, and we're committed to continuing that conversation beyond the pledge through action.
Now let me comment briefly on our fiscal fourth quarter.
Fee revenues were down about 7.9% at constant currency as the impact of the virus accelerated through the quarter.
Our adjusted EBITDA margin was almost 16% and we delivered $0.60 of adjusted EPS.
Full year revenues were $1.9 billion and we delivered approximately $300 million of adjusted EBITDA and $2.92 of adjusted EPS.
Now for the future.
There is no question that the magnitude of the humanitarian and economic impact brought on by the virus far outweighs with anyone could have expected a few short months ago.
The pace and magnitude of the decline caused by this global health crisis is unprecedented, at least in the last 100 years.
But with the crisis there is also tremendous opportunity.
And we believe that includes real tangible opportunities for Korn Ferry.
Almost every company on the planet is and will have to reimagine their business.
And I believe in the next two years, there is going to be more change than in the last 10.
Quite simply, different work needs to get done and work needs to get done differently.
And to get work done differently, companies will need to rethink their org structure, roles and responsibilities.
How they compensate, engage and develop their workforce, let alone the type of talent they hire and how they hire that talent in a virtual world, which will depend to even a greater extent on assessment.
And as a reminder, our assessment and learning business is almost 25% of the company.
So these are Korn Ferry's businesses and this is on top of our M&A change management, virtual sales effectiveness and customer experience services, let alone the D&I services that we offer to the marketplace.
That's real opportunity for us.
And as an organizational consulting firm, we enable people and organizations to exceed their potential.
And to exceed potential, people need in abundance of opportunity, development and sponsorship, which is absolutely foundational to our service offerings.
We're also using this time of change as an opportunity to reimagine our business.
For example, we're moving from analog to digital delivery of our assessment and learning business, which as I just mentioned, it's 25% of the company in a way that makes our IT more relevant and scalable.
On the recruiting side, we're further refining our platform processes, such as AI, video and technology.
And on the administrative front, we're continuing to further consolidate our activities, adopting a One Korn Ferry approach to deliver greater efficiencies across the entire organization.
When I look back during the Great Recession, our revenue was up almost 60% four quarters from the trough, eventually growing 5x to almost $2.1 billion revenue run rate, annual revenue run rate a few months ago.
We believe the opportunity to grow after the pandemic subsides lies in front of us.
We're a much different company today.
Our firm's recovery could be substantially different with a pronounced upswing based on a broader and deeper mix of business.
To undertake this journey, we're going to be agile, flexible and responsive to the environment and our clients.
Fortunately, we're facing this crisis from a position of strength when we consider we have a solid balance sheet with high levels of cash and liquidity and we've taken swift and decisive actions to protect the company, and more importantly, preserve its muscle.
We've also seen some green shoots in new business and client wins.
April, May and June stabilized, down approximately 30% year-over-year.
And sequentially, June was up approximately 18% over May.
So June was better than May and was better than June in terms of new business.
We've also set operational guardrails in our business, designed to preserve our position of strength and enable the firm to invest into the recovery.
We're committed to maintaining at least neutral EBITDA.
This preserves the muscle of the firm and our ability to fully harness the opportunities and the recovery and we will maintain our dividend this quarter.
As we discussed in the last earnings call, we continue to assess the changing health and economic environment and the impact it has on our forward visibility.
As city, states and countries reopen their economies, there has been a significant resurgence of COVID-19 cases in a number of places.
In some cases this has resulted in the delay or even cancellation of plans to reopen.
Despite the recent positive data indicating that our new business trends may be stabilizing as well as the resilience that our clients and colleagues are demonstrating, the near-term predictability of our business remains clouded.
As a result, we will not be providing specific revenue and earnings guidance for the first quarter of FY '21.
In wrapping up my remarks, I want to leave you with this.
You know at some point, we'll be looking at this virus through the rearview mirror.
And I truly believe that we have the right strategy with the right people at the right time to accelerate further through the turn like we've done before.
We have a demonstrated track record of doing that.
So now, I'm joined virtually by Bob Rozek and Gregg Kvochak.
I'll start with a few important highlights for the full year and the fourth quarter of fiscal year '20 before I address new business trends.
For the full year of fiscal '20, our fee revenue was $1.93 billion, which was essentially flat year-over-year.
Our adjusted EBITDA margin was -- our adjusted EBITDA, I should say, was $301 million and the adjusted EBITDA margin was 15.6%.
And as Gary indicated, adjusted fully diluted earnings per share were $2.92.
Now turning to the most recently completed quarter, our fourth quarter.
Fee revenue was $440.5 million, which was down 7.9% year-over-year measured at constant currency.
In the fourth quarter, fee revenue for Executive Search was down 10% globally, RPO and Pro Search was down 9%, Consulting down 14% and Digital grew 14%, and all of that's at constant currency.
Adjusted EBITDA in the fourth quarter was approximately $70 million with a 15.8% adjusted EBITDA margin, and our adjusted fully diluted earnings per share in the quarter were $0.60.
Our balance sheet and liquidity remained very strong at the end of the fourth quarter.
Cash and marketable securities totaled $863 million, and that's up about $95 million year-over-year.
And then when you pull out amounts reserved for deferred compensation and accrued bonuses, that's our -- what we define as our investable cash, that balance at the end of the fourth quarter was approximately $532 million, that's up about $150 million year-over-year.
At April 30, 2020, we have undrawn capacity of $646 million on our revolver.
So we have close to $1.2 billion in liquidity to manage our way through COVID-19, and as Gary indicated, to invest back into the business through the recovery.
Last, the firm had outstanding debt at the end of the fourth quarter of about $400 million.
Finally, due to the negative economic impact of COVID-19, we did take swift and decisive actions to downsize our cost base.
As previously announced, we took cost actions that were targeted at compensation as well as G&A spend.
And we have initially reduced our cost base by about $300 million on a run rate basis.
We believe these actions will help us manage the business to maintaining our minimum operating boundary of adjusted EBITDA neutrality throughout the COVID crisis.
And in the current environment, maintaining operational flexibility is critical for us and will allow us not only to preserve the franchise, but as I indicated, will allow us to invest into the recovery.
Gregg, do you want to go through some of the operating segment?
I'm going to start with the Digital segment.
Global fee revenue for KF Digital was $69 million in the fourth quarter and up approximately $7 million or 14% year-over-year measured at constant currency.
The subscription and licensing component of KF Digital's fee revenue in the fourth quarter was approximately $21 million, which was up $6 million year-over-year and was flat sequentially.
Adjusted EBITDA in the fourth quarter for KF Digital was $17 million with a 24.5% adjusted EBITDA margin.
Now shifting to the Consulting segment.
In the fourth quarter, Consulting generated $121 million of fee revenue, which was down approximately 14% year-over-year at constant currency.
In every region, Consulting fee revenue in the fourth quarter was negatively impacted by the sudden shift to work from home protocols, which limited our consultants' ability to execute and complete advisory assignments at client sites.
Adjusted EBITDA for Consulting in the fourth quarter was $11.1 million with an adjusted EBITDA margin of 9.2%.
RPO and Professional Search generated global fee revenue of $82 million in the fourth quarter with both components down approximately 9% year-over-year at constant currency.
Adjusted EBITDA for RPO and Professional Search in the fourth quarter was $12.7 million with adjusted EBITDA margin of 15.4%.
Finally for Executive Search, global fee revenue in the fourth quarter of fiscal '20 was approximately $168 million, which compared year-over-year and measured at constant currency was down approximately 10%.
At constant currency, North America and EMEA were each down 10% year-over-year and APAC was down 16%.
The total number of dedicated Executive Search consultants worldwide at the end of the fourth quarter was 556, down nine year-over-year and down 26 sequentially.
Annualized fee revenue production per consultant in the fourth quarter was $1.18 million.
And the number of new search assignments opened worldwide in the fourth quarter was 1,229, which was down approximately 28% year-over-year.
Adjusted EBITDA for Executive Search in the fourth quarter was approximately $47.5 million with an adjusted EBITDA margin of 28.3%.
So globally year-over-year decline in monthly business as we exited fiscal year '20 and entered fiscal year '21 appear to have stabilized.
Excluding new businesses for RPO, our global new business measured year-over-year was down approximately 20% in March and 34% in April.
Starting our new fiscal year, May was down approximately 32% year-over-year and June was down 26%.
And over the past two years, June has been sequentially better than May kind of in the 5% to 7% range.
In the current year, we're obviously seeing the same [Technical Issue] of improvement.
And obviously at this point, we still don't know July is new business yet.
With regards to the RPO, new business in the fourth quarter was once again strong with $109 million of global awards, which was comprised of $72 million of new clients and $37 million of renewals and extensions.
In the near-term, the new business pipeline for RPO remains strong.
We'd be glad to answer any questions that you have. | q3 earnings per share $1.54.
qtrly adjusted earnings per share $1.59.
q4 fy'22 diluted earnings per share is expected to range between $1.44 to $1.60.
q4 fy'22 fee revenue is expected to be in range of $670 million and $690 million.
q4 fy'22 adjusted diluted earnings per share is expected to be in range from $1.49 to $1.6. | 0 |
Joining us on the call today are members of the media.
During our question-and-answer session, callers will be limited to one question in order to allow us to accommodate all those who would like to participate.
I want to remind all listeners that FedEx Corporation desires to take advantage of our safe harbor provisions of the Private Securities Litigation Reform Act.
Joining us on the call today are Raj Subramaniam, president and COO; Mike Lenz, executive vice president and CFO; and Brie Carere, executive VP, chief marketing and communications officer.
And now, Raj will share his views on the quarter.
First and foremost, our thoughts are with those affected by the ongoing violence in Ukraine.
The safety of our team members in Ukraine is our utmost priority, and we are providing them with financial assistance and various resources for support.
We have suspended all services in Ukraine, Russia, and Belarus.
Additionally, we are helping to move relief to Ukraine, and we have provided more than $1.5 million in humanitarian aid.
Execution of our strategies resulted in substantially higher operating income for the quarter as Team FedEx delivered yet another outstanding peak season.
December 2021 was our most profitable December in FedEx history.
Our ability to handle the influx of packages was years in the making as we've taken deliberate steps to enhance our unparalleled network and support of customers large and small.
We have fundamentally changed our performance as we handled increased e-commerce volume during peak and set a new precedent for peak seasons moving forward.
Having said that, we are laser focused on improving our margins.
You'll hear us talk more about this today and then more specifically at our upcoming Investor Day.
Even with the successful execution of peak, the new year brought new challenges, mostly driven by omicron.
This affected our business in two ways: first, we experienced staffing shortages, particularly in our air operations.
In January alone, the absentee rate of our crew due to omicron was over 15%, which caused significant flight disruptions.
domestic and European markets.
Both of those factors resulted in softer-than-expected volume levels, especially in January.
We estimate the effect of omicron-driven volume softness in our Q3 results was approximately $350 million.
While it was significant, it was also temporary, and we have seen volume rebound from January levels.
Even with these challenges, FedEx Express delivered strong adjusted operating income growth of 27% year over year.
Speaking of the Express team, we announced that after nearly 40 years of distinguished service, Don Colleran, president and CEO of FedEx Express, will retire later this year and named Richard Smith, current executive vice president of global support and regional president of Americas at FedEx Express, as a successor.
We'll have much more to say about Don and his countless contributions to the business during our call in June.
FedEx Freight once again delivered strong results with third quarter operating income nearly tripling year over year, driven by a continued focus on revenue quality.
Turning to FedEx Ground.
Operating costs continue to be challenged by the competitive labor environment now primarily manifesting in increased labor rates.
We estimate the total impact of approximately $210 million at ground in the third quarter, which is significantly lower than what we saw in Q1 and Q2 as we have seen substantial improvement in labor availability post peak.
With the stabilization in the labor environment, I'm pleased to share that we have successfully unwound network adjustments that were necessary to provide service but cost inefficiencies.
Staffing levels and the rapid acceleration in labor costs have stabilized and our network is operating at normal levels.
Despite improvement in the labor headwind, volume levels in Q3 were softer than we had previously forecasted, in part due to omicron surge slowing customer demand.
As such, we expect our second half Ground margins will be lower than our previous expectations and not reach double digits.
Over the years, FedEx Ground has built a strong foundation to serve B2B and small and medium customers with an unmatched value proposition.
As a result, we have grown market share in these segments and they remain strong priorities for the future.
And then more than three years ago, we built upon this foundation and embarked on a strategy that positioned FedEx squarely in the center of the fast-growing e-commerce market with a differentiated portfolio and a diversified customer base.
This included a period of strategically investing in our network to meet growing market demand.
Let me note here that this strategy is different than what our primary competitor has pursued.
By building on our current base of business and making those prior investments in our network to facilitate growth, we are in a position to generate improved operating profit and margins.
We saw this potential in our financial results for December prior to the surge of omicron.
And moving forward, our financial performance will be further enhanced by maximizing existing assets, improving capital utilization, and leveraging technologies that facilitate optimization of our existing physical capacity and staffing.
As we prepare to close fiscal year '22, permit me a moment to share what's on the horizon for FedEx as we continue to focus on margin expansion and shareholder return.
In addition to the opportunity to enhance performance at Ground that I just discussed, we have other levers for profitable growth, which include: number one, driving improved results in Europe; number two, increasing collaboration and efficiency to optimize our networks, lower our cost to serve and enhance return on capital; and number three, unlocking new value through digital innovation.
Of course, we'll do this in an environment of strong revenue quality management.
Our international business, particularly Europe, remains a big profit opportunity.
Air network integration remains on track for the end of the month to complete the physical integration of TNT into FedEx Express and enable full physical interoperability of these networks, both in the air and on the road.
Paris CDG airport will serve as the main hub for all European and intercontinental flights.
Liege will connect specific large European markets and ensure we have the flexibility to scale our operations in response to market needs, thus enabling us to focus on international growth.
Our expanded collaboration across operating companies will utilize our air and ground networks in a smarter and more calculated manner.
For example, FedEx Freight trucks have traveled more than 7 million miles while operating on behalf of FedEx Ground this fiscal year.
FedEx Freight has also provided FedEx Ground with intermodal containers, which have already been dispatched more than 36,000 times.
We'll continue to comprehensively look at all our assets in our network to put the right package in the right network and the right cost to serve.
Additionally, we are unlocking value through digital innovation, our accelerated integration of data-driven technologies that will drive increased productivity in our linehaul and dock operations, as well as in the last mile.
Enhanced sortation technology will be operational at FedEx Ground in hundreds of facilities fired as we speak.
It will increase upstream efficiencies, enabling managers to do better balance and planned sortation operations, thereby unlocking key capacity.
For example, during Cyber Week, this technology helped keep 1.9 million ground economy packages out of constrained sorts.
We're also modernizing the planning and staffing of our dock operations, as well as the systems, training, and technology that maximizes productivity on every sort.
One such example is a recently rolled out package handler scheduling technology that will help ensure the right staffing levels for every sort and every facility across the Ground network.
This will improve dock productivity.
And when combined with a focus on employee retention, it will enable us to significantly reduce the cost of turnover and strategically target recruiting spend when and where necessary.
For last mile, we continue to improve upon the route optimization technology already implemented to enable service providers to make real-time decisions that enhance their business' daily efficiency.
These ongoing investments in automation and technology have helped FedEx build the most flexible and responsive network in the industry and will enable us to improve our margins.
In closing, we have the networks, the strategy, and the right team in place as we deliver financial returns and drive shareholder value for years to come.
Several macroeconomic forces, including the tragic conflict in Ukraine, uncertainty around the pandemic, a tight labor market, supply chain disruptions, high energy prices, and inflationary pressure have dampened the current GDP outlook globally and for the United States.
Last week, we lowered our economic outlook.
U.S. GDP is now expected to increase 3.4% in calendar year 2022, revised down from 3.7%, and our outlook is 2.3% in calendar year 2023, with consumer spending tilting toward services and B2B growth supported by inventory rebuilding.
Global GDP growth is expected to be 3.5% in calendar year 2022, previously 4.1% and it will be 3.1% in calendar year 2023.
Growth will be driven by the release of pent-up demand for services while investment demand and inventory restocking support global manufacturing and trade.
Given the tremendous fluidity of the macroeconomic environment, we will continue to update our outlook.
Our teams are ready to adjust plans, as required, to drive margin improvement despite the dynamic environment in which we operate.
With fuel prices increasing around the world, today, we announced a fuel surcharge increase effective April 4 for FedEx Express, Ground, and Freight.
Additional details can be found on fedex.com.
The change in economic outlook does not change our confidence that e-commerce will continue to drive strong parcel market growth.
We believe the e-commerce growth rate in the United States will be in the mid- to high single digits for the next three to four years.
We will continue to build differentiated value propositions to achieve market-leading pricing in all our customer segments, including e-commerce, our small and medium customers and our commercial B2B business.
We are very pleased with the results of our revenue quality strategy and know we have a great opportunity to increase the flow-through to margin expansion.
In the third quarter, revenue growth was 10% year over year, with double-digit yield improvement for FedEx Express and FedEx Freight, close behind with FedEx Ground at 9% year-over-year yield improvement.
In the United States, our package revenue grew 9% in Q3 on strong yield improvement of 10%.
We executed on our peak pricing strategy in the month of December, delivering more than $250 million in peak surcharge revenue.
Softness in parcel volumes came predominantly from constraining FedEx Ground economy and the effects of omicron on both our network and on our customers.
The focus on revenue quality and profitable share growth drove outstanding results for FedEx Freight this quarter.
For the quarter, revenue increased 23% year over year, driven by a 19% increase in revenue per shipment.
Additionally, FedEx Freight Direct continues to gain great momentum as an e-commerce solution for heavy bulky items with phenomenal growth in Q3 year over year.
Our international businesses are navigating a dynamic environment.
Capacity constraints continue to be a reality.
At this point, valet capacity on Trans-Atlantic passenger airlines is expected to recover faster than Trans-Pacific.
Passenger airline capacity is not expected to fully recover to pre-COVID levels until 2024 or even later across our largest global trade lanes.
Scarce capacity on international lanes and strong demand out of Asia is resulting in a continued favorable pricing environment.
With the completion of our integrated air network at the end of this month, we have one European air network and one road network in and out of Europe.
Our international portfolio of services contains the best European road network, the broadest U.S. next-day coverage, and a combined parcel and freight offering that no one else in the market has.
As a result of the integration, we will be able to offer improved transit times, earlier delivery, and later pickup services to more customers and more locations.
Seven new countries will now be connected on a next-day basis within Europe, while 14 countries will be expanding our noon delivery coverage.
In several countries, this will be the first time we have introduced next-day service to the rest of Europe.
We will leverage the expanded European portfolio to improve international profitability, drive revenue growth and gain market share.
In addition to the improvements in our European value proposition, we have made significant strides to enhance our digital solutions as well.
In January, we enhanced our tracking service based on an advanced machine learning and artificial intelligence model developed by FedEx DataWorks.
This new experience delivers greater estimated delivery date accuracy, including updates for early or delayed shipments through all tracking channels.
This improves both the shipper and the recipient experience, and it will reduce calls to customer service.
Additionally, our new modernized FedEx Ship Manager, which is our online shipping application, has now been rolled out in more than 153 countries.
In January, we began introducing customers to it in the United States and Canada.
FedEx Ship Manager is the primary shipping application for our small and medium customer segment.
We believe a market-leading digital portfolio will enable FedEx to continue to take market share in this very profitable segment.
In summary, we remain optimistic about Q4 and beyond, and we'll continue to deliver on our market-leading value proposition.
After a strong start to the third quarter with the most profitable December in company history, January was significantly influenced by the rapid spread of the omicron variant and its negative effect on our operations and the macro environment.
These challenges subsided during February, resulting in third quarter adjusted operating income of $1.5 billion, up 37% year over year on an adjusted basis.
There are a number of factors influencing our third quarter results for both this year and last year that I will cover.
As Raj explained the effects on our operations, I will give further context for the financial implications.
First, labor market conditions, although much improved, once again had a significant effect on our results at an estimated $350 million year over year, which was primarily experienced at Ground.
For the third quarter, that was primarily due to higher rates for both purchase transportation and wages.
Labor availability-driven network inefficiencies were significantly less of a factor in the third quarter compared to earlier in the year.
The implications from the omicron variant surge reduced third quarter operating income by an estimated $350 million, predominantly at Express, as it influenced customer demand and pressured our operations, resulting in constrained capacity, network disruptions and lower volumes and revenue.
The third quarter had favorable year-over-year comparisons for variable compensation of approximately $380 million, including the one-time Express hourly bonus last year and significantly less impactful winter weather that lead it to $310 million.
With that overview of the consolidated results of the third quarter, I'll turn to the highlights for each of our transportation segments.
Ground reported a 10% increase in revenue year over year, with operating income down approximately $60 million and an operating margin at 7.3%.
While pressures from constrained labor markets began subsiding, the effect was still significant at an estimated $210 million year over year, predominantly due to the higher purchase transportation and wage rates.
In addition, our volume was softer than expected due to the omicron variant surge slowing customer demand.
A 9% yield improvement partially offset these headwinds, and our teams remain very focused on improving ground performance, as Raj outlined earlier.
Express adjusted operating income increased by 27% year over year, driven by higher yields and a net fuel benefit, with adjusted operating margin increasing by 100 basis points to 5.8%.
Express results also benefited in the third quarter from $285 million of lower variable compensation, as well as much less severe winter weather.
The strong results were partially offset by the headwinds I mentioned earlier, with the omicron surge having the largest effect, especially during January, of an estimated $240 million.
Team member absences primarily among our pilot severely disrupted operations, requiring many flight cancellations and further constraining capacity.
Additionally, during this time, the omicron surge reduced customer demand in many parts of the world.
Freight had another outstanding quarter, delivering an operating margin of 15%, 850 basis points higher year over year, and revenue for the third quarter increased 23% with operating income up over 180% despite the pressures from higher purchase transportation rates and wages.
And for the first time in Freight's history, they realized sequential operating income and operating margin improvement from the second quarter to the third quarter.
Turning to the balance sheet.
We ended our quarter with $6.1 billion in cash and are targeting over $3 billion in adjusted free cash flow for fiscal 2022.
As I emphasized last quarter, our stronger cash flow provides extensive flexibility as we continue to focus on balanced capital allocation.
As such, I'm pleased to share the accelerated share repurchase program announced last quarter was completed during Q3 with 6.1 million shares delivered under the ASR agreement.
Total repurchases during fiscal '22 are nearly 9 million shares or 3% of the shares outstanding at the beginning of the year.
The decrease in outstanding shares resulting from the ASR benefited third quarter results by $0.06 per diluted share.
Also during the quarter, we made a $250 million, a voluntary contribution to our U.S. pension plan and have funded $500 million year to date.
Now turning to what's ahead.
We are affirming our full year adjusted earnings per share range at $20.50 to $21.50.
The operating and business environment uncertainty I mentioned in December did materialize to a greater degree than anticipated during Q3, but we have navigated those challenges and project a solid finish to our fiscal year.
Labor-related network and efficiency effects have diminished and the wage rate component should become less of a headwind as we lap the onset of labor rate increases in the fourth quarter.
Lastly, variable compensation expense will be a tailwind as it was in Q3.
Turning to capital spending.
We have lowered our FY '22 capital-spending forecast from $7.2 billion to $7 billion.
Much of the change is driven by extended timelines resulting from supply chain considerations.
While we are still developing our FY '23 plans, our focus remains on lowering our capital intensity while investing in strategic initiatives to drive returns.
We are highly focused on ensuring our capital investments generate returns to drive further growth in earnings and cash flows.
Lastly, our projection for the full year effective tax rate is now 22% to 23%, prior to the mark-to-market retirement plan adjustments.
While we are confident in our ability to deliver a strong fourth quarter, uncertainty remains across many fronts, including additional pandemic developments, the labor market, inflation, high energy prices and further geopolitical risk, and the potential effects on the pace and timing of global economic activity.
We continue to monitor these trends and adjust accordingly.
With that, we are all very much looking forward to sharing additional background in our upcoming investor meeting on June 28 and 29 in Memphis. | qtrly earnings per share $2.63.
qtrly adjusted earnings per share $2.88. | 0 |
These statements are not guarantees of future performance, and therefore, you should not place undue reliance upon them.
Also, our discussion today may include references to certain non-GAAP measures.
I'm joined today by Harp Rana, our chief financial officer.
Our business continued to fire on all cylinders in the second quarter.
We posted an impressive $20.2 million of net income or $1.87 of diluted EPS, with strong returns of 7.1% ROA and 28.7% ROE.
We experienced a return to double-digit year-over-year growth in our ending net receivables and quarterly revenue, which were up 15.7% and 10.9%, respectively.
Record high sequential portfolio growth of $78 million in the quarter drove our ending and average net receivables to all-time highs, which in turn generated record quarterly revenue.
We continue to capture market share as our growth once again outpaced the broader near-prime market.
At the same time, our quarter end 30-plus day delinquency rate fell to a historical low of 3.6%, and our net credit loss rate during the quarter dropped to 7.4%, a 320 basis-point improvement from the prior-year period.
These results validate the efficacy of our long-term strategy and the strength of our team's execution.
Our recent strategic investments in growth, including digital initiatives, geographic expansion, and product and channel development continue to bear considerable fruit.
Our core portfolio grew $80 million or 7% sequentially in the second quarter, with more than half of the growth occurring in June.
We originated a record $373 million of loans, of which $87 million was derived from our new growth initiatives.
The second-quarter volume was more than double last year's pandemic impacted quarter and up 7%, compared to the second quarter of 2019.
We continued to roll out our improved digital prequalification experience last quarter, and it's already driving increased digital booking rates.
We had record digitally sourced originations of $35 million in the second quarter, more than double first quarter levels and up dramatically from last year.
New digital volumes represented 28.5% of our total new borrower volume.
The average FICO on our digital volumes originated last quarter with 613, with 65% originated as large loans.
We will complete the deployment of the new prequalification experience to all of our states this quarter, and we will continue to integrate the new functionality with our existing and new digital affiliates and lead generators in the months ahead.
In addition, we have begun testing our new guaranteed loan offer product, which is an alternative to our convenience check loan product and offers online fulfillment with ACH funding into a customer's bank account.
Later this year, we will begin testing our end-to-end digital origination product for new and existing customers, and we remain on pace to roll out an improved online customer portal and a mobile app in the early part of 2022.
Our new larger auto secured loan product has also begun to gain traction as we've now rolled out the product to all of our states as of yesterday.
In addition, in late July, we expanded our retail point-of-sale lending relationship with a large Ashley Homestore franchisee.
With this expansion, we are tripling the number of locations we serve for this franchisee to 73 stores across five states, allowing us to better fulfill their need for near-prime and sub-prime installment financing options, all while fully underwriting borrowers via automation and maintaining industry-best service levels.
We believe there is a substantial opportunity and a renewed focus on our retail loan product, including cross-sell opportunities to our other loan products.
Beyond our digital product and channel investments, we continue to make important strides in expanding and optimizing our geographic footprint.
During the quarter, we entered Illinois and in just three months, our first branch has surpassed $1.5 million in receivables, which is impressive when you consider that our historical average time to reach $1.5 million in receivables in a new branch is 22 months.
The next two branches exceeded $500,000 in receivables after an average of only four and a half weeks.
These results demonstrate the tremendous opportunities that await us as we rapidly expand to new states and grab market share.
As a reminder, we plan to open roughly 20 new branches in 2021 across our network.
We also expect to enter one to two additional states by the end of the year and an additional four to six new states in 2022.
With the best first half in our company's history behind us, we entered the third quarter with considerable momentum.
We began the second half with nearly $1.2 billion of net finance receivables.
Loan demand has remained strong throughout July, even as child tax credit payments began to hit bank accounts.
We expect that demand for our loan products will increase in the coming months as the economy continues to recover, driving strong portfolio and top-line growth for the balance of the year and in 2022.
We are well-positioned to continue to gain market share as our strategic investments yield strong returns.
During this time of robust growth in our business, we remain focused on protecting our balance sheet and maintaining the credit quality of our loan portfolio.
In July, we further strengthened our liquidity position by closing on another securitization transaction.
This latest ABS deal is our first with a five-year term and has a weighted average coupon of 2.3%.
As of the end of July, we had over $813 million of unused capacity and available liquidity of over $229 million.
Of our $887 million in outstanding debt at the end of July, $759 million carries a fixed interest rate with a weighted average coupons ranging from 2.1% to 3.2%.
We also maintained $350 million of interest rate caps with strike rates of 25 to 50 basis points, covering $127 million in variable rate debt.
In sum, we're well-positioned to fund our future growth, and we're well protected should interest rates rise.
We also continue to maintain a superior credit profile, though we had expected a modest uptick in second-quarter delinquencies, we ended the quarter with another historically low 30-plus day delinquency rate.
This, in turn, contributed to a further improvement in our net credit loss rate and enabled us to reduce our allowance for credit losses by $200,000 in the quarter despite record portfolio growth.
As a result, our allowance for credit losses reserve rate at the end of the quarter was 11.8%, down from 12.6% last quarter.
Our $139 million allowance for credit losses as of June 30 continues to compare quite favorably to our 30-plus day contractual delinquency of $43 million and includes an $18 million reserve for additional credit losses associated with COVID-19.
As of June 30, approximately 80% of our total portfolio had been originated since April 2020, the vast majority of which was subject to enhanced credit standards that we deployed following the onset of the pandemic.
Looking ahead, credit performance should remain strong throughout 2021 and into 2022.
In light of our current historically low delinquencies, we now expect our full-year 2021 NCL rate to be roughly 7%.
We anticipate that our delinquency rate will gradually normalize over the next 12 months and that our NCL rate in 2022 will be between 8% and 8.5%, absent any significant changes to the macroeconomic environment.
As we progress throughout the year, we expect that our allowance for credit losses will increase as the portfolio continues to grow, though we anticipate that the reserve rate will normalize to pre-pandemic levels of around 10.8% by the end of the year.
In light of the unique circumstances presented by the pandemic and credit loss provisioning under the new CECL accounting standard, we have elected for this year only to provide a full-year 2021 net income outlook.
Having earned $46 million in the first half of the year, we expect to generate full-year 2021 net income of between 75 and $80 million, assuming no material change to current economic conditions.
This outlook reflects an expectation that we will build our allowance for credit losses in the second half of the year due to robust receivable growth, even as our reserve rate normalizes to pre-pandemic levels of roughly 10.8%.
We also expect to increase our SG&A expenses in the second half as we continue to invest in our growth initiatives, including increased marketing expenses as we continue to expand our digital lending.
Based on our confidence in the earnings power and value of our business, our board has approved a $20 million increase in the amount authorized under our current stock repurchase program from $30 million to $50 million.
As we move forward, we remain firmly on the strategic course we've charted.
We'll continue to invest in our omnichannel growth initiatives, digital innovation, geographic expansion, and new products and channels.
We will continue to grow our portfolio and market share by providing a best-in-class experience to our customers and will maintain a sharp focus on credit quality and a healthy balance sheet, which will allow us to fund our growth and return excess capital to our shareholders.
We remain fully committed to our customers and our path forward.
And we continue to be in a prime position to create sustainable long-term value for our shareholders.
I couldn't be prouder of the team and the results they've produced.
Let me take you through our second-quarter results in more detail.
We generated net income of $20.2 million and diluted earnings per share of $1.87 resulting from our growth initiatives, stable operating expenses, lower funding costs, and strong credit.
To highlight the underlying momentum of our business, consider that last quarter, we generated $25.5 million in net income, inclusive of a $10.4 million decrease in our allowance for credit losses.
This quarter, we generated $20.2 million of net income, inclusive of only a $200,000 decrease in our allowance.
The business produced strong returns, with 7.1% ROA and 28.7% ROE this quarter and 8.2% ROA and 32.7% ROE through midyear.
While our returns were aided by a benign credit environment, our ability to drive revenue to our bottom line and generate strong returns continues to pick up spin.
As illustrated on Page 4, branch originations were well above the prior year, due in part to the pandemic as we ended the second quarter, originating $263 million of loans in our branches.
Meanwhile, we more than tripled direct mail and digital originations year over year to $110 million.
Our total originations were a record $373 million, more than doubling the prior-year period and 7% higher than the second quarter of 2019.
Notably, our new growth initiatives drove $87 million of second quarter originations.
Page 5 displays our portfolio growth and mix trends through June 30.
We closed the quarter with net finance receivables of $1.2 billion, up $78 million from the prior quarter and $161 million from the prior-year period as we continue to successfully execute on our new growth initiatives and marketing efforts.
Our core loan portfolio grew $80 million or 7% from the prior quarter and $172 million or 17% from the prior year as we continue to expand our market share.
Large loans grew 10% versus the first quarter of 2021, while small loans increased 3% quarter over quarter.
For the third quarter, we expect demand to remain solid with some potential headwinds from the child tax credit payment.
Overall, we expect to see healthy quarter-over-quarter growth in our finance receivables portfolio in the third quarter.
On Page 6, we show digital resourced originations, which were 28.5% of our new for all volume in second quarter, another high watermark for us, and a further testament to our ability to meet the needs of our customers and serve them through our omnichannel strategy.
During the second quarter, large loans were 65% of our digitally sourced originations.
Turning to Page 7.
Total revenue grew 11% to $99.7 million.
Interest and fee yield increased 110 basis points year over year, primarily due to improved credit performance across the portfolio as a result of government stimulus, tightened underwriting during the pandemic, and our overall mix shift toward higher credit quality customers, resulting in fewer loans and non-accrual status and fewer interest accrual reversals.
Sequentially, interest and fee yield and total revenue yield increased 50 and 70 basis points, respectively, due to credit performance and seasonality.
As of June 30, 67% of our portfolio were large loans and 82% of our portfolio had an APR at or below 36%.
In the third quarter, we expect total revenue yield to be approximately 60 basis points lower than the second quarter, and our interest in fee yield to be approximately 30 basis points lower due to our continued mix shift toward larger loans.
Moving to Page 8.
Our net credit loss rate was 7.4% for the quarter, a 320 basis-point improvement year over year, while delinquencies remained at historically low levels.
Net credit losses were also down 30 basis points from the first quarter due to the impact of government stimulus, improving economic conditions, and our lower delinquency levels.
We expect that our full-year net credit loss rate will be approximately 7%.
Flipping to Page 9.
Our 30-plus day delinquency level as of June 30 was 3.6%, 120 basis-point improvement from the prior year, and notably, 70 basis points lower than March 31.
Moving forward, we expect 30-plus day delinquencies to rise gradually off of the June loan toward more normalized levels over the next 12 months.
Turning to Page 10.
We ended the first quarter with an allowance for credit losses of $139.6 million or 12.6% of net finance receivables.
During the second quarter of 2021, the allowance decreased by $200,000 to 11.8% of net-net receivables.
This decrease included a base reserve build of $6.1 million to support our strong portfolio growth and a COVID-19 reserve release of $6.3 million due to improving economic conditions.
As a reminder, as our portfolio grows, we will continue to build additional reserves to support this new growth.
With the improving economy, we've reduced the severity and the duration of our macro assumptions, including an assumption that the unemployment rate will be under 8% at the end of 2021.
We will continue to review these assumptions every quarter to reflect changing macro conditions as the economy continues to revamp.
Our $139.4 million allowance for credit losses as of June 30 continues to compare very favorably to our 30-plus day contractual delinquency of $42.8 million.
We are confident that we remain appropriately reserved.
Flipping to Page 11.
G&A expenses for the second quarter of 2021 were $46.4 million, up $4.9 million or 11.7% from the prior-year period, driven in part by normalized marketing from pandemic impacted second quarter 2020 levels, as well as increased investment in our new growth initiatives and omnichannel strategy.
On a sequential basis, our G&A expense rose $0.5 million, driven by our marketing activities.
Overall, we expect G&A expenses for the third quarter to be approximately $52 million as we continue to invest in our digital capabilities, our geographic expansion into new states, and new products and channels to drive additional sustainable growth and improved operating leverage over the longer term.
Turning to Page 12.
Interest expense was $7.8 million in the second quarter of 2021 and 2.8% of our average net finance receivables.
This was a 60 basis-point improvement year over year and $1.3 million lower than in the prior-year period.
The improved cost of funds was driven by the lower interest rate environment and improved funding costs from our recent securitization transaction.
We currently have $450 million of interest rate caps to protect us against rising rates on our variable price debt, which as of the end of the second quarter totaled $293.8 million.
We have purchased a total of $350 million of interest rate caps over the past year at a one-month LIBOR strike price range of 25 to 50 basis points, including a $50 million interest rate cap in the second quarter at a strike price of 25 basis points.
In the last six months, these caps have appreciated in value by $775,000.
As rates fluctuate, the value of these interest rate caps will be mark-to-market value accordingly.
Looking ahead, we expect interest rate expense in the third quarter to be approximately $10 million.
Page 13 is a reminder of our strong funding profile.
Our second quarter funded debt-to-equity ratio remained at a conservative 3.1-1.
We continue to maintain a very strong balance sheet with low leverage and $139 million in loan loss reserves.
As of June 30, we had $647 million of unused capacity on our credit facilities and $202 million of available liquidity, consisting of unrestricted cash and immediate availability to draw down our credit facilities.
As a reminder, during the quarter, we enhanced our warehouse facility capacity to $300 million, closing on three new warehouse facilities with our current lenders, Wells Fargo and Credit Suisse, and adding JP Morgan to our roster of lenders.
In July, we also closed our six securitization, our first five-year transaction of approximately $200 million at a weighted average coupon of 2.30%.
The new securitization will be used to further reduce our cost of capital and fund our growing business.
Our effective tax rate during the second quarter was 19%, compared to 36% in the prior-year period, better-than-expected from tax benefits on share-based compensation.
For the second half of 2021, we expect an effective tax rate of approximately 25%.
The company's board of directors has declared a dividend of $0.25 per common share for the third quarter of 2021.
The dividend will be paid on September 15, 2021, to shareholders of record as of the close of business on August 25, 2021.
In addition, during the second quarter, we repurchased 344,429 shares of our common stock at a weighted average price of $46.45 per share under our $30 million stock repurchase program announced in May 2021.
We also repurchased an additional 68,437 shares at a weighted average price of $50.49 per share in July, bringing total repurchases under the program to 412,866 shares at a weighted average price of $47.12 per share through July.
As Rob mentioned earlier, we are pleased to announce that our board has approved a $20 million increase in the amount authorized under our current buyback program from $30 million to $50 million.
We continue to be extremely pleased with our outstanding performance, our robust balance sheet, and our prospects for growth.
In summary, we are performing extremely well thus far in 2021.
Our omnichannel operating model, new growth initiatives, and superior credit profile led to another excellent quarter and a record-breaking first six months of the year, and we don't plan to let up.
We will continue to execute on our key strategic initiatives, positioning us to sustainably grow our business for years to come.
We have many exciting things on the horizon for Regional as we remain well-positioned to expand our market share and create additional value for our shareholders.
Operator, could you please open the line? | compname reports q2 earnings per share $1.87.
q2 earnings per share $1.87.
q2 revenue $99.7 million versus refinitiv ibes estimate of $95.3 million.
for full year 2021, company expects net income to be between $75 million and $80 million. | 1 |
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 vmay 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 Barclays Energy Conference in September.
Please contact me or the conference planners to schedule a meeting with the management team.
As with most oil and gas companies, lower commodity prices weighed on the third [Technical Issues] gathering business.
However, the remainder of the system had a very solid third quarter with pipeline earnings up nearly 45% on the strength of Supply Corporation's recent rate settlement and stable utility earnings, in spite of the COVID pandemic.
Also the quarter was another great example of the benefits of our integrated, diversified model where the earnings and cash flows of our regulated businesses provided a strong measure of stability against the more variable earnings of our E&P business.
Operationally, this was a really significant quarter for National Fuel, one in which we reached several important milestones that make us well positioned to deliver meaningful growth in the years to come.
First and foremost, last week we closed on the acquisition of Shell's upstream and midstream properties in Appalachia.
This is a terrific opportunity to check all the boxes we are looking for in an acquisition.
From start to finish, it was the results of the exceptional work of dozens of employees across our upstream and midstream operations.
Hats off to the team on a job well done.
The acquisition meaningfully increases our presence in Appalachia.
In fact, earlier this week Seneca's gross natural gas production crossed the 1 Bcf per day threshold.
This is a great milestone.
And to put in perspective, in fiscal 2018, our average daily production was only about half of that.
With the added scale, we expect to realize immediate cost synergies and you can see that in our guidance on cash operating costs, which we expect will be down about $0.05 per Mcfe in '21.
The financing for the transaction is complete.
Kudos to our finance team and the banks that supported them.
We're getting the deals done in the face of a challenging backdrop in the capital markets.
As I described a few months ago, the plan was to finance the deal with roughly 50-50 debt and equity, and I'm happy to say that we achieved that objective.
In May, we issued $500 million of bonds, the proceeds from which were used to fund the debt component of the acquisition and to term out our revolver.
We also raised just under $175 million through a common equity offering that was done at a better price than we would have received under the equity backstop arrangement available to us under the Shell purchase-and-sale agreement.
And lastly, earlier this week, we signed an agreement to divest substantially all of our Appalachian timber properties for approximately $116 million, which will fund the remaining equity needed for the transaction.
The timber properties are our non-core asset that we've held for some time.
The earnings and cash flows associated with them are modest, in fact, pretty close to break-even.
Reinvesting the proceeds from the sale allows us to avoid issuing another roughly 2 million common shares at the midpoint of our fiscal 2021 guidance.
That saves approximately $0.08 per share of dilution.
In addition, the timber properties have a very low tax basis.
By selling them now, we're able to structure the timber sale and Shell acquisition, is a like kind of exchange and by doing so, defer a large tax gain.
The remainder of Seneca's operations continue to run smoothly and John will have a full update later on the call.
But I'd like to emphasize the improvement we expect in this business in fiscal '21.
As you can see in last night's release, the midpoint of our production guidance is 320 Bcfe, a 32% increase over our expected production for fiscal 2020.
In addition with the NYMEX strip in the $2.65 to $2.75 area, there is cause for optimism on natural gas prices and we've been aggressive with our hedging program.
At this point about two-thirds of our fiscal '21 gas production is hedged.
Both of these factors should cause cash from operations to grow meaningfully.
On top of that, as a result of moving to a single rig program, capital spending at Seneca and NFG midstream is expected to decrease by $105 million or about 25%.
So, putting it all together, assuming the current strip, next year we expect more than $150 million in free cash flow from our E&P and gathering businesses.
The Pipeline and Storage segment is also positioned to deliver meaningful growth in 2021 and beyond.
And several noteworthy events occurred during the quarter to help make that a reality.
On the expansion front, we placed a portion of our Empire North project into service ahead of schedule, which allows us to capture some modest short-term growth -- short-term revenue opportunities this summer.
Once it's fully in service, which we expect will occur by the end of September, this project will add $25 million in annual revenues.
In July, we received our FERC certificate for the FM100 project and Transco also received their FERC approval for the companion Leidy South project.
Both projects are on track for a late calendar 2021 in-service date.
And as a reminder the expansion portion of this project is expected to add $35 million in annual revenue.
Lastly, in early June, FERC approved the settlement of Supply Corporation's rate case.
As I discussed on last quarter's call, new rates went into effect this past February and are expected to add $35 million in annual revenues.
Settlement also addressed the rate-making treatment of the modernization component of the FM100 project.
On the later of the in-service date of that project or April 2022, a step up in rates will go into effect, providing an incremental $15 million in annual revenues.
In total, the expansion projects and rate case settlement are expected to provide in excess of $100 million of incremental annual revenues for our pipeline business by mid-2022.
To put that in perspective, our fiscal 2019 pipeline revenues were $288 million.
So we're looking at some really meaningful growth in the next two years.
In addition to improving earnings and cash flows, the growth in our pipeline business will help us maintain relative balance between the regulated and non-regulated portions of our company.
On the utility front, despite the pandemic, our operations and financial performance remain right in line with our expectations.
With the reopening of most of the economies in our New York and Pennsylvania service territories, our capital program has returned to pre-pandemic levels.
We continue to focus on modernization projects that enhance the safety and reliability of our system, while at the same time reducing emissions.
In New York, our system modernization tracker allows us to do this in a manner that minimizes the regulatory lag to recover these large investments.
And given that we can add rate base to this tracker, through March of 2021, we expect to maintain consistent returns at our utility for at least the next few years.
Lastly, a few words on the COVID-19 pandemic.
Overall the business continues to run smoothly across the system.
Employees who can work from home are doing so and those who cannot, mostly our field personnel, have been provided appropriate PPE and are practicing social distancing.
In closing, despite the backdrop of a pandemic it's an exciting time for National Fuel, we just closed the most significant acquisition in the company's history and next year we'll construction on what will be our largest pipeline expansion project to-date.
Our balance sheet is strong and will likely get stronger as we generate free cash flow and we've extended our impressive dividend track record having increased it in June for the 50th consecutive year.
All of this makes National Fuel well positioned to deliver significant value to our shareholders in the coming years.
In echoing Dave's remarks we are excited to move forward after successfully closing on the acquisition of Shell's Appalachian upstream and midstream assets last week.
At the time of closing these shallow declining properties were producing around 220 million cubic feet per day net.
This additional scale is expected to be immediately accretive to Seneca's cost structure and to put this into context our G&A expense as a result of the Shell acquisition is expected to increase, less than 5% in fiscal '21, while our net production is expected to increase by over 30%.
Although, our purchase price for these assets ascribe no value for the reserves beyond proved producing, we are working towards maximizing the upside as we integrate these assets into our overall development plan.
We have now added significant Utica and Marcellus inventory in Tioga County, contiguous to our existing operations, an area we have been active for over a decade and we know very well.
In addition, we've also acquired valuable low cost pipeline capacity, including 200 million a day of firm transport on National Fuel's Empire system and 100 million a day on Dominion.
In fact, as a result of this Dominion capacity, which provides access to Leidy Hub, Seneca is in the unique position of being able to flow production from each of its three major producing areas into its FM100 Leidy South capacity.
Moving forward, we'll work closely with our midstream group to determine how to best integrate our development and pipeline activity, minimize capital deployment, drive operating efficiencies and maximize the value of these assets.
Turning to our third quarter, Seneca had strong operational results, producing 56 Bcfe, an increase of around 2% compared to last year's third quarter despite 7.3 Bcf price related curtailments.
In response to sustained, low natural gas prices, we reduced our activity to a single rig in June and have since curtailed an additional 2 Bcf of production in the month of July.
We have now curtailed around 13 Bcf of our gas production so far this year.
Moving forward, we expect prices to remain low over the next couple of months and therefore we are now forecasting to curtail our remaining spot volumes for the rest of this fiscal year.
While pricing and related curtailments put a damp around Seneca's results for the quarter, operationally, we're very pleased with our business.
We continue to drive down our well costs and have seen an 18% to 20% improvement this year compared to last.
This cost reduction has been driven primarily through fewer drill days per well, improved efficiencies and lower service costs across the sectors.
We will provide an updated well cost economics table in the investor deck next quarter.
In California, we produced around 584,000 barrels of oil during the third quarter, an increase of 2% over last year's third quarter.
Fortunately, with approximately 80% of our oil production hedged for remainder of the year at an average price of about $60 per barrel.
We are well-positioned to weather the downturn in oil prices.
Taking into account our price-related natural gas production curtailments, we are decreasing our fiscal '20 production guidance slightly to range between 240 to 245 Bcfe.
We are reiterating our capex range of $375 million to $395 million around 20% lower than fiscal '19 at the midpoint.
Moving to fiscal '21 guidance.
We are currently planning to remain at a one rig pace in Pennsylvania, due to our lower activity level with only a single rig and completion crew operating in Pennsylvania, our $290 million to $330 million range of capital expenditures for the year represents a 20% decrease at the midpoint of our fiscal '20 guidance and a 35% decrease from fiscal '19.
Fiscal '21 net production is expected to be in the range of 305 to 335 Bcfe, a 32% increase versus fiscal '20.
This increase is driven almost entirely by the production acquired from Shell.
With only a single rig operating in Pennsylvania, we plan to bring to production 32 wells next year, 16 Marcellus and 16 Utica.
As to production cadence, 27 of the 32 wells are to be brought on line during the first seven months of our fiscal year.
In California, we have deferred our development program until oil prices improve and therefore we are only currently forecasting to spend around $10 million in capex next year.
Unlike other oil producing basins in the U.S., however, our California assets enjoy a low rate of decline.
However, if prices improve we will move to quickly return to our development program and with approximately 49% of our oil production hedged in fiscal '21 at an average price of $58 per barrel, we will continue to generate free cash flow even at today's low prices.
In fiscal '21 through physical firm sales contracts, as well as our firm transport capacity, we have secured marketing outlets for around 91% of our expected Appalachian production and two-thirds protected with price certainty where the downside production -- protection of callers with a floor at $2.37.
That leaves only 9% available for sale onto the spot market.
But as always when we see opportunities we will layer in additional firm sales to minimize price related curtailments.
And finally, we continue to be very pleased with how our Seneca team has conducted business through the impact of the pandemic.
Our offices remain close except for those who need access and our operations team has done a great job continuing to operate successfully and safely in the field during this period.
GAAP earnings per share were $0.47 for the third quarter, adjusting for items impacting comparability, including the ceiling test impairment charge recorded in our E&P segment, adjusted operating results were $0.57 per share, a decrease of $0.14 from the prior year.
Strong results from our Pipeline and Storage segment due to the impact of the supply rate case and lower operating expenses were more than offset by lower natural gas and oil price realizations.
Last night's release explains the major earnings drivers.
So I won't repeat them here, instead, I'll discuss our expectations for the remainder of the fiscal year and our initial guidance for next year.
As it relates to fiscal '20 our updated earnings guidance is $2.75 to $2.85 per share, a decrease of $0.10 at the midpoint.
This change is due to a few main drivers.
As John mentioned, the largest decrease can be attributed to price related curtailments during the third quarter and approximately 6 Bcf of additional curtailments expected during the fourth quarter.
These curtailments will have a corresponding reduction to throughout in the Gathering segment.
From a pricing perspective, we've revised our NYMEX Gas and WTI oil assumptions, but given our strong hedge position, these changes generally offset each other from an earnings perspective.
Additionally, we've reflected the execution of our permanent financing for the Shell acquisition.
Given the market backdrop, we completed the necessary financing well ahead of closing and upsized our debt issuance to term out our revolver and enhance liquidity in advance of our December 2021 maturity.
As it relates to the rest of our assumptions there were some movement of expenses between the third quarter and fourth quarter in our regulated subsidiaries, but substantially all of our other guidance items for fiscal '20 remain intact.
Looking forward to fiscal '21 we are expecting material increase in earnings per share when compared to fiscal '20.
We are initiating preliminary guidance in the range of $3.40 to $3.70 per share, an increase of nearly 27% at the midpoint.
This range excludes the impact of any future ceiling test impairments which we expect to incur in the fourth quarter of this fiscal year as well as the first quarter of fiscal '21 based on the forward curve as of today.
So I won't repeat that information.
As a reminder even with the level of hedges we have given our base of production, changes in pricing can impact earnings for the year.
For reference, a $0.10 change in natural gas prices is expected to impact earnings by $0.11 per share, a $5 change in oil by $0.04 per share.
The biggest driver of the year-over-year earnings increase related to the impact of the Shell acquisition in both the E&P and Gathering segments.
Production is expected to be up nearly 80 Bcfe at the midpoint, in excess of 30% from fiscal '20, the bulk of which comes from the acquired assets.
All of this incremental production will flow through our gathering systems and is expected to lead to $185 million to $200 million in revenue for our Gathering segment.
This is an increase of approximately $50 million from fiscal '20 or approximately 35% of the midpoint.
A portion of this revenue growth will be offset with slightly higher expenses related to the acquisition, where we now expect O&M expense in the segment to be approximately $0.08 to $0.09 per Mcfe of gross throughput.
This is driven by higher compression lease expense.
With respect to our legacy gathering facilities, we typically don't lease compression equipment.
So therefore, this has the effect of a higher per unit O&M expense as we recognized the lease costs on the income statement.
In addition, we are forecasting higher depreciation expense related to the allocation of the acquisition purchase price and the higher plant balances on existing operations due to capital spending during the course of fiscal '20.
We generally assume a 25 year depreciable life on these assets, which will drive an $8 million to $9 million increase in depreciation in the Gathering segment.
In our regulated businesses, we are expecting relatively flat earnings in the utility business and a nice increase in the Pipeline and Storage segment due to the Empire North expansion project and the full year impact of the Supply Corporation rate case.
Focusing first on the utility, there are three major moving pieces.
First, we are forecasting a return to normal weather.
For the first nine months of fiscal '20 weather was 8% to 11% warmer than normal across our service territory.
This reduced margin by about $5 million, the majority of which was in our Pennsylvania service territory, where we do not have a weather normalization costs.
In addition to normal weather, we are forecasting a continued increase in margin related to our system modernization tracker in New York, which we expect will add approximately $3 million to margin in fiscal '21.
Going to the other direction is a modest 1% to 2% increase in O&M expense in line with inflation.
Touching briefly on the Pipeline and Storage segment, we expect revenues to increase approximately 10%, driven by the full year impact of the supply rate case, of which we only saw eight months of impact in fiscal '20 on the Empire North project, both of which Dave touched on earlier.
Collectively, these items will add approximately $35 million in revenue next year.
Partially offsetting these revenue additions is forecasted recontracting that happens in the normal course of business, as well as the reduction in short-term contracts, which we don't assume to recur.
On the expense side, we expect O&M to increase by approximately 3% to 4%, partially driven by general inflationary assumptions and the remainder due to expenses from the operation of two new compressor stations associated with the Empire North expansion project.
Additionally, we expect to see an increase in depreciation expense due to higher depreciation rates that were part of the Supply Corporation rate settlement, as well as normal increases due to higher plant balances and placing Empire North in service.
From a financing perspective, given our relatively flat capital spending forecast and 25% plus forecasted earnings growth, we anticipate generating in-excess of $100 million in consolidated free cash flow in fiscal '21, exclusive of our dividends.
Combining this with our anticipated cash-on-hand at the end of the year, resulting from the timber sale, we don't anticipate the need for incremental borrowing next year, even as we embark on one of the most capital-intensive pipeline projects in our history.
Looking beyond fiscal '21, we expect our cash from operations to cover capital spending and our dividend, which will lead to the continued strengthening of our balance sheet.
In summary, we're in a great spot financially, we've successfully financed the acquisition of Shell Appalachian asset, anticipate closing on the sale of our timber properties in the next few months and capitalized on the opportunity to enhance our liquidity with an upsized debt issuance.
We don't have a debt maturity until December of 2021, so we have a good amount of time to monitor the capital markets for the right opportunity to complete debt refinancing. | q3 gaap earnings per share $0.47.
sees fy earnings per share $3.40 to $3.70. | 1 |
This conference is being recorded.
I'll now introduce Webster's Chairman and CEO, John Ciulla.
CFO, Glenn MacInnes, and I, will review business, financial and credit performance for the quarter after which, HSA Bank President, Chad Wilkins; and Jason Soto, our Chief Credit Officer, will join us for Q&A.
We remain focused on managing capital, credit and liquidity as we continue to deliver for our customers, communities and shareholders.
We're positioning ourselves for growth and outperformance.
Our differentiated businesses and our engaged bankers, who I'm so proud of, help us win in the marketplace every day.
In a challenging environment, we generated meaningful business activity in the third quarter.
Our bankers are working with our customers and prospects and we are generating new relationships, loans and deposits.
Loan originations were higher than a year ago and our pipelines are solid.
HSA Bank is winning more direct-to-employer relationships than a year ago.
Our operational execution remains strong and we continue to manage credit and enterprise risk effectively.
Turning to Slide 2.
Pre-provision net revenue of $110.4 million increased 2% from Q2 as revenue grew in excess of expenses.
Earnings per share in the quarter were $0.75 compared to $0.57 in Q2 and $1 in the prior year's third quarter.
Our $23 million provision resulted in a reserve build of $11 million.
Glenn will walk you through the assumptions underlying the CECL process and resulting provision for the quarter.
Our third quarter return on common equity was 9% and the return on tangible common equity was 11%.
As I mentioned last quarter, we remain confident in our ability to again sustainably generate economic profit even in this more economically challenging and lower interest rate environment.
I'll provide further perspective in a few minutes.
Loans grew 12% from a year ago on Slide 3 or 5% when excluding $1.4 billion in PPP loans.
Commercial loans grew more than 10% from a year ago or by almost $1.2 billion, led by growth of more than $900 million in high-quality commercial real estate loans.
The decline in floating and periodic rate loans to total loans compared to a year ago reflects the $1.3 billion of fixed rate PPP loans added in the second quarter.
Deposits grew 16% year-over-year driven across all business lines.
Core deposits exceeded $4.3 billion and represent 90% of total deposits compared to 86% a year ago, while CDs declined $685 million from a year ago.
Slide 4 through 6 set forth key performance statistics for our three lines of business.
Commercial Banking is on Slide 4.
Loan balances increased to almost 10% from a year ago, excluding PPP loans.
Both investor CRE and C&I businesses in middle market banking and sponsor and specialty saw a double-digit loan growth year-over-year.
Deposits, up 32% from a year ago, are nearly $6 billion at September 30th as our commercial clients maintain liquidity on their balance sheets.
Commercial deposits were up 11% linked quarter on seasonal strength in our treasury and payments solutions business, which includes government banking.
HSA Bank is on Slide 5.
Core deposit growth was 15% year-over-year or 12.6%, excluding the impact of the State Farm transaction, which closed in the third quarter and added 22,000 accounts and $132 million in deposit balances.
We continued to see strong increases in new direct-to-employer business opportunities throughout the quarter, winning more new HSA RFPs than we did last year, specifically in the large employer space.
COVID-19 has impacted the HSA business with new account openings 28% lower from prior year when adjusting for the State Farm acquisition.
This is consistent with the industry and is due to slower hiring trends across our employer customers.
HSA consumer spending increased in the quarter, a trend we expect to continue as elective medical services continue to open up across the country.
This spending rebound had a favorable impact on interchange revenue when compared to Q2.
TPA accounts and balances declined 41,000 and 64,000,000, respectively linked quarter, continuing the outmigration of accounts that we disclosed a year ago.
In the quarter, we recognized approximately $3 million of account closure fees related to the outmigration.
Performance fundamentals of HSA Bank and the broader HSA market remains strong with ample opportunity for continued growth.
And while it's too early to forecast the upcoming January 1 enrollment season, we're pleased with the large direct-to-employer wins we recorded in this challenging 2020 selling season.
I'm now on Slide 6.
Community banking loans grew almost 10% year-over-year and declined slightly excluding PPP.
Business banking loans grew 5% from a year ago when excluding PPP.
Personal banking loans decreased 3% from a year ago as an increase in residential mortgages was offset by declines in home equity and other consumer loans.
Community banking deposits grew 12% year-over-year with consumer and business deposits growing 6% and 32% respectively.
The total cost of community banking deposits was 24 basis points in the quarter, that's down 48 basis points from a year ago.
Net interest and non-interest income both improved 3% from prior year driven by increased loan and deposit balances and by mortgage banking and swap fees, respectively.
Self-service transactions declined slightly linked quarter as we expanded and opened banking centers with enhanced safety protocols but grew year-over-year, reflecting the continued shift in consumer preference to digital channels.
The next two slides address credit metrics and trends.
Our September 30th reported credit metrics remained favorable and actually improved modestly, which Glenn will review in more detail.
While pleased with the reported metrics, we, nonetheless, remain appropriately cautious on credit as we continue to operate through the considerable uncertainties presented by the pandemic.
On Slide 7, we've updated our disclosure on the commercial loan sector as most directly impacted by COVID including payment deferral information.
The key points on this slide are that overall loan outstandings to these sectors have declined 5% from June 30th and the payment deferrals have declined $282 million or 57%.
On Slide 8, we provide more detail across our entire $20 billion commercial and consumer loan portfolio.
The key takeaway here is that payment deferrals declined by 65% to $482 million at September 30th and now represent 2% of total loans compared to 7% at June 30th.
Consistent with industry trends, we have had meaningful declines in payment deferrals in every loan category from June 30th to September 30th.
Of the $482 million of payment deferrals at September 30th, $251 million or 52% are first time deferrals.
CARES Act and Interagency Statement payment deferrals, which are included in the $482 million of total payment deferrals at September 30th, decreased to 62% from June 30th and now total just $283 million.
While pandemic-related challenges remain, we are pleased to have been able to provide considerable support to our customers and communities under our mission to help individuals, families and businesses achieve their financial goal.
As I stated last quarter, we are actively monitoring risk, we are making real-time credit rating decisions and addressing potential credit issues proactively.
We continue to feel good about the quality of our risk selection, our underwriting, our portfolio management capabilities and the strength of our capital and credit allowance positions.
I'll begin with our average balance sheet on Slide 9.
Average securities grew $184 million or 2.1% linked quarter and represented 27% of total assets at September 30th, largely in line with levels over the past year.
Average loans grew $262 million or 1.2% linked quarter.
PPP loans average $1.3 billion in Q3 and grew $403 million from Q2, reflecting the full quarter impact of loans funded last quarter.
We had no forgiveness activity on PPP loans during the quarter and therefore no acceleration of deferred fees.
During the quarter, we had $5.5 million of PPP fee accretion and the remaining deferred fees totaled $35 million.
Apart from PPP loans, commercial real estate loans increased $124 million or 2%, while asset-based and other commercial loans decreased $108 million and $38 million, respectively.
The $119 million decline in consumer loans include $62 million in home equity and $32 million of residential mortgages.
Deposits increased $1 billion linked quarter, well in excess of the combined growth of $446 million in loans and securities.
We saw increases across all deposit categories except CDs, which declined $280 million or nearly 10%.
The cost of CDs declined 36 basis points and was a significant driver of our reduction in deposit cost.
Public funds increased $599 million in a seasonally strong third quarter, while the cost of these deposits declined from 35 basis points to 18 basis points.
Borrowings declined $744 million from Q2 and now represent 7% of total assets compared to 8.5% at June 30th and 10.5% in prior year.
Regulatory risk-weighted capital ratios increased due to growth in equity.
The tangible common equity ratio increased to 7.75% and would be 34 basis points higher, excluding the $1.4 billion in 0% risk-weighted PPP loans.
Tangible book value per share at quarter end was $27.86, an increase of 1.7% from June 30th and 4.8% from prior year.
Slide 10 summarizes our income statement and drivers of quarterly earnings.
Net interest income declined $5.1 million from prior quarter.
Lower rates resulted in a quarter-over-quarter decline of $16.7 million in interest income from earning asset.
This was partially offset by $7.9 million due to lower deposit and borrowing costs and $3.7 million as a result of loan and security balanced growth.
As a result, our net interest margin was 11 basis points lower linked quarter.
Core loan yields and balances contributed 14 basis points to the decline with PPP loans contributing another 2 basis points to the NIM decline.
Lower reinvestment rates on our securities portfolio resulted in 3 basis points of NIM compression, while higher premium amortization resulted in an additional 4 basis points of NIM compression.
This was partially offset by a 10 basis point reduction in deposit cost, reflective of reduced rates across all categories, which benefited NIM by 10 basis points and fewer borrowings contributed another 2 basis points of NIM benefit.
As compared to prior year, net interest income declined $21 million, $65 million of the decline was the net result of lower market rates, which were partially offset by $44 million in earning asset growth.
Non-interest income increased $15 million linked quarter and $5.2 million from prior year.
HSA fee income increased $4.1 million linked quarter.
Interchange revenue increased $1 million, driven by a 12% linked quarter increase in debit transaction volume.
We also recognized $3.2 million of exit fees on TPA accounts during the quarter.
The mortgage banking revenue increase of $2.9 million linked quarter was split between increased origination activity and higher spread.
Deposit service fees increased $1.5 million quarter-over-quarter driven by overdraft and interchange fees.
Consumer and business debit transactions increased 16% linked quarter.
Other income increased $5.7 million, primarily due to a discrete fair value adjustment on our customer hedging book recorded last quarter.
The increase in non-interest income from prior year reflects higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service and loan-related fees.
Reported non-interest expense of $184 million included $4.8 million of professional fees driven by our strategic initiatives, which John will review in more detail.
We also saw a linked quarter increase of $4.3 million from higher medical costs due to an increase in utilization.
Non-interest expense increased $4.1 million or 2.3% from prior year.
The efficiency ratio remained at 60%.
Pre-provision net revenue was $110 million in Q3, this compares to $108 million in Q2 and $131 million in prior year.
The provision for credit loss for the quarter was $22.8 million, which I will discuss in more detail on the next slide.
And our effective tax rate was 20.9% compared to 21.8% in Q2.
Turning to Slide 11, I'll review the results of our third quarter allowance for loan losses under CECL.
As highlighted, the allowance for credit losses to loans increased to 1.69% or 1.8%, excluding PPP loans.
We have summarized the key aspects of our macroeconomic scenario, which reflect the gradual improvement in employment with real GDP returning to pre-COVID levels in 2022.
The forecast improved slightly from prior quarter, but was offset by commercial risk rating migration resulting in a provision of $23 million.
The $370 million allowance reflects our estimate of life of loan losses as of September 30th.
We will continue to assess the effects of credit quality, loan modifications and the macroeconomic conditions as we move through the pandemic.
Slide 12 highlights our key asset quality metrics as of September 30th.
Nonperforming loans in the upper left, decreased $10 million from Q2.
Commercial real estate, residential mortgage and consumer each saw linked quarter decline, while commercial increased $3 million.
Net charge-offs in the upper right decreased from second quarter and totaled $11.5 million after $4.3 million in recoveries.
C&I gross charge-offs declined slightly and totaled $12 million, primarily reflecting credits that were already experiencing difficulty prior to the onset of the pandemic.
Commercial classified in the lower left represented 332 basis points of total commercial loans, this compares to a 20-quarter average of 315 basis points and the allowance for credit losses increased to $370 million as discussed on the prior slide.
Slide 13 highlights our liquidity metrics.
Our diverse deposit gathering sources continue to provide us with considerable flexibility.
Deposit growth of $565 million exceeded total asset growth and lowered the loan-to-deposit ratio to 81%.
Our sources of secured borrowing capacity increased further and totaled $11.7 billion at September 30th.
Slide 14 highlights our strong capital metrics.
Regulatory capital ratios exceeded well capitalized levels by substantial amounts.
Our common equity Tier 1 ratio of 11.23% exceeds well capitalized by more than $1 billion.
Likewise, Tier 1 risk-based capital exceeds well capitalized levels by $870 million.
Looking to the fourth quarter, we expect stable loan balances with modest PPP forgiveness.
Assuming a flat rate environment with an average one-month LIBOR in the range of 15 basis points and an average 10-year treasury swap rate around 70 basis points, we believe we are near the bottom of core NIM compression.
Non-interest income will likely be lower linked quarter due to reduction in mortgage banking income and lower HSA fees on TPA account.
Core non-interest expense will remain in the range of Q3 and our tax rate will be around 21%.
With that, I'll turn things back over to John for a review of our strategic initiatives.
I'm now on Slide 15 and 16.
As I've mentioned on recent earnings calls, we have been and remain focused on revenue enhancements and operational efficiencies across the organization.
Well before the onset of the pandemic, our management team recognized that we would be operating in a low interest rate and more challenging business environment for an extended period of time.
In January, we began an enterprisewide assessment of our organization to identify revenue opportunities and cost savings using a very thorough and systematic process.
The onset of the pandemic in March further impacted the operating environment and accelerated changes in customer preferences and shifting workplace dynamics.
This not only made our commitment to this process that much stronger, but it also expanded the opportunities we have to rationalize and align our expenses with our business line execution.
We've identified and begun to implement dozens of initiatives across the bank, a handful of which are set forth on Slide 16, that will result in driving incremental revenue, reducing our overall cost structure and enhancing our digital capabilities to meet our customers' needs and to reduce our cost of delivery of products and services.
Our focus remains, first, on key revenue and asset growth drivers, including accelerating growth in commercial bank by building on our proven track record in select specialized industries, driving HSA Bank growth through improved sales productivity and customer retention and continuing to grow in community core markets through product enhancements.
We are also focused on efficiency and organizational alignment, simplifying our org structure, capturing targeted back office synergies and redesigning and automating critical processes.
We also are rationalizing and consolidating our retail and corporate real estate footprint.
Through this process, we will continue to improve the customer experience by enhancing digital capabilities, modernizing foundational systems and improving analytical capabilities.
We've begun executing on many of these initiatives and we recently made a series of organizational changes to position us for success over the next year and well beyond.
We plan to provide more detailed information on these initiatives, including additional financial details and timing on realization on our fourth quarter earnings call in January, as we are continuing to work through all of the final decision.
What I will say is that with respect to efficiency opportunities, we anticipate reducing our current expense base by 8% to 10% fully realized on a run rate basis by the fourth quarter of next year.
We see considerable opportunity above and beyond that as revenue initiatives and further efficiency gains are realized late in 2021 and in 2022.
As we stated last quarter, we remain confident that even if the current operating environment persists with low interest rates and economic uncertainty that execution on our identified revenue enhancements and efficiency opportunities will allow us to sustainably generate returns in excess of our estimated 10% cost of capital by the end of 2021.
Our vision remains consistent and is to strengthen our position as a major regional bank in the Northeast that leads with a distinctive and expanding commercial business and aggressively growing and winning national HSA Bank business, a strong community bank franchise in our core markets, all supported by an efficient and scalable operating model.
With that, Maria, Glenn, Chad, Jason and I are prepared to take questions. | compname reports q4 non-gaap earnings per share of $3.65.
q4 non-gaap earnings per share $3.65.
q4 gaap earnings per share $3.49.
q4 sales $787 million versus refinitiv ibes estimate of $713.7 million.
sees q1 non-gaap earnings per share $1.50 to $1.60.
sees fy 2021 non-gaap earnings per share $9.32 to $9.57.
expects q1 2021 constant-currency sales growth in range of 7% to 10%.
currency translation is expected to increase full-year sales growth by one to two percentage points.
expects full-year 2021 constant-currency sales growth in range of 5% to 8%.
currency translation is expected to increase q1 sales growth by approximately three percentage points. | 0 |
I'm joined by John Plant, Executive Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer.
After comments by John and Ken, we will have a question-and-answer session.
In addition, we've included some non-GAAP financial measures in our discussion.
First, let's summarize the headline numbers, starting on slide number four.
Revenue was $1.28 billion, adjusted EBITDA $292 million and EBITDA margin was 22.8%.
Each number was within the guidance range provided.
More importantly, year-over-year revenues increased for the first time.
The revenue was led by Commercial Aerospace, up 15% year-over-year, and contributing to a total increase of 13%.
Of note, the Howmet segment leading the increase was Engine Products as previously forecasted.
The company was also able to overcome the challenges once again of the Boeing 787 build rate declines and the supply chain issues limiting commercial truck production, the 787 affecting Fastening Systems and Engineering Structures in particular.
Aluminum prices continued the upward surge with aluminum and regional premiums increasing by over $400 per metric ton sequentially and impacting the margin rate by 20 basis points.
Adjusted earnings per share, excluding special items, was $0.27, and cash generated in the quarter was $115 million.
AR securitization was unchanged at $250 million.
On a sequential basis, Third quarter revenue and adjusted EBITDA were up 7% and adjusted earnings per share up 23%.
Moving to the balance sheet and cash flow.
Adjusted free cash flow for the quarter was strong at $115 million, which results in a Q3 year-to-date free cash flow at a record $275 million.
Ken will provide further details of our debt actions in the quarter, which included a bond tender refi finance to fundamentally lower interest costs and thereby improve future free cash flow yield.
The combination of debt actions in the third quarter, combined with our first half results and actions, will reduce annual interest expense by approximately $70 million.
In the quarter, we also repurchased approximately 770,000 shares of common stock for $25 million, which increases share repurchases year-to-date to approximately seven million shares for $225 million.
The net result of all these actions plus the reinstatement of the common stock dividend and the $115 million cash inflow resulted in a cash balance of $726 million, similar to that at the end of Q2.
Lastly, we continue to focus on legacy liabilities and have reduced pension and OPEB liabilities by approximately $180 million year-to-date.
Moreover, year-to-date pension and OPEB expenses have reduced by approximately 50% compared to last year.
Please move to slide number five.
Revenue for the quarter increased 13% year-over-year and 7% sequentially.
As expected, Commercial Aerospace was up 15% year-over-year and 16% sequentially, driven by the Engine Products segment and narrow-body aircraft production.
commercial transportation, namely Wheels, was up 38% year-over-year.
Volume was impacted by supply chain constraints, limiting the Commercial Truck production.
The volume reduction in the Wheels business was offset by metal recovery dollars.
The industrial gas turbine business continues to grow and was up 26% year-over-year and 6% sequentially, driven by new builds and spares.
Defense Aerospace was down 11% year-over-year, driven by reductions in the Joint Strike Fighter builds, but was up 3% sequentially from the second quarter.
At the bottom of the slide, you can see the progress on price, cost reduction and cash management.
Price increases are up year-over-year and continue to be in line with expectations.
Structural cost reductions have exceeded our annual target of $100 million.
Q3 structural cost reductions were $23 million year-over-year and $121 million year-to-date.
Every segment achieved a strong year-on-year margin expansion as revenue increased for the first time in the year in aggregate.
In the third quarter, Engine Products had an incremental operating margin of approximately 70%, and Forged Wheels had an incremental operating margin of approximately 45%.
Fastening Systems and Engineering Structures both had a higher EBITDA on lower revenue.
Fasteners had an operating margin expansion of some 630 basis points, while structures was up 210 basis points.
As a result, Howmet's adjusted EBITDA margin expanded a full 800 basis points year-on-year, driven by volume, price and structural cost reductions.
Adjusted free cash flow for the quarter was $115 million and year-to-date, $275 million.
And as I said previously, AR securitization is unchanged from the start of the year.
Lastly, we have lowered our annualized interest cost by $70 million through a combination of paying down debt and refinancing into low-cost debt.
Please move to slide number six.
Adjusted EBITDA margin for the quarter was 22.8%, representing an 800 basis point improvement compared to the third quarter of 2020.
The margin for the third quarter was consistent with the last few quarters, despite the cost of adding employees to meet the increasing production demand and the effect on margins of the higher aluminum prices.
In the quarter, Engine Products added approximately 500 employees net, which now brings the total to 800 net additional employees hired for that segment during the second and third quarters.
We continue to review the headcount required in our other segments to adjust for future demand requirements.
Please move to markets on slide seven.
Third quarter total revenue was up 13% year-over-year and 7% sequentially.
Commercial Aerospace increased to 42% of total revenue, which is an improvement sequentially, but far short of pre-COVID levels of 60%.
The third quarter marked the start of the Commercial Aerospace recovery, with commercial aerospace revenue up 15% year-over-year and 16% sequentially.
Defense Aerospace was down 11% year-over-year, driven by the Joint Strike Fighter and up 3% sequentially.
Commercial Transportation, which impacts both the Forged Wheels and Fastening Systems segment was up 38% year-over-year, however, flat sequentially after we adjust for the increase in aluminum prices.
Finally, the Industrial and Other Markets, which is composed of IGT, oil and gas and general industrial was up 14% year-over-year and down 2% sequentially.
IGT, which makes up approximately 45% of this market continues to be strong and was up a healthy 26% year-over-year and 6% sequentially.
Let's move to slide eight for the segment results.
As expected, Engine Products year-over-year revenue was 24% higher in the third quarter.
Commercial Aerospace was 50% higher, driven by the narrow-body recovery.
IGT was 26% higher as demand for cleaner energy continues.
Defense Aerospace was down 8% year-over-year, but up 7% sequentially.
Incremental margins for Engine Products were approximately 70% for the quarter despite hiring back approximately 500 workers to prepare for future growth.
Operating margin improved 1,200 basis points year-over-year.
Please move to slide nine.
Also as expected, Fastening Systems year-over-year revenue was 6% lower in the third quarter.
Commercial Aerospace was 25% lower as we saw continued production declines for the Boeing 787 and customer inventory corrections.
The commercial transportation and industrial markets within the Fastening Systems segments were approximately 55% and 19% year-over-year, respectively.
Year-over-year Fastening Systems was able to generate $14 million more in operating profit, while revenue declined $17 million.
As a result, operating margin improved 630 basis points.
Please move to slide 10.
Engineered Structures year-over-year revenue was 3% lower in the third quarter.
Commercial Aerospace was 13% higher as the narrow-body recovery was partially offset by production declines for the Boeing 787.
Defense Aerospace was down 21% year-over-year, but was flat sequentially.
Year-over-year, Engineered Structures was able to generate $4 million more in operating profit on $7 million of lower revenue.
As a result, operating margin improved 210 basis points.
Finally, please move to slide 11.
Forged Wheels year-over-year revenue was 34% higher in the third quarter.
On a sequential basis, revenue and operating profit were essentially flat.
The segment was able to overcome a 4% decrease in volume due to customer supply chain issues, limiting commercial truck production, and a 13% increase in aluminum prices to maintain a healthy operating margin of approximately 27%.
Year-over-year incremental margins for Forged Wheels were approximately 45% for the quarter.
Improved margins were driven by continued cost management and maximizing production in low-cost countries.
Now let's move to slide 12.
We continue to focus on improving our capital structure and liquidity.
I would highlight three actions.
First, in the first half of the year, we paid down approximately $835 million of debt by completing the early redemption of our 2021 and 2022 bonds with cash on hand.
The annualized interest expense savings with this action is approximately $47 million.
Second, in the third quarter we tendered $600 million of our 6.875% notes due in 2025 and issued $700 million of 3% notes due in 2029.
The annualized interest expense savings with this action is approximately $20 million.
Third, with cash on hand, we repurchased $100 million of our 2021 notes through an open market repurchase in Q3 and in October, which neutralized the gross debt impact of the tender and refinancing.
The annualized interest expense saving with this action is approximately $5 million.
As a result of these actions, we have lowered annualized interest costs by approximately $70 million and smoothed out our future debt maturities.
At the end of Q3, gross debt was approximately $4.2 billion, which is similar to Q2.
Net debt to EBITDA improved from 3.5 times in Q2 to 3.2 times despite the deployment of cash for debt refinancing, share buybacks and dividends.
All debt is unsecured, and the next maturity is in October of 2024.
Finally, our $1 billion revolving credit facility remains undrawn.
Before turning it back to John to discuss guidance, I would like to point out that there's a slide in the appendix that covers special items for the quarter.
Special items for the third quarter were a net charge of approximately $93 million, mainly driven by the costs associated with the bond tender and refinancing completed in the quarter.
The leading indicators for air travel continue to show improvement, notably for domestic travel.
But also we note the sort of revised requirements or these restrictions being lifted for, certainly, transatlantic travel starting this month.
As expected, Howmet transitioned to revenue growth in the third quarter, and we expect year-over-year revenue growth will continue into the fourth quarter and to 2022, with a growth of approximately 12% in commercial aerospace and total revenue growth in the fourth quarter of approximately 6%.
Growth is expected to continue in 2022.
As expected, the Engine Products business began to grow notably in the third quarter.
We expect modest sequential growth in Q4 for Engineered Structures despite continued delays with the 787.
Fastening Systems is expected to show growth in the first half of 2022.
In terms of specific numbers, we expect the following: In terms of guidance for Q4, I'll just call out the midpoints, as you can read the slide: Revenue, $1.315 billion; EBITDA, $300 million; EBITDA margin, 22.8%; earnings per share of $0.29.
And for the year, we expect revenue to be $5 billion, plus or minus; EBITDA at $1.135 billion; EBITDA margin at 22.7%; earnings per share increased to $1 per share; and cash flow of $450 million.
Moving to the right-hand side of the slide, we expect the following: Second half revenue to be up approximately 8% versus the first half driven by Commercial Aerospace, Commercial Transportation and IGTT; Q4 sequential segment incremental operating margins, we expect to be in the order of 28%.
Price increases will continue to be greater than 2020, the cost-reduction carryover of $100 million, as already commented, is exceeded.
Pension and OPEB contributions of approximately $120 million and capex should be in the range of $180 million to $200 million compared to depreciation of approximately $270 million.
Adjusted free cash flow compared to net income continues to be approximately 100%.
I'd now like to preview some initial thoughts regarding 2022.
An early approximate total revenue guide would be for an increase in annual revenues of 12% to 15%, led by recovery in Commercial Aerospace.
In aggregate, our current view is that we see an acceleration during the course of the year, following a fairly flat first quarter compared to the fourth quarter this year, except for increased revenues due to metal recovery.
We'll refine this view and provide guidance at our earnings call in February 2022.
Now let's move to slide 14 for the summary.
We delivered strong performance in the third quarter, which was in line with guidance.
Growth was very healthy, year-on-year and sequentially.
Incrementals were truly exceptional, and the company's margin is in the top decile in aerospace.
Q3 started -- or marked the start of the Commercial Aerospace recovery.
Moreover, we delivered sequential improvements in both EBITDA and earnings per share.
We'll continue to manage costs very carefully during this recovery phase.
Liquidity is strong, and we have very healthy cash generation.
The fourth quarter, for our -- revenue outlook is $30 million higher than the third quarter, with margins of approximately 23%, which sets a platform for a healthy 2022.
Adjusted earnings per share guidance was increased, reflecting lower interest costs. | howmet aerospace delivers third quarter 2021 sequential revenue growth.
howmet aerospace delivers third quarter 2021 sequential revenue growth; raises adjusted earnings per share guidance1.
q3 earnings per share $0.27 from continuing operations excluding items.
q3 revenue rose 13 percent to $1.28 billion. | 1 |
Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.
Fortive.com, under the heading, Investors Quarterly Results.
We completed the separation of our prior Industrial Technologies segment through the spin-off of Vontier Corporation on October 9, 2020.
And have accordingly included the results of the Industrial Technologies segment as discontinued operations.
All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.
Early in the third quarter, Fortive celebrated its fifth anniversary as an independent public company.
This quarter, we continue to demonstrate the success of the strategy we outlined in 2016 to enhance growth and margins across our businesses through the successful execution of the Fortive Business System, the acceleration of innovation and the impact of disciplined capital allocation.
Our third quarter results were highlighted by 32% growth in adjusted earnings per share.
We continue to generate significant revenue momentum throughout the quarter, realizing 9.1% core revenue growth and order growth of just over 20% against the backdrop of strong broad-based demand.
Strong execution and application of FBS helped to generate 325 basis points of core operating margin expansion, along with very strong free cash flow despite widespread supply chain disruption.
In the third quarter, our software businesses grew by low-double-digits, supported by strong demand and improving net dollar retention.
In total, we now have almost $750 million of annualized software revenue across the portfolio with double-digit organic growth profile as well as a high share of recurring revenue and high operating margins.
In August, we closed the acquisition of service channel, adding another differentiated high growth software asset to our Intelligent Operating Solution.
The service channel acquisition significantly enhances our strategic position in the facility and asset lifecycle market, extending our leading suite of offerings for facility owners and operators and providing a variety of potential avenues to deliver unique value added solutions in combination with Gordian and Accruent.
As you can see on slide four, across Fortive, we continue to invest in product development to drive organic growth and enhance our competitive position.
Many of our investments in organic innovation are focused on enabling digital transformation across our customer base.
This includes vertically tailored software offerings at Tektronix and Fluke Health, emerging IoT solutions in sensing as well as early progress with new tools for improved workforce management at TeamSense.
In addition, our investment can afford continue to drive data analytics and machine learning opportunities across all of our businesses.
Our success and accelerating the pace of innovation across our portfolio is demonstrated by example, such as the Fluke ii900, a groundbreaking product which was recently recognized as test measurement inspection product of the year at the 2021 electronics industry awards.
We continue to build the strength of our talent base to accelerate progress across Florida.
This quarter, we announced a number of important additions and promotions to the senior leadership team, including the appointment of Olumide Soroye as President and CEO of Intelligent Operating Solutions, the promotion of Tami Newcombe to President and CEO of Precision Technologies and the promotions of Justin McElhattan and Bill Pollak to Group President roles within iOS.
These moves highlight how we are building leadership capacity through a combination of internal development and external hires aimed at adding differentiated skill sets and experiences to our senior team.
With Olumide and Tami as well as Pat Murphy now leading advanced healthcare solutions, we have significantly increased the depth of our leadership within all three of our segments.
Turning to a quick summary of the results in the quarter on slide five.
We generated year-over-year total revenue growth of 12%, core growth of 9.1% and orders growth of just over 20% with backlog increasing by 40% year-over-year.
Adjusted operating margin was 22.8%, while adjusted earnings per share with $0.66, representing a year over year increase of 32%.
The strong adjusted operating margin performance helped us to deliver $252 million of free cash flow, which represented 105% conversion of adjusted net earnings.
On slide six, we take a closer look at the intelligent operating solution segment.
iOS posted total revenue growth of 16.6% in the third quarter with core growth of 13.1%.
This included low teens growth in North America, high teen's growth in Western Europe and mid single digit growth and China.
Fluke's core revenue increased by mid teens with very strong demand trends continuing across its end markets and major geographies.
Fluke's performance was highlighted by high teen's revenue growth at Fluke industrial, which also generated order growth of greater than 20%.
Fluke's industrial imaging business continues to perform well paced by momentum from innovation across its acoustic imaging product lines, which doubled year-over-year in the third quarter.
Fluke Network had a very strong quarter driven by innovation such as Link IQ product line.
Fluke's efforts to expand its recurring revenue base sought further progress in Q3, including strong performance across both its service offerings and an email which generated high teens growth in revenue and fast bookings for the quarter.
The combination of robust order growth and supply chain constraints in Q3 led to strong backlog that we're carrying into the fourth quarter and 2022.
Industrial scientific revenue increased by mid teens, as instruments and rental business continued their strong recovery.
The ISC team has done an excellent job using FBS tools to accelerate product redesign initiatives, which have helped alleviate component supply challenges and limit impact on delivery times to customers.
Intelex grew by mid teens and posted another record revenue quarter.
Intelex is seeing solid FPS driven improvements in its upsell process to support higher net dollar retention.
Also in Q3 intellect signed an exclusive partnership deal with data Moran [Phonetic], which enables Intelex customers to manage their full lifecycle of their ESG strategy including materiality analysis and risk identification.
Accruent grew by low single digits in the third quarter while seeing strong bookings greater than 20%.
This booking strength was paced by continued demand for occurrence Meridian engineering, document management, and maintenance connection CMF offerings.
Accruent also continues to see strong demand for its EMS event, workspace and resource scheduling solution to support emerging hybrid office models as customers execute their return to work plans.
Among the notable new customer wins for the EMS solution in Q3 were several leading global financial services providers.
Accruent and also continue to see improve performance in its professional services business, which generated low double digit growth.
Gordian increased by mid teens with strong growth in procurement and in estimating in the third quarter Gordian continued to see increasing project volume as well as higher average dollars per project.
Gordian has also seen success from its expansion into healthcare with significant demand for its facility solutions from hospital customers.
After completing the acquisition of service channel at the end of August, we are obviously early in our ownership but we're very pleased with what we've seen thus far and are excited to have them join Florida.
Specifically service channel continues to demonstrate strong momentum in its large enterprise retail business, with several large customer wins in Q3, including Walgreens, which will roll out automation software across their more than 10,000 locations, and the third largest mobile carrier in North America as they transform their facility management program.
Moving to slide seven.
The Precision Technology segment posted a total revenue increase of 8.9% in the third quarter, with core growth of 7.7%.
This included high single digit growth in North America and high teens growth in Western Europe.
China grew low single digits but saw strong continued momentum and demand with double digit order growth in the quarter.
Tektronix through high single digits with strong demand trends across its product portfolio and double digit order growth.
Growth was led by the performance of its mainstream oscilloscope, with a greater than 30% increase supported by new extensions to the six series MSO product line.
Tektronix continued to see traction from its efforts to expand in data centers and other related wired communications applications, delivering a number of key customer wins, including Lenovo and Ericsson.
Throughout the third quarter, Tektronix did an excellent job deploying FBS countermeasures to navigate sustained supply chain challenges while also delivering significant price realization.
Even with the strong execution, given the continued robust pace of demand from its customers, Tektronix increased its backlog by more than 70% versus a year ago.
Sensing Technologies increased by low double digits in the third quarter.
Sensing reported strong growth across each of its major regions with robust order momentum across its key end markets.
Setra registered additional market share gains with its HVAC offerings in Q3 and continues to generate strong growth across a range of critical environment applications, including hospital isolation rooms and pharmaceutical manufacturing.
Pacific Scientific EMC grew by mid-single digits, including improved momentum across its commercial customer base.
Pay continues to see significant growth opportunities in its aircraft and space end markets with strong momentum across its critical safety technology offerings.
Moving to Advanced Healthcare Solutions on slide eight, total revenue increased 9.3%, while core revenue increased 4.7%.
This included mid-single-digit growth in North America and low single-digit growth in China.
Western Europe saw high-teens decline based on a difficult prior year comp at Invetec, partially offset by strong growth at ASP and Fluke Health.
ASP grew by low single-digits in the third quarter, highlighted by a strong capital equipment performance, including low double-digit growth in terminal sterilization capital.
ASP continues to benefit from the solid sales execution driving the consistent expansion of its global installed base.
Consumables revenue grew by low single-digits, led by high single-digit increase across all geographies outside of the United States.
In the U.S., the spike in COVID-related hospitalizations, led to a notable decline in elective procedure volumes toward the end of the quarter, resulting in global electric procedures at approximately 88%, of pre-COVID levels for the period.
While we expect only nominal improvement in electric procedure volume in Q4, longer term, we expect ASP's consumable revenue will benefit from procedure volume normalization and growth in its global installed base.
Census increased in the low 40% range, highlighted by very strong growth in professional services and related hardware.
It CensiTrac SaaS offering, grew mid-teens as it continued to benefit from new customer additions as well as good momentum with up-selling and cross-selling to existing customers.
Censis continues to have open access to customer sites.
And saw strong sustained order growth throughout the quarter.
Fluke Health Solutions increased by high single-digits with continued strength in North America and Western Europe, tied to market share gains with OEM customers through the continued deployment of FBS growth tools.
FHS executed very well throughout the quarter, driving significant price realization and managing through supply chain constraints to open new market opportunities.
FHS continues to benefit from partnership efforts with the Ford, driving lower customer churn at Landauer using the Ford's predictive modeling tools.
The company continues to see good early traction from software innovation efforts with 30% growth year-over-year in Q3.
Invetech declined by mid-single digits, which was better than expected against the tough prior year comp that included significant COVID-related tailwinds.
The company continues to see strong demand across the diagnostics and life science verticals.
And expect to end the year with significant order momentum and a healthy backlog to carry into 2022.
With that, I'll pass it over to Chuck, who will take you through some additional details on our margins, free cash flow and balance sheet.
We delivered another quarter of strong margin performance in Q3, using FBS tools to deliver strong pricing and successful value engineering to implement component substitutions across a variety of hardware businesses.
This FBS execution and the continued strength of our software businesses helped deliver adjusted gross margins of 57.3%, in Q3.
This reflects 90 basis points of expansion on a year-over-year basis, as we accelerated to 220 basis points of total price realization.
Q3 adjusted operating profit was 22.8%, reflecting solid execution across the portfolio, including counter measures enacted in the face of ongoing supply chain challenges.
We had strong margin performance across all of our segments, resulting in 325 basis points of core operating margin expansion.
On slide nine, you can see that in the third quarter, we generated $252 million of free cash flow, representing a 105% conversion of adjusted net income.
Free cash flow over the trailing 12 months increased 22% to $991 million.
Our current net leverage is approximately 1.6 times and we expect net leverage to be around 1.3 times at year-end, excluding any additional M&A.
Turning now to the guide on slide 10, we are raising the low end of our full year 2021 adjusted diluted net earnings per share guidance to $2.70, resulting in a range of $2.70 to $2.75 for the year.
This represents a year-over-year growth of 29% to 32% on a continuing operation basis.
This assumes that total revenue growth of 14% to 14.5%, adjusted operating profit margins of 23% to 23.5%.
And an effective tax rate of approximately 14%.
We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year.
We are also initiating fourth quarter adjusted diluted net earnings per share guidance of $0.74 to $0.79, representing year-over-year growth of 6% to 13%.
This assumes total revenue growth of 6.5% to 8.5%, adjusted operating profit margin of 23.5% to 24.5% and an effective tax rate of approximately 15%.
The adjusted diluted net earnings per share guidance also excludes, approximately $12 million of anticipated investments in strategic productivity initiatives that we expect to execute before the end of the year.
For the fourth quarter, we expect free cash flow conversion to be approximately 125% of adjusted net income.
With that, I'll pass it back to Jim for some closing.
We're very pleased with our performance in Q3.
We worked diligently to countermeasure supply chain challenges, that persisted throughout the quarter and which we expect to continue into 2022.
Our teams are doing an excellent job, deploying FBS to navigate those headwinds, while also delivering strong margin performance and free cash flow generation.
Looking across our end markets, the demand backdrop we're seeing is very strong with significant momentum in our order flow, driving continued growth in our backlog and double-digit growth across our software businesses.
While continuing our focus on execution, we're investing in innovation, expanding our base of leadership talent and pursuing additional capital deployment opportunities, as we look to enhance our competitive advantage and pave the way for consistent double-digit earnings and free cash flow growth in the years to come.
That concludes our formal comments. | sees fy adjusted earnings per share $2.65 to $2.75 from continuing operations.
sees q3 adjusted earnings per share $0.62 to $0.66 from continuing operations. | 0 |
This is Shawn Collins.
The new Director of Investor Relations at Harley-Davidson.
You can access the slides supporting today's call on the Internet at investor.
In addition, Chief Commercial Officer, Edel O'Sullivan will join for the Q&A.
With that, Jochen why don't we get started?
We delivered a solid quarter, and are pleased with our year-to-date performance where you've seen many proof points that our Hardwire strategic initiatives are setting up a solid foundation for future growth at Harley-Davidson.
As part of the Hardwire strategy, we renewed our focus and profitably driving our core business.
Through 2021 we've been encouraged by the recovery of the Touring market.
Grand American Touring sits at the core of our mission and our brand.
We are committed to defending and expanding our share in the segment and see potential for future growth.
By selectively targeting high potential categories such as Adventure Touring with Pan America and sports with Sportster S we are also maintaining our focus on long-term profitability and potential alinged to our brand and product capabilities.
The increased demand that we have seen across both our core and expanding categories underscores the momentum behind the Harley-Davidson Brand and all it stands in the pursuit of freedom and adventure.
We've also seen interest increasing across new riders with a marked increase in the participation in the Harley-Davidson Riding Academy.
Through September, we've seen Riding Academy participation and completion increased 20% over 2019.
In addition to our strategic changes as part of our streamline market strategy, macro headwinds, including a variety of challenges from supply chain shortages to congestion at ports and increased shipping times that have been impacting our production and our other suppliers in Q3, in particular in our international markets.
The supply chain challenges are likely to continue into 2022, our team remains committed to managing the effects of the disruption, leveraging the scale of our global network and infrastructure to mitigate the impact on our business.
That said, I'm very excited by the global potential of Harley-Davidson brand in the coming years.
And, as we focus on more profitable motorcycle unit as part of our strategy, we continue our journey toward a more efficient use of inventory.
While we are below our intended inventory strategy, we've seen our dealer community adapt, improve the profitability and therefore improve the overall health of our dealer network.
I'll now hand over to Gina to provide more details on our financial performance for the quarter and year-to-date.
Third quarter results reflect continued demand momentum as evidenced by our strong wholesale and unit growth and share performance across the market.
As Jochen said we did experience increased supplier volatility, which impacted our production and supply levels for the quarter.
Despite this, our financial results demonstrate our agility in maximizing profitability, including the execution of a pricing surcharges in the US, optimizing production schedules to prioritize our most profitable models and markets and enacting tighter operating expense controls.
In the quarter, total revenue of $1.4 billion was 17% ahead of last year behind increased shipments and favorable motorcycle unit mix, primarily driven by the actions undertaken as part of the rewire.
Total operating income of $204 million was ahead of last year with growth across both of our reported segments.
The motorcycle segment, which includes our general merchandise and parts and Accessories products delivered $98 million of operating income, which is $51 million better than last year.
And the Financial Services segment delivered $107 million of operating income, which is $15 million better than last year.
Third quarter GAAP earnings per share of $1.5 is $0.78 better than last year or up 35% year-over-year.
When adjusting to exclude the impact of EU tariffs and restructuring charges our adjusted earnings per share was $1.18 and up 12% year-over-year.
Turning to Q3 year-to-date results, revenue of $4.3 billion is 30% ahead of 2020 and operating income of $831 million was $701 million ahead of last year.
Year-to-date results reflect the strong unit growth over the pandemic impacted results of 2020 as well as the positive impact from last year's Rewire actions.
GAAP year-to-date earnings per share was $4.06, up $3.42 from a year ago, while adjusted earnings per share was $4.29 up $0.03 from last year.
Global retail sales of new motorcycles were down 6% in the quarter with growth in North America offset by declines in our international market.
North America Q3 retail sales were up 2% versus last year driven primarily by 5% growth in Grand American Touring, our most profitable segment and the successful launches of Pan American and Sportster S. Pan America maintained its status as the number one selling adventure touring model in the US since its launch earlier this year, capturing a 16% market share in the third quarter in a rapidly growing adventure touring segment and after much anticipation beyond these Sportster S motorcycles began shipping to dealers late in Q3 and we have seen very strong sell-through today.
In our international markets the retail sales declines were primarily driven by the actions taken during Rewire to exit markets and prune unprofitable models.
EMEA, and APAC sales were disproportionately impacted by the decision to exit the unprofitable Street and Legacy Sportster bikes, and in LATAM the declines in the model pruning and market exits were accompanied by pricing actions taken across select models.
Through these actions the LATAM region has improved their profitability, which we expect will set up a solid foundation for future growth.
Worldwide retail inventory of new motorcycles was down 30% versus last year and relatively flat to the previous quarter.
Q3 inventory has been impacted by stronger demand in the US as well as supplier challenges, which impacted our ability to produce to planned levels.
while inventory levels are lower than our original plan We have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles and strong dealer profitability.
international markets continue to be impacted more profoundly by global transport challenges, which resulted in higher cost and longer ship times to key ports.
Looking at revenue, total motorcycle segment revenue was up 20% in Q3, and up 36% on a year-to-date basis.
Focusing on current quarter activity 9 points of growth came from higher year-over-year volume from motorcycle units, including the new Pan America and Sportster S motorcycle, 8 points of growth for mix driven by a larger percentage of touring bikes in the quarter and reductions across Legacy, Sportster and Street, 2 points of growth from pricing and incentives, and during the quarter we increased the pricing surcharges in the US from an average of 2% taken in Q2 to 3.5% to partially offset raw material inflation and finally, one point of growth from foreign exchange.
Q3 gross margin percent of 26.7 was down 3% points versus prior year.
Our margin benefit from stronger volume, profitable profitable mix and pricing was more than offset by the negative cost headwinds across the supply chain and higher EU tariffs.
Q3 operating margin finished at 8.4% and was up 3.6% points over the prior year.
The positive margin benefit from volume, mix, pricing and reduced restructuring expense was able to offset the negative gross margin drivers already noted.
Year-to-date operating margin is significantly ahead of last year given the COVID impact and it is also 4.6 points ahead of 2019.
Despite absolute unit decline versus 2019 profit per unit has increased behind a stronger mix, pricing, lower incentives and an overall lower cost structure.
These results validate the efforts that we took during the rewire in a set up a more profitable foundation for future growth.
As mentioned previously, the global supply chain remains volatile, not only for our business, but across the global manufacturing sector.
Our team has continued to do a great job navigating through the unprecedented challenges and demonstrating agility and managing production schedules to optimize output.
We have continued to see increasing inflation within raw materials in all modes of freights and we are forecasting this to continue at least through the balance of the year.
To help provide additional insight into the supply chain Slide 9 provides a detail on our cost of sales mix as well as the estimated inflation impact across the major components.
As you can see, logistics cost began to increase early in the year and peaked in Q2 at 2.5 times our prior year cost before settling down a bit in Q3 at two times prior year.
Q3 was better than Q2 as we move past the cost incurred with our 3PL conversion in North America.
Materials and components cost inflation accelerated through the third quarter, where we experienced a 6% to 7% increase versus last year.
This includes the cost of raw materials and higher cost of purchase components.
And finally, manufacturing inflation which includes labor cost has been relatively consistent throughout the year at 3%.
We're forecasting continued inflation pressure across all three buckets in the fourth quarter at similar levels to what we've seen in Q3.
The Financial Services Segment operating income in Q3 was $107 million, up $15 million compared to last year, primarily driven by $23 million of interest expense favorability.
HDFS's retail credit loss ratio remained historically low at 0.8%, a 56 basis point improvement over last year.
Overall retail delinquency rates have been favorably impacted by improved economic conditions and the benefits provided to individuals under the federal stimulus packages earlier this year.
Delinquency rates have continued to run much lower than pre-pandemic historical levels and what we do expect delinquency rates to normalize over time we believe losses will continue to remain lower in the short term.
Looking at HDFS's base business, retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume.
As a result, ending retail finance receivables in Q3 were $6.7 billion, which is up 2.2% from last year.
In addition, the retail allowance for credit losses at the end of Q3 was 5.1%, which is flat sequentially and down from 5.9% at the end of Q3 last year.
A year ago the US economy was restrained by the pandemic and this is reflected in higher allowance rate.
While today's allowance rate has improved versus the peaks of 2020, it is still above pre-pandemic levels, given the continued uncertainties surrounding the pace of economic recovery.
Wrapping up with Harley-Davidson Inc financial results, we delivered year-to-ate, operating cash flow of $926 million, down $210 million from the year-over-year period.
The key driver of unfavorable cash flow was an increase in wholesale finance receivable originations.
Total cash and cash equivalents ended the quarter at $2.1 billion, which is $1.5 billion lower than Q3 last year as we worked down higher cash balances held as a result of the pandemic.
As we look to the balance of the year, we are maintaining our guidance on the Motorcycles segment revenue growth of 30% to 35%.
We are also maintaining our GAAP Motorcycles segment operating income margin guidance of 6% to 8%, which is inclusive of the full impact of the incremental EU tariff and the supply chain inflation laid out earlier.
Our estimated EU tariff impact for 2021 has been adjusted to approximately $54 million in line with our unit forecast.
We are lowering our capital expenditures guidance to $135 million to $150 million from the previously communicated range of $190 million to $220 million.
The spending change is driven by tighter cash management across projects as well as changes in the cash flow phasing across key initiatives.
And lastly, we are increasing the Financial Services segment operating income growth guidance to 95% to 105% which is an increase from the previously communicated range of 75% to 85%.
The improved outlook takes into account the year-to-date loss favorability, the reserve releases early in the year and our outlook for Q4.
Cash allocation priorities remain to first fund growth through the Hardwire initiatives then to pay dividends, and the company may also choose to execute discretionary share repurchases in 2021 and 2022.
As we look ahead to the fourth quarter, On slide 14 there are a few known and expected factors to consider regarding our revenue and profitability.
First, as we've discussed, we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year product.
While we will continue to run the plant this dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bikes builds will go into company-owned inventory ahead of the model year launch.
We expect the financial impact was very similar to the impact we saw last year in Q4.
Other Q4 factors include higher expected expense and capital spending to support upcoming launches and marketing campaigns, and as we previously mentioned, we also expect to see supply chain inflation consistent with what we experienced in Q3.
This will be slightly offset by lower Q4 restructuring spending versus last year.
Restructuring charges in Q4 2021 will not be material and we no longer plan to spend the $20 million full-year estimate mentioned in previous quarters.
As we pursue our Hardwire goals we continue to enhance our organization and processes, focusing on alignment and efficiency.
Underpinned by drive to win as a team, which is the basis for our culture, we will look to ensure that Harley-Davidson as a company and as a brand is getting stronger than ever and is positioned for long-term success.
By designing, engineering and bulding the most desirable motorcycles in the world reflected in quality innovation and craftsmanship we continue to further our legacy as the only American motorcycle brand with 118 years of uninterrupted heritage.
As you know desirability provides the framework for our Hardwire strategic plan, our 5-year roadmap to both enhance and grow our position as the most desirable motorcycle brand in the world.
Desirability not only impacts those new to our sport and our brand, but also a dedicated community of riders and non-riders alike.
As we recognize the post pandemic conversations around the sport of motorcycling have changed, we also see a rider base that has a desire to escape, explore the outdoors and rediscover passion for riding, all of which fits squarely in the Harley-Davidson mission of delivering freedom for the soul in the pursuit of adventure.
Desirability is also a motivating factor for getting people into the sport.
We know there are plenty of people who are interested in riding, but more importantly interested in riding Harley-Davidson.
The Harley-Davidson Riding Academy is an important way in which would build ridership and deepen our connection with our customers.
Already we are focused on North America we have plans to take the HD Riding Academy to high potential markets across the world including China, where we see a high potential to leverage our brand and introduce new riders to the sport.
We are also mindful of the need for riders to hone their riding skills at this part of their journey in pursuit of adventure.
The latest offering from the Harley-Davidson Riding Academy [Indecipherable] the adventure touring rider course specifically designed the offering to complement our Pan American motorcycle.
This course which we are planning to expand strategically over time is a perfect experience for new and existing adventure touring riders offering the skills and knowledge to get more out of the offroad experience by prioritizing rider safety.
With improved market conditions we've seen growing consumer appetite for our brand and our iconic motorcycles, including the new products we launched this year.
Since launching Hardwire we've experienced strong demand for our products and our brand and the demand that we have seeing is in our strongest and most profitable segments.
Despite the continued impact of the pandemic and related supply chain challenges we can see the potential of our streamlined market strategy as we maintain a long-term focus on profitable growth in line with our Hardwire ambitions.
As we continue to execute against our strategy of 70-20-10 SKUs two of our stronghold segments of Touring, Large Cruiser and Trike we remain guided by our commitment to two critical conditions, profitable segments, improving volume, margin and potential and segments aligned to our brand capabilities with a clear path to leadership.
[Technical Issues] work hard to continue to solidify and grow our position as leaders, acknowledging that these segments are the most attractive of the global market in terms of our profit focus, another component of the Hardwire selective expansion.
The focus on selective expansion also allows us to target segments that deliver balanced combination of volume, margin and growth potential and that are aligned with our brand capabilities and identity.
Again, we run these segments supported by the right allocation of time and energy balanced with the right investments in product, brand and go-to market capabilities.
In February, this year we launched our first adventure touring motorcycle to Pan America.
Taking inspiration from our heritage we wanted to create a motorcycle that redefine the category.
The Pan America squarely built in our mission to the deliver to adventure for our riders on and off the road.
The performance of the Pan America has recently been demonstrated by a group of riders who reached the summit of the Key La Pass in the Himalayas, the highest unpaved motorable road in the world at some 18,600ft, a feat at first for Harley-Davidson.
This quarter saw the Pan America [Indecipherable] to become the number one selling adventure model in the United States, an accolade that we are very proud of.
We believe we will continue to grow the category in North America and the potential of the Pan America across the world is significant.
For example, the North America the category accounts for 5% of the overall market and has grown 51% since 2017.
When you look to Europe Adventure Touring currently represents 33% of the motorcycle market as a whole, growing 33% since 2018 and we believe it's continuing to grow.
We see great opportunity to build on the success of Pan America in the first 6 months in markets and look to win in Europe and further as we actively target new Harley-Davidson riders in the Adventure Touring space.
In July, we also launched the latest information of the iconic Sportster, the Sportster S at our Global Reveal event.
Immediate response to the Sportster S has been exceptional with positive reviews including motorcycle.com praising the Revolution Max as their new favorite motorcycle engine, [Indecipherable] calling out the bike as a pillar [Indecipherable].
At launch we saw one of the largest engagement rates on our Harley-Davidson social channels.
We've been pleased to see this excitement translating into orders for the Sportster S allocation being sold out through our integrated pre-order system.
With our pre-order system, our dealers are able to effectively create an integrated reservation system.
This direct line of communication has allowed us to work through manufacturing allocations and improves the overall dealer visibility on orders.
In Q4 this year Harley-Davidson will officially launch the reservation process in the US and Canada to capture early demand on select 2022 models.
This process will provide a consistent experience both in Harley-Davidson.com and at the dealership network and will allow dealers to engage with customers on contributing and customizing the new motorcycle, keep them notified of when to expect delivery, and inform future enhancements that strengthen and support the Harley-Davidson community online and on the road.
With our ambition to put our customers at the forefront of everything we do aligned to our Hardwire goals.
By facilitating early engagement between dealers and customers, we are investing in strengthening this important relationship to move and integrated tools that we creating.
For dealers we believe this new reservation process will improve the sell-through rate and for Harley-Davidson, it will help ensure production better match customer demand.
We are excited to see the Sportster S make its way into the hands of our customers around the world and look forward to this new generation of Sportster hitting the streets in full force.
As evidenced by strong performance this quarter, HDFS's strategic asset with [Technical Issues] growth and profitability.
With HDFS Harley-Davidson is uniquely positioned to be able to offer our customers value the financing options for their motorcycles.
With over 65% of Harley-Davidson motorcycles financed by HDFS.
Going forward, it is our goal to make HDFS the preferred choice for all Harley-Davidson riders, but in the new capabilities that rival the innovators of financial services.
HDFS is integral to the Harley-Davidson success and with the plant expansion in Europe in the near-to-medium term, I'm excited for the future.
With HD1 marketplace I think for HDFS it was our intention to change the face of the online market for pre-owned Harley-Davidson motorcycles blaming the best of digital and in dealer experiences aligned to our Hardwire priorities.
Since launching in July H-D1 marketplace has become the go to online Harley-Davidson marketplace for dealer based listings, with the largest selection of dealer pre-owned Harley-Davidson motorcycles in the United States, including the largest selection of HD-certified motorcycles ensuring the ultimate choice in preowned.
We've seen the power of the HD certified program driving desirability and enhancing the overall consumer experience while providing customers with an extra level of confidence in their purchases.
As of this month, H-D1 marketplace features over 25,000 owned Harley-Davidson motorcycle listing,1200 Harley-Davidson certified motorcycles, over 500,000 units released since launch and over 550 participating Harley-Davidson dealers.
Backed by the strength of our dealer network we want to continue to ensure that our riders have access to the largest selection of the best Harley-Davidson motorcycles.
We believe the H-D1 will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important part that riders of pre-owned Harley-Davidsons play in our community.
While we have achieved this initial goal in the United States, it is our ambition that marketplace will continue to evolve and that it will become the the ultimate column for pre-owned Harley-Davidson motorcycles.
For over a decade, Harley-Davidsons has produced and published Annual Sustainability Report, ahead of many in our sector.
Over that time we've made solid progress and that progress has reinforced the importance of inclusive stakeholder management as a key [Technical Issues] as we recognize that our future will be defined not only by our product and experiences, but how we deliver value for all our stakeholders.
In publishing our 2020 inclusive stakeholder management report, we made a commitment to create a high performing, engaged and diverse workforce, create an inclusive and more sustainable dealer network and supply base, create a path to net zero environmental impact by 2050 at the latest, deliver positive impact in our communities, and aling the rewards of inclusive shareholders.
By making inclusive stakeholder management a key part of our strategy, we are prioritizing long-term profitable growth and value for our stakeholders, our communities, our people and our planet.
I will invite you all to read our report in full.
The initial proof points of our 5-year strategy.
I believe there is tremendous potential for our brand and business globally and we will not rest until we have the best in class in every marketing segment in which we compete.
In closing, before we go to questions, I would also like to provide a brief update on EU tariff situation so far to the fact our company.
At the negotiations between EF and EU continue, we are quite optimistic that a resolution will be found.
We've been especially encouraged by the positive media reporting of the negotiations that we have seen over the past few weeks.
We've actively engaged with both the US administration and EU as we expect throughout, we believe that Harley-Davidson bear has place in this political dispute that is not of our making. | sees fy financial services segment operating income growth of 95 to 105 percent,.
full-year 2021 motorcycles segment guidance remains unchanged relative to prior guidance.
compname says fy 2021 capital expenditures of $135 million to $150 million, decrease from previously communicated range of $190 million to $225 million.
sees fy 2021 motorcycles segment revenue growth to be 30 to 35 percent.
qtrly motorcycle shipments, in thousands, of 47.9, up 12%.
sees fy 2021 financial services segment operating income growth of 95% to 105%, increase from prior range of 75% to 85%.
sees fy capital expenditures of $135 million to $150 million.
harley-davidson - qtrly motorcycles segment operating margin was driven by unit mix, pricing & reduced restructuring expense. | 1 |
As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.
We made excellent progress in the quarter, reducing our cash burn rate, improving our total liquidity and reopening hotels for the eventual recovery.
The second quarter, however, was unlike any in the history of the hotel industry.
When we last spoke in May, we were in the midst of the largest contraction in GDP ever experienced in the U.S. as government restrictions were imposed to curtail the spread of COVID-19 in order to protect the general public.
While some communities were able to reduce the spread of the virus, other locations experienced sudden increases in the transmission of this terrible virus.
Contemporaneously, the concerns over systematic bias in our society led to demonstrations across the United States involving an estimated 15 million to 25 million people.
The overall environment experience in 2020 is the very definition of unprecedented.
Before going any further, I want to recognize the hard work of our hotel operating teams and their dedication to the health and safety of our guests.
I also want to recognize our corporate employees for their agility, creativity and perseverance to ensure that DiamondRock is secure and well positioned for a profitable future.
Let me recap those for you.
One, the second quarter is expected to be the worst period in the year.
The demand recovery will come in stages with leisure demand from drive to resorts coming back first, followed slowly by emerging business transient customers and, finally, by the return of large group meetings likely in 2021.
Supply is going to be constrained going forward as new construction starts to evaporate and obsolete hotels shut their doors for good.
According to F.W. Dodge, rolling three-month hotel construction starts were down 56% in June as compared to the prior year.
Moreover, last quarter, we suggested as much as 10% of the existing supply in Midtown East, New York, may not reopen.
There's reason to believe that our early estimate may be conservative.
Fourth and finally, this is an opportunity to reinvent the operating model by identifying lasting opportunities to increase efficiencies through new best practices, promoting technology adoption like digital check-in and supporting emerging customer priorities such as the green room initiative.
We are optimistic that this could lead to increased profit margins once we return to pre-COVID-19 levels of demand.
Let's talk specifically about the second quarter.
In response to travel demand declining by over 90%, we suspended operations at 20 of our 30 operating hotels, leaving just 10 hotels open at one point in April.
The quick action taken by the team allowed us to realize a 72% reduction in hotel-level expenses excluding wage of benefit accruals.
Impressively, compared to the prior year, second quarter man hours decreased 83% at open hotels and 99% at hotels with suspended operations.
The decision to reopen hotels has been and continues to be dynamic and data driven.
As we articulated in the past, our plan is to reopen hotels if we can lose less money doing so.
Accordingly, starting in May, we prioritized our drive to resorts based on returning demand visible through various channels.
And ultimately, we reopened a total of 12 additional hotels in the second quarter.
The 22 hotels we had opened at the end of the quarter represent 58% of our hotel rooms.
But since the openings were staggered, the math works such that just 43% of our rooms were available in the quarter.
Demand got a little better as the quarter progressed.
Weekly occupancy for our operating hotels, which had bottomed at 6.8% at the end of March, rose steadily to 27.8% by the last week in June.
This trend has continued beyond Q2 with occupancy for operating hotels in July over 200 basis points higher than the full month of June.
Over the course of the quarter, we saw a growing number of hotels achieve breakeven profitability, and we expect that this trend continued in July.
In April, five hotels achieved breakeven profitability on a GOP basis, and this figure grew to seven hotels in May and 10 hotels in June.
On a hotel EBITDA basis, two hotels generated profits in April and account increased to four hotels in May and six hotels in June.
The consistent theme is nearly is that nearly every one of these hotels is among our collection of drive to resorts.
Leisure was clearly the brightest segment during the quarter and certainly a source of strength in DiamondRock's portfolio.
As you might have guessed, weekends were the strongest.
From early May to the end of June, weekend occupancy at our resorts increased from 11% to nearly 56%, with healthy gains in ADR for the majority of the weeks.
For the second quarter, leisure transient ADR was 1.6% higher than in the second quarter of 2019.
The resilience of rate in the leisure category tells us that price is not a gating issue for those customers.
Trends at our resorts in July were encouraging.
The Shorebreak in Surf City Huntington Beach averaged nearly 50% occupancy in July.
Our L'Auberge de Sedona, Orchards Inn and Havana Cabana Key West, each ran occupancy over 60%.
L'Auberge actually had an average rate in July of $553, which was a 14% increase over the prior year.
But our little star of the month was Landing in Lake Tahoe, which had 80% occupancy in July with average rate up nearly $100 a night to over $519.
As for business transient, we are not expecting a significant recovery after this summer.
In fact, we do not expect a true recovery in business transient demand until folks return to the office, which appears drifting toward early 2021 for many major employers.
Nevertheless, there are individuals traveling for business, and we did see a gradual improvement in our room and total revenue activity each month over the course of the quarter.
In April, the weakest month of the quarter, we saw less than $400,000 of revenue from business transient channels, but this grew to $1 million in May and $2.5 million in June.
These are meager beginnings.
But longer term, we are optimistic that as a consequence of more office personnel working from home, there may be increase in hotel meeting activity to plan strategy, conduct training and foster corporate culture.
The group segment has certainly experienced an enormous deferral of business.
Globally, C-Band had two billion RFPs passed through their system in the second quarter of 2020 as compared to six billion in the second quarter of 2019.
Group trends are challenging, and we expect this segment will be the final one to recover.
While DiamondRock does not have the depth of exposure to group, particularly large group as some of our peers, we thought that the limited data points we were seeing could be of value.
Since the start of the COVID impact and through the second quarter, our portfolio experienced approximately $117 million of canceled group revenue.
Over 80% of these cancellations occurred in March and April.
The pace of cancellations was initially as high as $20 million per week in March, but has since slowed to just $2 million to $3 million per week.
We expect cancellations will persist as we move throughout the year.
However, it was encouraging to see 250,000 to 350,000 room nights of group leads generated each month during the second quarter.
Some of the early lead volume was rebooking activity.
Short term, group bookings are increasingly weighted toward SMERF association and wedding events.
We're seeing larger pieces of group business, which are typically corporate, look at dates in 2021 and 2022.
Overall, rate expectations are consistent with pre-COVID levels.
While there have been short-term opportunistic groups booked in 2020, rate parameters for the 2021 and 2022 periods have been normal.
Instead, the main request is around terms for cancellations and rebookings, highlighting that groups do want to meet, but desire flexibility until there is greater visibility.
I want to touch on a few financial items in Q2, address our capital markets activity in the quarter and I'll conclude with an update on our liquidity and cash burn rate.
Total revenue decreased 92.1% in second quarter 2020 as a result of a 92.8% decline in RevPAR.
Total revenues were $3.3 million in April with 10 hotels open, $5.7 million in May with 12 hotels open and $10.9 million in June with 22 hotels open.
Excluding the Sonoma Renaissance, which opened July 1, the same 22 hotels are on pace for nearly $13 million of revenue in July.
As Mark mentioned, we decreased hotel-level operating expenses 72% from $170 million to approximately $48 million, excluding nearly $3 million of accrued benefits for furloughed employees.
We were able to slash variable expenses by 80%.
It is critical to understand that we achieved this level of cost reduction despite over 70% of our hotels partially open during the quarter.
Hotel adjusted EBITDA in the quarter was negative $30.4 million.
Corporate adjusted EBITDA in the quarter was negative $37 million.
Finally, second quarter adjusted FFO per share was negative $0.20.
For CapEx, we have canceled or delayed over 65% of our original capital expenditure plans.
In the second quarter, we restricted capex spending to only $20.7 million, including $8.5 million for Frenchman's Reef to put the project in a position where we could pause work.
Our primary focus remains conserving capital, so we are prioritizing only those expenditures where we have high confidence that they can produce a near-term earnings benefit and high return on investment at minimal cost and complexity.
In this regard, we spent $4.5 million to complete the F&B repositioning initiatives at our Renaissance hotels in Sonoma, Worthington and Charleston as well as the JW Marriott Cherry Creek.
We expect these investments will be earnings contributors in 2021, and the average IRR is forecast to be over 30%.
We remain in a strong liquidity position.
At the end of the quarter, we have $364 million of total liquidity between corporate and hotel level cash and undrawn revolver availability.
I'm also pleased to report that through hard work, we are able to meet our initial expectations for our overall cash burn rate.
At the hotel operating level, we averaged a $10.1 million monthly loss in the quarter, surpassing our initial forecast by 16%.
Including corporate G&A, the average monthly loss was approximately $12 million or 12% ahead of our expectation.
Finally, our total burn rate, including debt service, was approximately $17 million.
Compared to our average pace in second quarter 2020, we expect our burn rate will improve slightly in July, mainly because we had 58% of our rooms open at the end of June as compared to only 43% during the quarter.
Our preliminary estimate for our hotel-level cash burn in July is approximately $9 million to $10 million, which is potentially $1 million or 10% lower than the average monthly pace seen in the second quarter.
Including cash, G&A and debt service, this works out to an overall burn rate of $16 million to $17 million and provides a runway before capex of up to 23 months based upon our total liquidity of $364 million at the end of the quarter.
I want to make a few additional comments on the balance sheet.
The erosion in EBITDA obscures the strong balance sheet DiamondRock wielded before going into the pandemic.
For example, net debt to undepreciated book value as of second quarter 2020 was just 26%.
We ended the second quarter with net debt of only $106,000 per key on a portfolio with a replacement cost in the range of $450,000 per key.
This implies a net debt to replacement cost of less than 24%.
Importantly, DiamondRock's debt is well structured.
It is diversified between nonrecourse CMBS and bank mortgage debt as well as unsecured bank debt.
At the end of the quarter, we had $605 million of nonrecourse mortgage debt at a weighted average interest rate of 4.1%.
We had $550 million of bank debt, comprised of $400 million in unsecured term loans and just under $149 million on our unsecured revolving credit facility.
We finalized an amendment to our credit facility in the quarter.
We had several objectives in this process, but there are three I'd like to highlight.
First, secure a waiver through the end of the first quarter of 2021 and relaxed covenants through year-end 2021.
Covenant tests restart in the second quarter of 2021 using annualized results to wash out 2020 from our financial results.
Second, flexibility for investment.
Collectively, we have $110 million for capital investment, which has proved to be one of the largest capital investment allowances relative to assets or pre-COVID EBITDA.
Third, flexibility for acquisition.
We have no limitation on our ability to pursue equity funded unencumbered acquisitions, and our $300 million limitation on encumbered acquisitions is proportionately larger than the limitation many peers have on total acquisitions.
I think a key competitive advantage that will come into sharper focus in the next year is our maturity schedule.
We have no debt maturities for the balance of 2020.
We have no maturities in 2021, and we have only one loan for $48 million due in 2022 and even that can be extended to 2023 under certain conditions.
Our first significant maturity is our revolver which matures in 2023, but this too can be extended one year into 2024.
The combination of a conservatively leveraged balance sheet, a diversified source of debt capital and one of the best maturity schedule in the sector is a measurable competitive advantage for DiamondRock.
In closing, I want to point out, we've expanded our disclosure to provide monthly detail on hotels open the entire quarter, hotels partially open during the quarter and hotels that remain closed.
It is here that you can see how the hotels progressed as we move through this most difficult period.
Moreover, we provided the number of days each hotel was open to give you context to revenue, expense and EBITDA that each hotel produced.
And on that note, I'll hand the call back to Mark for final comments.
I want to make a few comments about the future.
Although we saw improvement in the second quarter, we expect uncertainty will persist until there is an effective vaccine, improved patient outcomes, broad acceptance of safety protocols such as social distancing and wearing mask or some combination of the above.
Encouragingly, there are already 30 vaccines in human trial.
Because of the wide array in variables related to the resolution of the healthcare crisis, we are not in a position today to provide you with company guidance.
We do expect the balance of 2020 to be difficult, with drive to resorts doing best, only very modest increases in BT business and large group business not meaningfully returning until 2021.
We did want to provide you with some of the ways in which we are positioning DiamondRock for the future.
Let me highlight a few.
One, we have a great portfolio that is increasingly weighted toward drive to resorts.
We have 13 of 31 hotels that are leisure oriented.
This has been a multiyear strategic initiative as seven or last eight hotel acquisitions fit into this category.
We were early to recognize the trend here and remain committed believers.
Two, small hotels have been outperforming.
According to STR, hotels under 300 rooms have shown the best relative performance.
Due to our focus on boutiques and drive to resorts, the median hotel in DiamondRock's portfolio is just 265 rooms.
Three, the portfolio has numerous ROI projects, many with 30% plus IRRs.
These include the just completed rebranding of the Sheraton Key West to the Barbary Beach House resort as well as the upcoming luxury upbranding of our Vail Resort.
Four, while we pause the reconstruction of Frenchman's Reef, we remain excited about its long-term prospects.
Essentially, this is a nugget of future value for our shareholders.
And finally, we have a solid balance sheet to allow us to withstand a substantial downturn and then position us to be offensive at the right time.
We are already seeing some interesting opportunities in the market.
We have great assets, a solid balance sheet, strong industry relationships and an experienced management team that has weathered numerous prior downturns over the last 30 years. | q2 adjusted ffo loss per share $0.20.
not providing updated guidance at this time. | 1 |
Catherine, and good evening everyone.
I'm responsible for Investor Relations at Mettler Toledo and happy that you're joining us tonight.
I'm joined on the call today with Olivier Filliol, our CEO and Shawn Vadala, our Chief Financial Officer.
Let me cover just a couple of administrative matters.
For a discussion of these risks and uncertainties, please see our most recent Form 10-K and other reports filed with the SEC from time to time.
More detailed information with the respect to the use of and differences between the non-GAAP financial measure and the most directly comparable GAAP measure is provided in our Form 8-K.
I'm calling in from Switzerland tonight, while Shawn and Mary are in Columbus, Ohio.
Patrick Kaltenbach is also joining the call with me from Switzerland and we are excited to have him on board.
Patrick, I will turn it to you as I know you want to make a few comment.
I spent my time so far, working with Olivier, meeting senior leaders virtually throughout the world, and studying thorough strategy documents, comprehensive materials on Spinnaker approaches and detailed R&D and SternDrive priorities.
I'm truly impressed with the depth and sophistication of the strategy, initiatives and programs that are in place.
A fantastic foundation has been built and I'm committed to the organic growth strategy and look forward to leading a team to further enhance our performance and continue the successful journey.
Call today and I look forward to the actions on the next call and in the future.
Before I hand it back.
Under your leadership, you have developed Mettler Toledo into a tool with a tremendous track record and future potential.
I'm very pleased to note that you will continue to be part of the company.
For this very kind words.
From my side, we are off to a great start and I look forward to our continued teamwork.
I will start with a summary of the quarter and then, Shawn will provide details on our financials.
I will then have some additional comments and we will open the lines for Q&A.
We ended the year with a very strong fourth quarter, which came in better than we expected.
Local currency sales increased 7% in the quarter, our growth was relatively broad-based throughout the world.
Our Laboratory business and our Chinese business did particularly well in the quarter.
We benefited from strong execution and we're well-positioned to capture growth as customer demand improved.
However, we continued to be negatively impacted by COVID-19 in certain areas.
From the onset of the global pandemic, our focus has been to identify and pursue pockets of growth within our end markets and to be well-positioned to capture growth as demand improves, which is what we saw in Q4.
Our innovative go-to-market approach really played very well into this environment and allowed us to capture this growth.
Good cost control and the continued benefit of our margin and productivity initiatives contributed to strong growth in adjusted operating profit and very strong growth in adjusted earnings per share in the quarter.
Finally, cash flow not one in the quarter, but also for the full year was excellent.
2020 was an extraordinary year with some of the most challenging market conditions we have faced in more than a decade.
Our organizational agility helped us to quickly adapt approaches and processes to the new environment.
Our broad end-market diversification and the use of sophisticated data analytics allowed us to shift our sales and marketing focus to the most promising end markets early on.
It also helps to ensure we were well-positioned to capture growth as demand improved during the latter part of the year.
We adopted our supply chain and service organization to maintain superior performance that strengthened our franchise and introduced many new digital sales and support tools to provides top quality customer interactions despite the remote settings of our customers and sales teams.
Throughout 2020, we increased our customer engagement and customer satisfaction, which translated into accelerated market share gains in many product categories.
With the strong ends to 2020, we have very good momentum as we start 2021, and believe we are well-positioned to continue to gain share and deliver good results.
We will have some additional comments on 2021 but first, let me turn to Shawn to cover the financial results.
Sales were $938 million in the quarter, an increase of 7% in local currency.
On the U.S. dollar basis, sales increased 11% as currency benefited sales by 4% in the quarter.
On Slide number 4, we show sales growth by region.
Local currency sales increased 8% in the Americas, 7% in Europe, and 8% in Asia, rest of the world.
Local currency sales increased 12% in China in the quarter.
The next slide shows sales growth by region for the full year 2020.
Local currency sales increased 2% in the Americas, 1% in Europe and 3% in Asia/rest of the world.
China local currency sales grew 7% in 2020.
On Slide number 6, we outlined local currency sales growth by product area.
For the fourth quarter laboratory sales increased 12%, industrial increased 1%, with core industrial up 5%, and product Inspection down 5%.
Food Retail increased 7% in the quarter.
We estimate that we benefited 1% to 2% from COVID tailwinds in the quarter related to our pipette business for covered testing.
The next slide shows sales growth by product area for the full year.
Laboratory sales increased 5%, industrial declined 1% with core industrial up 2%, and Product Inspection down 7%.
Food Retail declined 4% in 2020.
Let me now move to the rest of the P&L for the fourth quarter, which is summarized on the next slide.
Gross margin in the quarter was 59.6%, a 60 basis point increase over the prior-year level of 59%.
Our margin initiatives centered on pricing in SternDrive, as well as temporary cost savings contributed to the margin growth, offset in part by higher transportation costs and unfavorable business mix.
R&D amounted to $39.9 million, which represents a 6% increase in local currency.
SG&A, amounted to $226.4 million, a 5% increase in local currency over the previous year.
Increased variable compensation was offset in part by our temporary cost savings and ongoing cost containment initiatives.
Adjusted operating profit amounted to $292.8 million in the quarter, which is a 14% increase over the prior year amount of $256.3 million.
Operating margins increased 80 basis points in the quarter to 31.2%.
We are very pleased with this margin growth.
Currency benefited operating profit growth by approximately 2%, but actually hurt operating margin expansion by about 50 basis points.
A couple of final comments on the P&L.
Amortization amounted to $14.7 million in the quarter.
Interest expense was $9.5 million in the quarter and other income amounted to $3.7 million.
We reduced our effective tax rate for the full year from 20.5% to 19.5%.
This is the rate before discrete items and adjusting for the timing of the stock option exercises in the quarter.
We are very pleased with this reduction and expect to maintain this rate in 2021.
Moving to fully diluted shares, which amounted to $24 million in the quarter and is a 3% decline from the prior year.
Adjusted earnings per share for the quarter was $9.26, a 19% increase over the prior year amount of $7.78.
Currency benefited adjusted earnings per share by approximately 2% in the quarter.
On a reported basis in the quarter, earnings per share was $9.03 as compared to $7.84 in the prior year.
Reported earnings per share in the quarter includes $0.12 of purchased intangible amortization and $0.11 of restructuring.
We also had 2 offsetting items for income taxes.
We had a $0.20 increase due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.
This was offset by a $0.20 benefit from adjusting our tax rate to 19.5% for the first three quarters.
The next slide shows our full year results.
Local currency sales increased 2% in 2020 while adjusted operating income increased 8% and adjusted operating margins were up 130 basis points.
Adjusted earnings per share amounted to $25.72, an increase of 13% over the prior year amount of $22.77.
Currency was neutral to the full year adjusted EPS.
Given the unprecedented challenges we faced in 2020, we are very pleased with our performance and believes it reflects the agility and the strong culture of our organization, the effectiveness of our growth in margin expansion initiatives, in resiliency of our end markets.
That is it for the P&L.
Now let me cover the cash flow.
In the quarter, adjusted free cash flow amounted to $218 million, which is an increase of 20% on a per share basis, as compared to the prior year.
We are very happy with our cash flow generation.
DSO declined approximately 3.5 days in the quarter to 36.5 days as compared to the prior year.
We are seeing concrete results from the use of analytics and productivity improvements in receivable collections and cash flow management during this period.
ITO came in at 4.3 times.
For the full year 2020, adjusted free cash flow was $648 million as compared to the prior year amount of $531 million.
On a per share basis, this is a 26% increase in earnings flow-through of more than 100%.
We are very pleased with this performance, which demonstrates the strength of our franchise as well as our focus on continuous process improvements to drive cash flow generation.
Let me now turn to guidance.
Forecasting continues to be challenging given the uncertainty surrounding Covid-19 and the ultimate impact for the global economy.
Market dynamics are fluid and changes in customer demand can happen quickly.
With our strong fourth quarter performance, we continue to feel confident about those factors within our control, namely executing on our sales and marketing initiatives, and continuing to launch new products with clear value-added benefits to our customers.
We believe we have been successful in identifying and capitalizing on pockets of growth and are well positioned to continue to gain share.
We also continue to feel positive in our ability to generate margin improvement by our pricing and SternDrive initiatives.
Now let me cover the specifics.
For the full year 2021, we now expect local currency sales growth will be in the range of 5% to 7% as compared to 2020.
We expect full year adjusted earnings per share will be in the range of $29.20 to $29.80, which is a growth rate of 14% to 16%.
This compares to previous adjusted earnings per share guidance in the range of $27.50 to $28.30.
With respect to the first quarter, we would expect local currency sales growth to be in the range of 11% to 13% and expected adjusted earnings per share to be in the range of $5.55 to $5.70, a growth rate of 39% to 43%.
Some further comments on 2021 guidance.
Let me start with the pacing of the year.
We expect the first half of the year will be much stronger than the second half.
We are starting the year with excellent momentum coming off a strong Q4.
The first half of the year will also benefit from easier comparisons and the continued tail -- Covid tailwind in our pipette business.
As we look to the second half, we will face more difficult comparisons, particularly with respect to our business in China.
Our Covid tailwinds will also turn to a headwind as we lack comparisons.
We also feel more uncertainty exists for the second half of the year, especially with respect to Covid's potential impact to the global economy.
We recognize that we're currently benefiting from strong momentum, which will not necessarily continue.
We will provide additional quarterly guidance on our next call, but I thought it would be helpful to provide this context now.
Some additional comments on guidance.
We expect interest expense to be approximately $40 million in 2021 and total amortization to be approximately $55 million.
Other income, which is below operating profit, will be approximately $9 million in 2021.
As I mentioned earlier, we would expect our effective tax rate in 2021 to also remain at 19.5%.
In terms of free cash flow for the year, we expect it to be approximately $690 million.
We will continue to repurchase shares and expect to end 2021 in a targeted range of approximately 1.5 times leverage ratio.
With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3.5% in 2021 and 5% in the first quarter.
In terms of adjusted EPS, currency will benefit growth by approximately 3% in 2021.
Let me start with some comments on our operating results.
Our Lab business have exceptional growth in the quarter.
Pipettes have excellent growth and benefited from COVID-related testing demand.
Process Analytics had another quarter of strong growth, while demand for analytical instruments and balances recovered nicely in the quarter.
Sales growth in all regions was very strong.
We expect Lab to continue to be very strong in the first half of 2021 due to favorable biopharma trends, vaccine research, and testing a bioproduction scale-up and production.
Lab will face tougher comparisons in the second half of the year.
With our excellent Lab product portfolio including our power demand solutions, focus on automation, digital interfaces and data management and prove -- proven Spinnaker sales and marketing strategies, we believe we are well positioned to continue to capture share.
In terms of Industrial business, Core Industrial did well in the quarter with a 5% increase driven by double-digit growth in China.
We will return to growth in Core Industrial in Europe, while Americas was flat, although they have very good growth in the prior year.
We are particularly pleased at how resilient our Core Industrial has proven throughout 2020 given the challenges of the pandemic.
We believe this reflects the strength and diversity of our product portfolio, our success in identifying on pursuing pockets of growth, and strong focus on execution.
Product Inspection came in weaker than we had anticipated with a 5% decline in the quarter.
Both Europe and Asia declined while Americas was flat with the prior year.
While our outlook has improved for this business and we expect to start 2021 with solid growth, we are cautious as large package food companies continue to face operational challenges at their manufacturing sites related to COVID.
We believe pent-up demand exists for our instruments but ultimate timing is still hard to determine.
Food retailing came in better than we expected with 7% growth overall and growth in all regions.
Now let me make some additional comments by geography.
Sales in Europe increased 7% in the quarter with excellent growth in Lab and good growth in core industrial and food retail.
We expect solid growth in Europe in 2021.
Americas increased 8% in the quarter with excellent growth in Lab offset by flat results in both product inspection and core industrial.
We expect good growth in Americas in 2021.
Finally, Asia/Rest of the World grew 8% in the quarter with both Lab and Core Industrial doing very well.
As mentioned, China have 12% growth in the quarter with excellent growth across product lines.
We expect market conditions in China to be very favorable as we start 2021 while they face much tougher comparisons in the second half of the year.
One final comment on the business, Service and Consumables were up 13% in the quarter and 8% for the full year.
That concludes my comments on the business.
As I reflect on 2020.
I'm very pleased with our performance given the exceptional challenges we faced.
This performance would not have been possible without the strong foundation and well-ingrained corporate programs that we have in place, which allowed us to quickly pivot and adapt to the new environment.
We have always considered agility and focus on execution a key pillar of Mettler-Toledo and I think you saw evidence of both of these in our results.
Probably most important, however, our success in 2020 sets the stage for us to continue to capture growth in 2021 and beyond.
Our strategy over many years has been remarkably consistent.
As a leader in fragmented market, we have established strategies that allow us to gain a little market share each year while continuously expanding our margin.
The initiatives within these strategies will involve and develop but strategies remain the same.
As we look to 2021, let me comment on how we are going about this.
I would start with our Spinnaker sales and marketing initiatives.
As we discussed on our last call, we made some leapfrog advances in digital transformation during 2020 that positioned us very well for the future.
We will continue to refine our sophisticated Analytics to guide our sales force to the best opportunities.
We will continue to support our market organization with tools and methodologies to increase sales force time with the most strategic account while leveraging our value-selling and cross-selling tools to further penetrate opportunities.
We will also continue to leverage digitalization to develop new approaches that drives sales force efficiency and refine techniques to improve the effectiveness of telesales team, but also look forward to returning to visit accounts to generate new opportunities.
Finally, we look to execute more telemarketing campaigns, enhance tools to increase order conversions.
Service will continue to be essential element of our customer value proposition.
Our almost 3,000 service technicians are an important competitive advantage for us.
This year, we will focus on further I base penetration and utilizing many of the same sales force guidance telesales of digital tools that we use for product sales to further drive service sales.
Our team in China did an exceptional job in 2020, not only continuing to serve customers and penetrate growth opportunities, but also in terms of manufacturing and supply chain.
The team's priorities to continue to optimize the organization to focus on high potential growth areas and attractive segment and further leverage digital technology to engage customers and generate leads.
Introducing products for the local market such as an entry-level x-ray instrument for our product inspection portfolio is also an important element to growth in China and throughout emerging markets.
We remain very optimistic about the growth potential, not one in China, but throughout emerging markets over the medium term.
Constantly coming to market with new product launches is another important strategy.
Given the diversification of our product portfolio, a new product launch will never be material by itself, but together, these launches reinforces our market leadership, help trigger replacement in existing customers, help open doors to new customers, and help support our price differentiation.
Later this month, we will launch a new automatic laboratory balance that will set a new standard for weighing of powders and liquids in research labs, testing labs and quality-control labs.
Addressing the needs in the Laboratory for automation, smaller sample sizes, flexibility, ease of use, and seamless documentation, this new balances offers an unmatched value proposition.
It is a simple fully integrated solution that will support our customers in their everyday operation.
It is just one example of the many product launches we will have this year, but illustrates how we are continually focused on bringing products to market that demonstrate clear value to our customers.
Similar to the continued evolution of growth strategies, we also continue to develop our pricing and productivity initiatives.
We have good results -- good developments within pricing, utilizing Analytics, and so machine learning to most effectively price our offering.
On the supply chain side, the team was able to continue to make progress on their SternDrive productivity goals in 2020, but we will be able to make further progress in 2021 when the team won't have as many challenges as they faced last year.
Finally, I think you will continue to see us market strategic acquisition that leverage our technology leadership and global distribution.
However, these acquisitions will be small and strategic, not transformational.
I believe our franchise is stronger than ever as demonstrated in how we performed in 2020 despite all the challenges.
As I look back over the last decade plus years, we have made much progress in many areas.
Our continuous improvement programs of Spinnaker, sales and marketing, and SternDrive productivity, which I just discussed, are well ingrained throughout our organization and we'll continue to evolve and be important ingredients for the future.
Emerging markets, an important growth driver are 35% of sales today compared with 25% in 2007.
Similarly, our faster growing Laboratory business is now 54% of sales, up from 44%.
Finally, Service and Consumable is now 33% of sales as compared to 28%.
Redirecting resources and investments to faster growing businesses has always been at the heart of our initiatives and these businesses will continue to fuel growth in the future.
The strength of the organization and how well we are positioned for the future contributed to my decision to step down as CEO.
Under Patrick's leadership, I believe we have the organization, corporate programs, senior leadership team, and tools in place to continue to gain share and continue our successful track record. | q4 earnings per share $7.84.
q4 adjusted non-gaap earnings per share $7.78.
qtrly reported sales increased 3% compared with prior year.
will face tough comparisons in q1 2020 due to strong sales in prior-year quarter.
will face strong headwinds to adjusted earnings per share due to adverse currency and impact of tariff costs in q1.
expects a significant impact on its china sales in q1 due to wuhan coronavirus.
anticipates that local currency sales growth in q1 2020 will be approximately 0% to 1%.
anticipates q1 adjusted earnings per share in range of $4.20 to $4.30.
uncertainty remains in macroeconomic environment.
qtrly net sales $844 million versus $817.9 million. | 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. | esco technologies inc - q3 gaap earnings per share $0.57 and adjusted earnings per share $0.67.
q3 gaap earnings per share $0.57 and adjusted earnings per share $0.67.
q3 sales rose 5 percent to $181 million.
sees q4 adjusted earnings per share $0.73 to $0.78. | 0 |
Also on the call are Brian McDade, chief financial officer; and Adam Reuille, chief accounting officer.
Our conference call this evening will be limited to one hour.
For those 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.
I'm pleased to introduce David Simon.
We had a very busy and productive quarter to end a very successful year.
We recorded occupancy gains, record retail sales, and demand for our space from a broad spectrum of tenants is robust, and our other platform investments had strong results.
We generated nearly $4.5 billion in funds from operation in '21 or $11.94 per share.
The $4.5 billion is a record amount for our company for the -- for a year.
And coming off a difficult year of 2020, these results are a testament to our relentless focus on operations, cost structure, active portfolio management, smart investments, coupled with coherent strategy.
Fourth-quarter funds from operations were 1.160 billion -- I'm sorry, $1.16 billion or $3.09 per share.
Included in the fourth quarter results was a net loss of $0.10 per share from a loss on extinguishment of debt and a write-off of predevelopment cost, partially offset by an after-tax gain on the sale of equity interest.
Our domestic operations had another excellent quarter to conclude the year.
Our international operations improved in the quarter.
Domestic property NOI increased 22.4% year over year -- I'm sorry, for the quarter and 12% for the year, including our share of NOI from TRG and our international properties, portfolio NOI increased 33.6% for the quarter and 22.3% for the year.
Mall and outlet occupancy at the end of the fourth quarter was 93.4%, an increase sequentially of 60 basis points and 260 basis points year over year.
Average base minimum rent was $53.91, add $8 to that if you included variable rent.
For the year, we signed more than 4,100 leases for a total of more than 15 million square feet.
This was the highest amount of leasing activity we have done over the last six years.
Retail sales, reported retail sales continued in the fourth quarter.
Mall sales for the fourth quarter were up 8% compared to the fourth quarter of 2019 and up 34% year over year.
Reported retail sales per square foot reached a record level for 2021 at $713 per foot for our Mall and Outlet Business and $645 for the Mills.
These results obviously are impressive, particularly given the lack of international tourism for '21.
Occupancy costs at the end of 2021 are the lowest they've been in five years at 12.6% year-end.
and a premium outlet in South Korea.
Construction continues on our tenth outlet in Japan, opening this fall and Normandie France opening the spring of '23.
We completed five significant redevelopments.
We added densification components with the opening of two hotels and the completion of an NHL headquarters and practice facility.
Progress continues on the densification of Phipps Plaza which will open this fall.
We have a significant pipeline of redevelopment projects, which will be funded from our internally generated cash flow.
Let me turn to our other platform investments, they produced terrific results in 2021, namely JCPenney, SPARC, ABG, and RGG, which is Rue Gilt Groupe.
JCPenney's results were impressive.
Their liquidity position is growing, now $1.6 billion.
The company de-levered their balance sheet, has no borrowings on their line of credit.
CEO, Marc Rosen strengthened his management team with a new CIO and Chief Digital Officer.
RGG, including our Shop Premium Outlet, marketplace growth continues, and we expect continued investment in 2022 to drive customer acquisition and sales growth.
SPARC Group will be the operating partner for Reebok in the U.S. There's a tremendous opportunity for SPARC to develop sportswear and footwear expertise.
The Reebok integration will require additional investment by SPARC as it expands its capability and reach.
TRG, Taubman Realty Group, which we own 80% posted great operating metrics and results, which also beat our underwriting.
Reported retail sales was $942 per square foot, a 31% increase year over year.
Occupancy also increased 210 basis points for the year.
Now, turning to the balance sheet.
We've been active in the debt markets.
We amended and extended our $3.5 billion revolving credit facility with a lower pricing grid for five years.
We issued $2.75 billion of senior notes 750 million-euro notes, completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.14%.
We paid more than $4 billion in debt and de-levered by $1.5 billion.
And with the recent January notes offering, our liquidity stands at $8 billion.
Now, just to turn to dividend.
We paid out $2.7 billion in cash common stock dividends last year.
Today, we announced a dividend of $1.65 per share for the quarter, a year-over-year increase of 27%.
This dividend is payable on March 31.
Now, just to go through guidance for 2022.
Our FFO guidance is $11.50 to $11.70 per share.
When looking at our '22 FFO guidance, it is important to note the following items as compared to '21 actual results.
Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klepierre, approximately $0.32 per share in gains related to our investment in authentic brands.
These gains were partially offset by approximately $0.14 per share in debt extinguishment charges resulting in an adjusted FFO of $11.44 per share for '21.
'21 also included significant increase in overage and percentage rent compared to prior years and lease settlement income of approximately $0.10 higher than historical average.
Our guidance reflects the following assumptions: Domestic property NOI growth of up to 2%, approximately $0.15 to $0.20 drag on FFO from additional investments in RGG, and SPO, JCPenney, and the Reebok integration cost at SPARC all to fund future growth, the impact of a continued strong U.S. dollar versus the euro and yen compared to '21 levels and continued muted international tourism, no significant acquisition or disposition activity.
And for bouncing back in '21 after a very difficult 2020.
Make no mistake about it, '21 was a great year.
And I think -- Tom knows, but I think our FFO guidance was -- which was consistent with basically the analytic community around $9.60 per share, and we reported $11.94 per share.
So, that's a heck of a year.
I'm very excited about our plans for '22 and the future growth prospects of our company, and we're ready for any questions. | simon property sees fy ffo per share $11.50 to $11.70.
sees fy ffo per share $11.50 to $11.70.
q4 ffo per share $3.09.
sees 2022 net income to be within a range of $5.90 to $6.10 per share and ffo within a range of $11.50 to $11.70 per share.
u.s. malls and premium outlets occupancy was 93.4% at december 31, 2021. | 1 |
I'm Cynthia Hiponia, Vice President, Investor Relations.
On the call today we have Aaron Levie, our CEO; and Dylan Smith, our CFO.
However supplemental slides are now available for download from our website.
We also posted the highlights of today's call on Twitter at the handle, @boxincir.
The timing and market adoption of and [Phonetic] benefits from our new products, pricing and partnerships.
The impact of our acquisitions on future Box product offerings, the impact of the COVID-19 pandemic on our business and operating results.
The KKR-led investment in Box and any potential repurchase of our common stock.
These statements reflect our best judgment based on factors currently known to us and actual events or results may differ materially.
In addition, during today's call, we will discuss non-GAAP financial measures.
These non-GAAP financial measures should be considered and in addition to, not as a substitute for or in isolation from our GAAP results.
Unless otherwise indicated, all references to financial measures are on a non-GAAP basis.
Lastly, while we recognize, there has been news around our upcoming Annual Meeting on September 9.
The purpose of today's call is to discuss our financial results.
With that now let me hand the call over to Aaron.
We achieved strong second quarter results across all metrics, marking our fifth consecutive quarter of achieving both revenue and non-GAAP earnings per share above our guidance.
We delivered second quarter revenue growth of 12% year-over-year, a second consecutive quarter of accelerating revenue growth, billings growth of 13% and RPO growth of 27%.
From our business performance and building momentum, it's clear that enterprises are increasingly making strategic, long-term decisions on how to support a remote workforce and digital processes while still maintaining a high level of security and compliance policies.
As a result, more customers are turning to the Box Content Cloud to deliver secure content management and collaboration built for this new way of working.
Our strong momentum is best illustrated by our customer deal metrics in the second quarter.
Our net retention rate was 106%, up from 103% in the prior quarter.
We had 74 new deals over $100,000, up 16% year-over-year.
And we had a 73% attach rate of Suites on deals over $100,000 in the quarter, up from 49% in the prior quarter and up from 31% in Q2 fiscal '21.
We view these strong customer metrics is evident that we are executing on the right product strategy, one that is well aligned with the three major changes happening around the future of work and the enterprise.
First, hybrid work is going to be a necessity going forward; second, digital transformation is driving significant change across all industries; and third, cyber security and privacy threats are increasing at a growing rate as we've seen with recent ransomware attacks.
These trends have major implications for how companies work with their content.
Today enterprises have to purchase and integrate a mix of solutions from disparate vendors to solve the entire content management lifecycle.
This leads to broken processes for users, security risk due to the gaps between tools, fragmented data and increased cost for enterprise customers.
Our vision for the Box Content Cloud is to integrate, empower the complete content lifecycle from the moment content is created through the entire content workflow.
By leveraging our product leadership and content management, our Content Cloud will continue to extend in the key elements of this lifecycle including e-signature, content publishing, deeper content workflows, new collaboration experiences, analytics, data privacy and advanced security.
Critical to our success is our ability to execute on our product roadmap which expands our total addressable market and adds value to our core platform with new product innovation.
This is why we were pleased to deliver on our product road map with the launch of Box Sign to select customers in late July, capitalizing on the trend of more transactions moving from paper-based manual workflows to the cloud, while also addressing an incremental multi-billion dollar market.
Box Sign was developed through the acquisition of SignRequest, a leading cloud-based electronic signature company and a good example of our disciplined approach to M&A.
Our decision to acquire this particular technology versus developing internally was driven by time-to-market with e-signature being the number 1 requested feature from customers last year.
Initial response from customers has been very positive and we are rolling our Box Sign to all business and enterprise customers throughout this fall with a significant roadmap of innovation ahead.
Also over the quarter, we made meaningful updates to our governance functionality to help support customers' legal hold and document retention needs as well as new features within Box Shield to protect the flow of content with advanced machine learning based security features.
Our security, compliance, data governance and privacy capabilities remain one of the most critical reasons customers choose the Box Content Cloud and our innovation here is only accelerating.
In addition to these and many other product updates in the quarter, we continue to integrate deeply across the SaaS landscape, a key part of our content product value proposition, interoperability and strong partnerships with leading technology companies.
This is critical to our success at scale, building on the great work we've done with so many amazing partners, including Slack and Microsoft.
In the second quarter, we announced a new integration with ServiceNow legal service delivery application to modernize legal operations which benefit customers by bringing together ServiceNow's advanced workflow expertise to minimize manual processing while ensuring confidential legal content is secured on Box's Content Cloud.
And we also announced new and deepened integrations with Box for Cisco Webex and make it easier for customers to work securely and effectively in the cloud.
And we're just getting started to address our $50 billion plus market opportunity, we are building the end-to-end platform for managing the lifecycle of content and continue to be regarded by customers and analysts as the leading independent vendor for Cloud Content Management.
Of course, evolving our product strategy to meet today's enterprise, remote and hybrid workforce needs and strengthening our partnerships with leading technology companies are only part of our strategy to drive growth.
We have also been methodically enhancing our land and expand go-to market model to deliver our full platform to our customers.
To accelerate growth, over the past couple of years, we've been actively implementing a number of strategic go-to-market initiatives including optimizing pricing and packaging, improving sales segmentation and territory planning, driving efficient marketing programs and pipeline generation, increasing sales enablement and doubling down our focus on key verticals such as life sciences and financial services in the federal government and the success of our go-to-market initiatives and the growing demand for our more advanced capabilities drove our strong Suites adoption in the second quarter.
This is why we've been working aggressively to sell the full Box platform through our Suites' offering to bring all the Box has to offer to our customers.
We know that when a customer adopts our multi-product offerings, we see greater total account value, higher net retention, higher gross margin and a more efficient sales process.
Building on the success of Suites, in late July, we also announced a new simplified product addition for our enterprise customers called Enterprise Plus which includes Shield, Governance, Relay, Platform, Box Sign, the ability for large file uploads and enhanced important consulting credits.
You can see the success of our go-to-market efforts most clearly when looking at our Q2 customer expansion.
For instance, one of the largest banks in the world purchased a seven figure deal with multiple products including KeySafe, Governance, Relay, Shield and Platform to support new use cases for Box including claims processing and loan origination in a more secure virtual environment.
The bank has also standardized on Box for internal and external collaboration.
An innovative biopharmaceutical company did a six figure expansion with Box to support its growing workforce following multiple acquisition to help power its mission to transform the way the drugs are manufactured in the US.
With Box, the company's workforce is able to improve collaboration, security and GST compliance providing with them with a scalable and secure foundation that allows them to work faster.
And finally, a global leader in energy services that has been a Box customer since 2017 expanded its use of Box with a six figure ELA and the purchase of Enterprise Plus.
This will enable them to have a proactive approach to internal threat detection on content, be more prescriptive with security controls around content and automate more than a dozen critical business workflows.
These deals showcase the simplicity and power of our business model.
We are focused on expanding our customers through additional seed growth by going wider within organizations, as well as adding more value through additional feature enhancements and new products that drive up customer value and retention.
Over the past year, we have been executing on our strategy to reaccelerate growth while also driving continued operating margin improvements and our results in the second quarter demonstrate that our strategy is working.
As a result, we have raised our guidance for the full fiscal year 2022 and are reiterating our long-term target for the 12% to 16% revenue growth and 23% to 27% non-GAAP operating margin in FY '24.
Our strong second quarter results and our confidence in our outlook for this fiscal year and beyond are the direct result of the leadership of our board and the hard work and execution we've been driving as a company.
I could not be prouder of the team at Box and while we still have so much we want to accomplish, I am confident that we have the right team and leadership to execute on our strategy and targets going forward as well as a world-class Board of Directors that is focused on and committed to driving enhanced value for shareholders.
As Aaron mentioned, we are proud to have delivered strong top and bottom line results in Q2.
We drove an acceleration across key metrics, revenue growth, net retention and operating profit, clearly demonstrating strong business momentum as we build on our Content Cloud vision.
Revenue of $214 million was up 12% year-over-year, an acceleration from our Q1 revenue growth of 11% and above the high end of our guidance.
Our Content Cloud offerings are increasingly resonating with our customers as shown by the strong Suites traction and net retention rate we achieved in Q2.
As our customers are increasingly adopting products with more advanced capabilities, 61% of our revenue is now attributable to customers who have purchased at least one additional product, up from 56% a year ago.
In Q2, we closed 74 deals worth more than $100,000, up 16% year-over-year, a record 73% of the six-figure deals were sold as a Suite, up from 49% in Q1 and from 31% in the year-ago period.
Suites have enabled us to streamline our sales process and drive greater adoption of multi-product solutions, resulting in customers who are larger, stickier and have a greater propensity to expand over time.
We couldn't be more encouraged by our traction here.
We ended Q2 with remaining performance obligations or RPO of $922 million, up 27% year-over-year, an acceleration from the prior quarter's RPO growth rate of 20% and exceeding our revenue growth by 1,500 basis points.
Q2's RPO growth is comprised of 16% deferred revenue growth and 37% backlog growth demonstrating Box's stickiness as we continue to sign longer term agreements to support our customers' content strategies.
We expect to recognize more than 60% of our RPO over the next 12 month.
Q2 billings of $213 million were up 13% year-over-year and well ahead of our previous expectations to deliver a growth rate in the mid-single-digit range.
This billings result reflects the strong sales execution that we saw in the enterprise and SMB with both teams generating double-digit year-over-year sales productivity improvement.
Our net retention rate at the end of Q2 was 106%, up 300 basis points from 103% in Q1.
This result was driven by strength in customer expansion and a stable annualized full churn rate of 5% based on the strong momentum we're seeing in customer expansion and retention, we expect to deliver additional improvement in our net retention rate over the course of this fiscal year.
Gross margin came in at 74.5%, up 100 basis points from 73.5% a year ago.
Q2 gross profit of $160 million was up 13% year-over-year, exceeding our revenue growth rate.
We continue to benefit from both our ongoing shift to cloud data centers and the hardware and software efficiencies we're generating in the infrastructure we manage.
Our gross margin expectations for the full year of FY '22 continue to be approximately 74%.
Our ongoing efforts to improve profitability are paying off as we continue to unlock leverage in our operating model.
Q2 operating income increased 47% year-over-year to $44 million which in turn drove a 500 basis point improvement in Q2 operating margin to 20.6%.
We continue to deliver profitable growth and disciplined expense management.
This year, we've made significant progress in building out our Engineering Center of Excellence in Poland, which will help us drive additional operating leverage and efficiencies over time as we transition certain engineering functions away from higher cost California locations.
This resulted and are delivering $0.21 of diluted non-GAAP earnings per share in Q2 above the high end of our guidance and up from $0.18 a year ago.
I'll now turn to our cash flow and balance sheet.
In Q2, we delivered cash flow from operations of $45 million, up 39% from the year-ago period.
We also generated free cash flow of $30 million, a year-over-year improvement of 124%.
Capital lease payments, which we include in our free cash flow calculation were $13 million down from $14 million in Q2 of last year.
For the full year of FY '22, we continue to expect capex and capital lease payments combined to be roughly 7% of revenue.
As a result, we ended the quarter with $779 million in cash, cash equivalents and restricted cash.
We completed our modified Dutch Auction Tender Offer at the end of June for an aggregate cost of approximately $238 million and our Board subsequently authorized a $260 million share repurchase program.
As of August 24, 2021, we had repurchased 2.9 million shares of Class A common stock at a weighted average price of $23.89 for a total of $70 million.
Combined with the modified Dutch Auction tender, we have repurchased a total of 12.2 million shares for a total of $308 million.
With that, I would like to turn to our guidance for Q3 and fiscal 2022.
As we announced a few weeks ago, based on our strong Q2 results and our continued business momentum, we raised our full year revenue, operating margin and earnings per share guidance.
Note that our share count and earnings per share expectations factor in only the shares that we have already repurchased to date.
While we expect to opportunistically purchase additional shares through the remainder of the year under our ongoing share repurchase program, the amount could vary significantly based on market conditions and other factors.
Therefore, we're taking a prudent approach and not assuming any future repurchases in our Q3 or FY '22 outlook.
For the third quarter of fiscal 2022, we anticipate revenue of $218 million to $219 million, representing 12% year-over-year growth and a third consecutive quarter of revenue growth acceleration at the high end of this range.
We expect our non-GAAP operating margin to be approximately 20%, representing a 200 basis point improvement year-over-year.
We expect our non-GAAP earnings per share to be in the range of $0.20 to $0.21 and GAAP earnings per share to be in the range of negative $0.09 to $0.08 on approximately 162 million and 154 million shares respectively.
We expect our Q3 billings growth rate to be roughly in line with our revenue growth for the full fiscal year ending January 31, 2022, we have raised our full year revenue guidance and we expect FY '22 revenue to be in the range of $856 million to $860 million, up 11% year-over-year.
This is an increase from last quarter's guidance of $845 million to $853 million and represents an acceleration from last year's revenue growth.
We expect our non-GAAP operating margin to be approximately 19.5%, representing a 410 basis point improvement from last year's result of 15.4% and a sizable increase over our previous guidance of 18% to 18.5%.
Due to our strong top and bottom line momentum, we now expect our FY '22 non-GAAP earnings per share to be in the range of $0.79 to $0.81 on approximately 166 million diluted shares.
Our GAAP earnings per share is expected to be in the range of negative $0.34 to $0.32 on approximately 158 million shares.
We continue to expect our billings growth rate to be above our revenue growth rate for the full year of FY '22 and for RPO growth to outpace both revenue and billings growth for the full year of FY '22.
We will provide further details into our Q4 expectations on our Q3 earnings call.
Finally, our FY '22 revenue growth rate combined with FY '22 free cash flow margin is now expected to be at least 32%, an increase over our previous guidance of at least 30%.
Box today is not the Box of 2019.
Our strong Q2 performance is the result of the business transformation we began two years ago.
This year, we're delivering both revenue acceleration and increased operating leverage for our shareholders, proving that our Content Cloud platform is resonating with customers.
We are well on our way to delivering against our previously stated target of 12% to 16% revenue growth and 23% to 27% operating margin in FY '24, two years from now.
In FY '24, we're also committed to delivering revenue growth plus free cash flow margin of 40%.
Before we conclude, I'll hand it back to Aaron for a few closing remarks.
Before we open it up to questions, we wanted to share that on October 6, we will be hosting 10s of thousands of attendees at BoxWorks which will be an all digital event for the second year in a row.
This year will be another incredible event where we'll share more on our vision for the Content Cloud and we'll showcase major product advancements.
Attendees will also be hearing from an outstanding slate of speakers including the CEOs of Okta, Slack and Zoom as well as IT [Phonetic] leaders from enterprises like Lionsgate, State Street, USAA and World Fuel Services among many others.
Q2 was a strong quarter, not only in terms of achieving quarterly revenue and non-GAAP operating results that were above our original guidance, but also in our metrics that show the power of our Content Cloud platform.
Net retention rate, billings and RPO growth are all leading indicators that show the success of our strategy, not only retaining customers, but expand our solutions, within our existing customer base to drive revenue growth and operating margin improvements and ultimately shareholder value. | compname reports q1 non-gaap earnings per share of $0.18.
sees q2 non-gaap earnings per share $0.17 to $0.18.
sees q2 gaap loss per share $0.12 to $0.13.
q1 non-gaap earnings per share $0.18.
q1 gaap loss per share $0.09.
sees q2 revenue $211 million to $212 million.
sees fy revenue $845 million to $853 million.
sees fy 2022 non-gaap earnings per share $0.71 to $0.76.
sees fy 2022 gaap loss per share $0.45 to $0.50.
billings for q1 of fiscal year 2022 were $159.4 million, up 24%. | 0 |
These statements involve a number of risks and uncertainties, including the impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and Form 10-Q.
The impact of any pending or potential labor disputes restructuring costs and costs subsequent to the end of the third quarter.
The impact of foreign exchange rate changes subsequent to the end of the third quarter, impacts from further spread of COVID-19 and environmental and litigation charges.
With the COVID-19 pandemic remaining top of mind for our colleagues and stakeholders around the world, we hope that you and your families remain safe and healthy.
We certainly accomplished a lot this quarter.
Our teams remain focused on our commercial and strategic objectives.
These are exciting times for our company.
In addition to our third quarter results, we are excited to announce today that we reached an agreement to acquire NxEdge, which will significantly expand our solutions offerings in the semiconductor industry.
We will cover that news in a few minutes, but first, I'd like to touch briefly on our third quarter highlights.
We delivered another strong quarter in Q3 with sales increasing approximately 16% organically and adjusted EBITDA margin expanding 250 basis points.
As Milt will describe in greater detail shortly, performance in the Sealing Technologies and Advanced Surface Technology segments were the primary drivers of these results.
Heightened collaboration among our supply chain, manufacturing, and commercial teams over the past year has been foundational to our strong year over year earnings growth.
We have held supply chain disruptions to a minimum and successfully managed supply shortages, material cost increases, and pricing initiatives.
The global supply chain pressures will likely continue for some time, and we will remain vigilant in working with our suppliers and delivering on customer needs.
Results for the quarter and year to date also reflect the positive effect of our portfolio reshaping and growth initiatives.
During the quarter, we announced additional moves that enhance an overall our overall portfolio of businesses.
On September 3, we announced the divestiture of our Polymer Components business, continuing our efforts to optimize the Sealing Technologies segment.
Following quarter close, we announced an agreement to sell our Compressor Products International business, marking another meaningful step in our company's evolution, which will significantly reduce our exposure to the oil and gas market.
And today, the announcement of the agreement to acquire NxEdge is yet another significant step in our transformational journey.
I will hand the call over to Milt for other highlights on the quarter, following which we will come back to today's announced acquisition.
As Eric mentioned, we had another strong quarter, positive momentum across most major end markets, as well as the addition of Alluxa contributed to top line results, partially offset by the reduction in sales due to last year's divestitures and weakness in power generation, oil and gas, and automotive markets.
As reported, sales of $283.1 million in the third quarter increased 5.5% year over year.
As Eric noted, organic sales for the quarter increased about 16% compared to the third quarter of 2020.
Gross profit margin of 38.7% increased 350 basis points versus the prior-year period.
The increase was driven primarily by strong organic sales growth, increased pricing, the benefit of divesting lower-margin businesses and the addition of Alluxa, partially offset by increased raw material costs.
Adjusted EBITDA of $51.5 million increased 22.3% over the prior-year period as a result of operating leverage on organic sales growth.
The benefit of reshaping actions completed in 2020, including the addition of Alluxa and pricing initiatives, partially offset by increased raw material costs.
Adjusted EBITDA margin of 18.2% expanded approximately 250 basis points compared to the third quarter of 2020.
Corporate expenses of $11.6 million in the third quarter were essentially flat from a year ago.
Adjusted diluted earnings per share of $1.40 increased 39% compared to the prior-year period.
Amortization of acquisition-related intangible assets in the third quarter was $11.2 million compared to $9 million in the prior year, reflecting the addition of Alluxa.
As a reminder, our estimated normalized tax rate used in determining adjusted earnings per share is 30%.
Moving to the discussion of segment performance.
Sealing Technologies sales of $146.9 million decreased 6.9% due to the impact of divestitures in 2020.
Excluding the impact of foreign exchange translation and divested businesses, sales increased 15.7%, driven by strong demand in the petrochemical, heavy-duty truck, food and pharma, and general industrial markets, partially offset by tepid aerospace and power generation markets.
For the third quarter, adjusted segment EBITDA increased 7.8% to $34.5 million, and adjusted segment EBITDA margin expanded 320 basis points to 23.5%.
The margin expansion was driven primarily by operating leverage on volume growth, portfolio reshaping, and select pricing initiatives, partially offset by increased material costs and SG&A expenses.
Excluding the impact of favorable foreign exchange translation and divestitures, adjusted segment EBITDA increased 26.5% compared to the prior-year period.
Turning now to our Advanced Surface Technology segment.
Third quarter sales of $64.3 million increased 44.2%, driven by continued strong demand in the semiconductor market and the addition of Alluxa.
Excluding the impact of the foreign exchange translation and the Alluxa acquisition, sales increased 23.6% versus the prior-year period.
For the third quarter, adjusted segment EBITDA increased 44.8% to $19.4 million and adjusted segment EBITDA margin of 30.2% was relatively flat compared to a year ago.
Excluding the impact of Alluxa and foreign exchange translation, adjusted segment EBITDA increased 8.2%, reflecting transactional foreign exchange headwinds and start-up costs of the new facility in Taiwan to support strong lean tech growth.
Just as a reminder, LeanTeq acquired in the fourth quarter of 2019, is a leading provider of highly differentiated cleaning, coating, and related solutions, supporting the most advanced technology nodes within the semiconductor industry.
Sequentially, adjusted EBITDA margins improved 380 basis points in the quarter.
More broadly across the entire AST segment, we expect sustained organic revenue growth and strong profitability over the long term.
In Engineered Materials, third quarter sales of $73.8 million increased 9% compared to the prior year, driven primarily by sales in general industrial markets, partially offset by sales in power generation, oil and gas and automotive markets.
Excluding the impact of foreign exchange translation and last year's divestiture of GGB's Bushing Block business, sales for the quarter increased 11%.
Third quarter adjusted segment EBITDA increased 11.4% over the prior-year period to $8.8 million and adjusted segment EBITDA margin was relatively flat year over year.
The year over year increase in EBITDA was partially the result of operating losses incurred in the prior year related to the divested Bushing Block business.
Excluding the impact of foreign exchange translation and the impact of the Bushing Block divestiture, adjusted EBITDA was relatively flat compared to the prior-year period, reflecting material cost headwinds and higher SG&A that offset the benefit of higher volumes and pricing initiatives.
Now turning to the balance sheet and cash flow.
We ended the quarter with cash of $330 million and full availability of our $400 million revolver, less $12 million in outstanding letters of credit.
At the end of September, our net debt to adjusted EBITDA was approximately 0.8 times, a sequential decline from the 1.1 times reported at the end of the second quarter.
We'll talk momentarily about the anticipated impact of today's announced acquisitional leverage.
Free cash flow for the first nine months of 2021 was $84 million, up from $37 million in the prior year, driven primarily by higher operating profits, offset by working capital investments supporting higher sales.
And during the third quarter, we paid a $0.27 per share quarterly dividend.
For the first nine months of the year, dividend payments totaled $16.8 million, a 3.7% increase versus the prior year.
Before moving to guidance, I'd like to mention a few additional items, including events subsequent to quarter end.
First, we increased our environmental reserve for the Passaic River site by $4.5 million in response to estimated remedial costs and ongoing settlement negotiations with the United States EPA, bringing our total reserve for this legacy environmental liabilities of $5.4 million at the end of the third quarter.
These negotiations bring us one step closer to resolving this legacy liability.
Second, subsequent to quarter end, we received a tax refund from the Internal Revenue Service for $26 million in conjunction with several years of audits proceeding in the 2017 completion of the ACRP process.
And finally, as previously noted, we signed an agreement to sell CPI for a price of $195 million with estimated after-tax proceeds of approximately $175 million in conjunction with the sale, which is expected to close by the end of the first quarter of next year.
Moving on to Slide 11 and our 2021 guidance.
In light of the divestiture of our Polymer Components business, we are adjusting our sales guidance to be in the range of $1.085 to $1.12 billion and our 2021 adjusted EBITDA range to $202 million to $208 million.
The only changes to prior guidance are a tightening of the range on the low end and exclusion of earnings from polymer components on the high end of the guidance.
That was the business that we sold in September.
We expected adjusted -- or we expect adjusted diluted earnings per share from continuing operations to be in the range of $5.35 to $5.55, and up slightly at the midpoint from the range of $5.16 to $5.50 provided last quarter.
Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition, acquisition-related intangible assets in the range of $28 million to $30 million and net interest expense of $13 million to $15 million.
Now, I'll hand the call back to Eric to discuss the acquisition of NxEdge.
NxEdge is an advanced manufacturing, cleaning, coating, and refurbishment business focused on the semiconductor value chain.
This is an exciting acquisition of a highly complementary business that we believe will be transformative to our AST segment and deliver compelling strategic and financial benefits for EnPro and the customers we serve.
It also marks a significant next step in our ongoing portfolio reshaping strategy.
Before getting into more specifics on NxEdge, I'd like to remind everyone of our strategy as outlined during our May Investor Day and in subsequent communications.
Since 2018, we have been executing on a transformative strategy to reshape our portfolio.
These actions have strengthened profitability and enhanced growth through a focus on high-margin technology-related businesses, which possess stronger and more consistent cash flow, operating in faster growth markets.
We are executing the strategy through divestitures of noncore businesses and product lines as well as strategic acquisitions of high growth, high-margin businesses that meet our M&A criteria.
You have seen evidence of this strategy in the acquisitions of Aseptic, LeanTeq, and Alluxa and through a number of divestitures completed over the past three years.
Based in Boise, Idaho, NxEdge serves the semiconductor supply chain from six main facilities located in Idaho and California.
The company is expected to generate sales and EBITDA in 2021 of approximately $190 million and $70 million, respectively.
We've long admired NxEdge and its management team and are very familiar with their business.
With vertically integrated capabilities across the semiconductor value chain, including a robust aftermarket business, NxEdge will broaden our solutions portfolio.
In addition, NxEdge will bring ASP more opportunities to earn process of record qualifications with key customers.
NxEdge is highly complementary with EnPro's existing semiconductor business, and upon closing, will become part of our ASP segment.
The combined business will have enhanced capabilities across the semiconductor value chain with significantly expanded customer relationships and new high-margin revenue streams.
Beyond the compatibility of our businesses, we've been drawn from the start to NxEdge's experienced leadership and their talented employee base.
Jackson Chao has been a driving force in building NxEdge into the highly profitable, high-growth company there is today, and we're excited for him to continue leading NxEdge as part of EnPro.
We believe NxEdge's culture aligns closely with ours, including a shared focus on values of safety, excellence, and respect, which we believe will support a smooth transition and integration.
We're excited by the prospect of combining complementary products, technical capabilities, customer bases and teams, making the combined company stronger and better positioned for long-term profitable growth while offering customers differentiated products and solutions.
Turning to Slide 15.
As we outlined at our investor day, we have put in place and adhere to our rigorous set of criteria for screening acquisitions, including thoughtful strategic filters and financial criteria.
We are focused on businesses with growing addressable markets that benefit from secular growth trends.
We look for businesses with recurring revenue streams as it relates to the organizational profile.
Talent is critical, and we look for experienced management teams and engaged employees just as we found at Alluxa and LeanTeq.
Finally, we look for EBITDA margins and cash flow return on investment greater than 20%.
At NxEdge, we found a business that checks all of these boxes.
The combination is expected to significantly enhance the scale and breadth of EnPro's offerings across the semiconductor value chain, at a time when the entire industry is being driven by powerful secular trends, some of which I will review on the following slides.
From a services standpoint, NxEdge brings to EnPro highly complementary and differentiated capabilities across the semiconductor value chain from an advanced manufacturing through cleaning, coating, refurbishment, replacements, and new components.
I want to highlight coatings, in particular, which, together with related proprietary material science is a linchpin of our overall semiconductor strategy.
Advanced coatings are increasingly critical to the semiconductor production process, increasing production yields, especially for the advanced nodes.
We believe that NxEdge's high-performance proprietary coatings materials will be a key differentiator for EnPro as a supplier in the semiconductor industry.
NxEdge has long-term strong relationships with top-tier global IDMs and OEMs that will provide meaningful customer engagement and geographic diversification, while driving higher-margin growth, including an expanded aftermarket mix.
As shown on Slide 16, the NxEdge combination with EnPro will expand our geographic footprint.
With facilities in Idaho and California, we expect to add significant value to our global IDM customers who are expanding capacity in the United States and developing new domestic supply chains, reducing lead times, and expanding our product and service portfolio in the U.S. is timely.
NxEdge's high degree of aftermarket exposure will increase recurring revenue mix, which remains a core component of our strategy.
The combination of NxEdge with the existing AST businesses would result in aftermarket recurring revenue increasing from 35% to 44% of 2020 pro forma ASD sales.
Moreover, NxEdge is focused on full life cycle management, vertically integrated model, and superior surface coating technology provides revenue visibility over a long-term horizon.
We expect this combination to deliver long-term revenue growth, expand capabilities within AST and strengthen customer relationships.
Turning to Slide 17.
We expect AST will benefit from NxEdge's integrated design, build, and vertical integration strategy, which is a major advantage of reducing lead times and improving quality controlled traceability.
With its vertical integration and broad scope of solutions, NxEdge has a unique capability to provide customers with improved supply chain efficiency while providing compelling products, cleaning, coding, and refurbishment solutions all along the semiconductor value chain.
Further, AST will benefit from NxEdge's differentiated coating capabilities.
NxEdge is a leader in advanced plasma spray coatings, while Technetics, Semi, and Alluxa offer high-density physical vapor definition light coatings.
Combining these differentiated capabilities will enable the combined entity to serve a wide range of leading-edge semiconductor applications.
Together, NxEdge and EnPro will touch many steps of the part life cycle from the initial design and engineered to recoating and reconditioning.
NxEdge is a vertical integration strategy.
For next-generation products, we will create a greater installed base for our cleaning, coating, and refurbishment capabilities globally, increasing process of record, stickiness and resulting in growing aftermarket opportunities through the life cycle.
As the install base of advanced manufacturing equipment grows, our service annuity escalates.
Further, as semiconductor production becomes more advanced, particularly at the sub 14-nanometer nodes, chamber components require more frequent maintenance.
Looking at Slides 20 and 21.
As most of you know well, consumer trends and increased computing power in the semiconductor industry are creating powerful secular tailwinds, including growth in data management, 5G networks, Internet of Things, and machine learning as well as the expansion of the use of semiconductors from consumer and auto electronics into numerous business sectors.
Most semiconductor devices are manufactured on silicon wafers and annual wafer starts are a good indicator for predicting the volume level at which semiconductor fabs are running and the corresponding aftermarket opportunities that are generated to support the fabs.
As the chart on Slide 20 shows, for the last two decades, wafer starts have been steadily growing.
The demand for refurbished and after market components is directly tied to growth in ongoing capacity utilization and semiconductor fabs, which is driven by the growing demand for integrated circuits.
NxEdge's aftermarket business directly correlates to wafer starts and makes us less sensitive to capital equipment cycles.
With NxEdge, we will be able to expand AST's participation to other areas of the processing chambers.
These in-chamber products go through regular preventative maintenance cycles to ensure the fab yields meet expectations.
NxEdge's capabilities provide new components, replacement parts, and refurbishment of warn parts' relative equipment life cycle.
Once combined, NxEdge and EnPro will be well positioned in the regions where semiconductor capacity expansions and capital spending is expected to accelerate.
Capacity expansions planned in coming years around the world as depicted in Slide 21, show a consistent capital spending environment, which will favor the complementary nature of the combination with NxEdge and EnPro.
In addition to adding more products inside the chamber, our combined positioning in the Americas and Taiwan positions us in regions where spending is expected to accelerate.
This not only helps our OEM business but drives longer-term recurring revenue opportunities for replacement parts in cleaning, coating, and refurbishment services.
Advanced semiconductor manufacturing is returning to the U.S. and domestic fabs and IDMs will create incremental step change revenue opportunities for capital equipment and subsequently drive demand for U.S.-based component manufacturers and cleaning, coating, and refurbishment service providers.
TSMC, Intel, and Samsung have all announced major expansions in the U.S.-focused on leading-edge chip nodes sub-14 nanometer.
NxEdge's capabilities and domestic locations will position our AST segment to capitalize on ongoing IDM expansion in semiconductor supply chain development domestically.
Under the terms of the agreement announced today, EnPro will acquire NxEdge from Tribe Capital for $850 million in cash, subject to limited closing adjustments, including working capital.
We expect to fund the purchase with a combination of cash, borrowings from our revolving credit facility and additional term loan debt provided by our bank group.
The transaction is expected to close by the end of the year following regulatory approvals.
As Eric mentioned, NxEdge expects to generate sales and adjusted EBITDA in 2021 of approximately $190 million and $70 million, respectively.
Based on global semiconductor benchmarks, the announced expansion of wafer production in the U.S. and the capabilities of NxEdge, combined with those of our AST business, we anticipate NxEdge's annual revenue growth over the next five years, on average, to be in the high single digit, low double-digit range.
At current interest rates, we expect NxEdge to contribute approximately $1.70 in adjusted diluted earnings per share in 2022, which represents approximately 30% above the midpoint of our 2021 guidance range.
As Eric noted, NxEdge will continue to be led by current CEO, Jackson Chao, and will become part of our Advanced Service Technologies segment.
The addition of NxEdge continues the migration of EnPro's end market exposure toward faster-growing markets, including semiconductor.
As you can see on Slide 25, on a pro forma basis, including the impact of the announced NxEdge acquisition and the CPI divestiture, semi sales would represent about one-third of our total sales with noticeable drops since 2018 in heavy-duty trucking and oil and gas.
Slide 26 provides multiyear trends for sales, adjusted EBITDA and adjusted EBITDA margin, which reflects the results of our performance and portfolio reshaping.
2019 and 2020 are as reported.
2021 is based on the midpoint of current guidance and 2021 pro forma shows the midpoint of guidance adjusted to reflect NxEdge, CPI, and polymer components as if those transactions occurred at the beginning of the year.
Of note, 2021 pro forma adjusted EBITDA margins are 700 basis points above 2019 margins.
And with 240 basis points of that improvement attributable to the impact of this year's completed and announced transactions.
Looking at the balance sheet.
Upon completion of the NxEdge acquisition, we anticipate net leverage of approximately 3.7 times adjusted EBITDA.
Proceeds from the sale of CPI will lower our leverage ratio to about 3.3 times.
Over time, through operating cash flow and possible further portfolio optimization, we expect to bring our leverage ratio back to a target of around two times.
Now, I'll pass the call back to Eric for closing comments.
The sustained benefits of our ongoing portfolio reshaping actions, and our intention to continue investing in growth opportunities.
We expect this momentum to continue as we focus on driving commercial and operational excellence throughout the company.
Our team also helped put us in a position to announce this exciting transaction with NxEdge.
We're focused on completing the transaction before the end of the year and beginning the integration planning process, so we can hit the ground running upon close.
We're very excited about welcoming everyone at NxEdge to the EnPro team and look forward to realizing the value of this combination.
This is the right deal at the right time, with the right company, with the right leadership for EnPro in a growing market that expects to exceed $1 trillion by 2030.
We're really excited about the combination.
And with that, we'll open it up to the operator. | q3 adjusted earnings per share $1.40.
q3 sales rose 5.5 percent to $283.1 million. | 1 |
I'm joined by our Chief Executive Officer, Patrick Beharelle.
We use non-GAAP measures when presenting our financial results.
Any comparisons made today are based on a comparison to the same period in the prior year, unless otherwise stated.
I am pleased to report we had a strong start to the year.
We delivered net income of $7 million in the first quarter versus a loss of $150 million in the first quarter of the prior year.
As a reminder, the first quarter last year included a non-cash asset impairment charge of $152 million net effects.
Growth, excluding the impairment charge, was led by a series of new client wins, improving industry performance, including those hit the hardest last year, and disciplined cost management.
I'm pleased that on an adjusted basis, we experienced growth of $9 million in both adjusted net income and adjusted EBITDA year-over-year.
Before turning to the segment results, I want to highlight the early new win successes at PeopleManagement and PeopleScout as we are beginning to see increased interest in clients using more variable labor.
In PeopleManagement, new wins on an annualized basis are $44 million this year, up from $16 million same time last year, mainly in manufacturing, logistics and retail.
We have seen similar growth at PeopleScout where annualized wins are $30 million this year, up from $3 million the same time last year.
New client growth is coming from a variety of industries, including retail, healthcare and transportation, which is very encouraging.
Now let's turn to our results by segment, starting with PeopleReady.
PeopleReady is our largest segment, representing 59% of trailing 12-month revenue and 69% of segment profit.
PeopleReady is the leading provider of on-demand labor and skilled trades in the North American industrial staffing market.
We service our clients via national footprint of physical branch locations, as well as our JobStack mobile app.
PeopleReady's revenue was down 13% during the quarter versus down 18% in Q4.
PeopleManagement is our second largest segment, representing 33% of trailing 12-month revenue and 22% of segment profit.
PeopleManagement provides onsite industrial staffing and commercial driving services in the North American industrial staffing market.
The essence of a typical PeopleManagement engagement is supplying an outsourced workforce that involves multi-year multi-million dollar onsite for driver relationships.
PeopleManagement revenue is reaching pre-pandemic levels, by growing 7% in the first quarter versus up 5% in Q4.
Turning to our third segment, PeopleScout represents 8% of trailing 12-month revenue and 9% of segment profit.
PeopleScout is a global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings.
Revenue was down 13% during the quarter, versus down 24% in Q4.
Now I'd like to shift gears and update you on our key strategies by segment starting with PeopleReady.
Our long-term strategy at PeopleReady is to further digitalize our business model to gain market share and improve the efficiency of our service delivery cost structure.
Most of our competitors in this segment are smaller mom and pops that don't have the scale or capital to deploy something like our JobStack mobile app.
This along with our nationwide footprint is what makes us unique.
As a reminder, we began rolling out JobStack to our associates in 2017.
And in 2018, we launched the client side of the app.
We now have digital fill rates north of 50% and more than 26,000 clients are using the app.
In Q1 2021, we sold 716,000 shifts via JobStack, representing a digital fill rate of 58%.
Our client user count ended the quarter at 26,500, up 13% versus Q1 2020.
The rise in heavy client user growth continues to be our primary focus.
Heavy client user has 50 or more touches on JobStack per month, whether it's entering an order, rating a worker, or approving time.
JobStack heavy client users continue to post better year-over-year revenue growth rates compared to the rest of the customer base.
In Q1 2021, the revenue growth differential between heavy client users and non-users was over 35 percentage points on a same customer basis.
This growth differential is largely driven by wallet share takeaways from competitors as heavy client users are telling us a major reason they are moving share to PeopleReady is due to JobStack's unique capabilities.
Our focus on heavy user growth is become more material in our overall results.
We increased our heavy client user mix from 24% of PeopleReady's business in fiscal 2020 to 31% in Q1 2021.
With the foundation of our digital strategy in place, our focus has turned to how we can better serve our existing customers and reach new clients.
Combining the strength of our geographic footprint with technology, centralized work activities and repurposed job roles will allow us to achieve this goal with greater efficiency.
At the end of the first quarter, we launched two market pilots.
Pilots use the elements I mentioned to provide an altered go-to-market approach and are intended to strengthen the local presence in the communities where we do business.
While it's still too early to report results, we are encouraged by the progress made by the team.
We'll continue to update on this front as the pilot progresses.
Turning to PeopleManagement, our strategy is to focus on execution and grow our client base.
Last year, we sharpened our vertical focus to target essential manufacturers and made investments in our sales teams to enhance productivity.
With these initiatives in flight, we have broadened the strategy to expand our geographic footprint by targeting more local and underserved markets.
We are seeing strong results, as mentioned earlier, with new win growth during the first quarter.
Finally, we are investing in customer and associate care programs in an effort to serve our client needs better and improve retention.
Turning to PeopleScout, the strategy leverages our strong brand reputation to capture opportunities in an industry poised for growth.
Before COVID struck, we along with our competitors experienced a trend toward more insourcing, with some clients bringing more recruitment functions in-house.
Many of the in-house teams have been reduced or eliminated during the pandemic and we're seeing companies move to hybrid and fully outsourced models as the economy recovers.
To capitalize on this trend, we've made investments in our sales.
We believe there is a big opportunity to increase wallet share at our existing clients and diversify the industry mix within our portfolio by adding new clients.
These efforts are already delivering results as shown by the $30 million of annualized new business wins across multiple sectors as I referenced earlier.
I'll now pass the call over to Derek, who will share greater detail around our financial results.
Total revenue for Q1 2021 was $459 million, representing a decline of 7%.
We posted net income of $7 million or $0.20 per share, compared to a net loss of $150 million in the prior year, which included a non-cash impairment charge of $152 million net of tax.
On an adjusted basis, we delivered adjusted net income of $9 million or $0.25 per share, an increase of $9 million compared to Q1 2020.
The increase in adjusted net income was driven by a decline in SG&A expense.
Adjusted EBITDA was $13 million, an increase of 189% compared to Q1 2020 and adjusted EBITDA margin was up 200 basis points.
Gross margin of 24.1% was down 140 basis points.
Our staffing businesses contributed 150 basis points of compression with 130 basis points due to a benefit in the prior year for a reduction in expected healthcare costs.
Adjusting for this, our overall gross margin was nearly flat.
There are also some other offsetting gross margin trends that I would like to point out.
In our staffing businesses, higher pay rates in relation to bill rates and sales mix provided 90 basis points of drag offset by 70 basis points of benefit from workers compensation expense, largely related to favorable development in our reserves.
PeopleScout also contributed 10 basis points of expansion.
Turning to SG&A expense.
We delivered another quarter of strong results with expense down $20 million or 17%.
Maintaining our cost discipline is important but of equal importance is doing it in a way that preserves our operational strengths to ensure the business is well positioned for growth as economic conditions continue to improve.
We are also implementing pilot projects to further reduce the cost of our PeopleReady branch network through greater use of technology, centralizing work activities and repurposing of job roles while maintaining the strength of the geographic footprint.
These pilots will occur throughout 2021.
And if successful, could lead to additional efficiencies in 2022.
Our effective income tax rate was a benefit of 2% in Q1, as a result of our job tax credits exceeding the income tax associated with our pre-tax income.
Turning to our segments.
PeopleReady saw revenue decline 13%, while segment profit was up 55% due to lower expense.
PeopleReady experienced encouraging intra-quarter revenue improvement with March down 3% compared to January down 18%.
We were also pleased to see revenue trends improve in some of our hardest hit markets.
Non-residential construction improved to a decline of 8% in March versus a decline of 24% in Q4 2020.
And hospitality improved to a decline of 9% from a decline of 49% for these same time periods.
California was our largest market pre-COVID and was one of our hardest hit geographies.
California's revenue trend improved to a decline of 4% in March versus a decline of 27% in Q4 2020.
PeopleManagement saw revenue increase 7%, which in combination with lower expense drove a $3 million increase in segment profit.
PeopleManagement also experienced encouraging intra-quarter revenue improvement with March up 15% compared to 5% in January.
Of the $44 million of annualized new business wins Patrick mentioned, $2 million was recorded in Q1 and approximately $28 million is expected over the remainder of the year.
Peoplescout saw revenue declined 30% while segment profit increased 61% as a result of lower expense.
Sequentially, revenue was up 11% compared to Q4 2020.
As Patrick noted, we are encouraged by the new business wins and the results within our hardest hit industries including travel and leisure which went from a decline of over 50% in Q4 2020 to a decline of about 25% in March.
We are also optimistic about the long-term signals we are seeing in these new win.
First, there are signs of a growing interest from clients to shift back from an in-house model to an outsource model.
Second, wins are coming from a variety of industries, including retail, healthcare, and manufacturing.
Of the $30 million of annualized new business wins Patrick mentioned, $2 million was recorded in Q1 and approximately $14 million is expected over the remainder of the year.
Now let's turn to the balance sheet and cash flows.
Our balance sheet is in excellent shape.
We finished the quarter with $88 million of cash, no outstanding debt and an unused credit facility.
While our profitability increased compared to Q1 last year, cash flow from operations was flat largely due to less benefit from working capital associated with better revenue trends this year.
In regards to the topline, the historical sequential revenue growth from the first quarter to the second quarter has averaged about 10%.
This average excludes 2020.
Turning to gross margin for the second quarter, we expect expansion of 180 basis points to 220 basis points.
Segment revenue mix and operating leverage from higher volumes at Peoplescout are expected to drive approximately 120 basis points of the improvement with the remainder coming from non-repeating workforce reduction costs incurred in Q2 2020.
We expect gross margin expansion of 40 basis points to 100 basis points for the full year.
For SG&A, we expect $108 million to $112 million for the second quarter and $446 million to $454 million for the full year.
I'd also like to remind everyone that we will anniversary most of our 2020 cost reduction actions in April of 2021.
For capital expenditures, we expect about $14 million for the second quarter and $37 million and $41 million for the year.
Included in our capital expenditure plan are build out costs for our Chicago support center, much of which will be reimbursed by our landlord.
Our outlook for fully diluted weighted average shares outstanding for the second quarter of 2021 is $35.1 million.
We expect our effective income tax rate for the full year before job tax credits to be about 26% to 30%.
And we expect the benefit from job tax credits to be $8 million to $10 million.
With the momentum of our first quarter results, a solid balance sheet, and a strong mix of operational and technology strategies, we feel we are well positioned to take advantage of growth opportunities during the recovery and beyond.
Please open the call now for question. | q1 adjusted loss per share $0.01.
q1 loss per share $4.04.
q1 revenue $494 million versus refinitiv ibes estimate of $498.9 million.
for q1 took a non-cash goodwill and intangible asset impairment charge of $175 million.
ot providing customary quarterly guidance.
covid-19 pandemic is creating a material impact on demand for our services. | 0 |
During the call, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.
A transcript of this conference call will also be posted on our website.
As a result, the factors discussed in the annual report on Form 10-K of the fiscal year ended, December 31, 2020 and in other reports filed with the SEC.
Overall, I'm extremely pleased with how our team across the world performed in 2020, providing exceptional services to our clients, while successfully navigating the pandemic-related challenges and delivering solid results for all our stakeholders.
Our fiscal year was capped off by a better than expected performance in the fourth quarter, which is a testament to the growing strengths of our platform.
While we remained cautious about the first half of 2021 given the extent of uncertainty related to the pandemic, we are proud of JLL's execution for a unique year in 2020.
Before turning to the market environment and our financial performance, I wanted to briefly explain how some of the strategic investments made prior to 2020 supported us to successfully navigate this past year.
Our technology investments in finance and HR ERP systems, and the migration of all geographies and business lines into one accounting system, provided management much better visibility into our working capital position, while we were able to significantly improve our receivables collections and enhance cash generation.
I cannot emphasize enough how vital this was to effectively manage our overall liquidity, repaying debt ahead of our schedule and continuing to invest to drive future growth.
Secondly, the investment in our Capital Markets' CRM platform, while we also integrated our colleagues from HFF, allowed us to share client information seamlessly and promote cross-selling throughout the organization.
This has been a strong contributor to our success in 2020, also evidenced by our fourth quarter performance in Americas Capital Markets relative to the overall market.
We will continue to invest in superior technology tools and leveraging our data to further enhance our value proposition for customers, differentiate us from the competition and ultimately create value for shareholders.
In 2020, we also accelerated the organizational transformation initiated in January 2019 through the appointment of new global and regional leadership roles, further enhancing the global integration of our services and expertise.
It is also important to note that we are focused on helping our clients plan their transition to a post-pandemic environment, leveraging our thought leadership to advice on the future of work, the changing role of the office and the evolution of cities.
Turning to the market environment.
The development and administration of vaccines in the fourth quarter marked the first steps in a long march toward a post-pandemic environment.
While the second half of 2020 saw the beginning signs of recovery, many countries are witnessing record-breaking levels of new cases.
Significant uncertainty will continue to weigh on the overall recovery as the world waits for widespread immunization to an extent that will bring the pandemic under control and further bode for the economic development.
Relative to the global office leasing market, JLL Research reported that activity in the fourth quarter was down 43% from a year earlier.
The United States saw a much sharper decline compared to the other regions with activity down 53%.
EMEA and Asia Pacific recorded decreases in activity of 39% and 25% respectively relative to last year.
Vacancy rates increased across all regions in the fourth quarter with a global vacancy rate now at 12.9%, the highest level since 2014.
Global Capital Markets continue to recover from the sharp contraction recorded earlier in the year as declines in investment sales decelerated in the fourth quarter led by a robust rebound in activity in the Americas and large European markets.
Despite the challenges throughout the year, the decisive actions undertaken by our team as well as the overall resilience of our platform enabled JLL to deliver solid results for the year.
Consolidated revenue fell 8% to $16.6 billion and fee revenue declined 14% to $6.1 billion in local currency.
We recorded adjusted EBITDA of $860 million, a decline of 24% from the prior year and adjusted diluted earnings per share of $9.46, which represented a decline of 34% from the prior year.
It is worth noting that despite the challenges of 2020, we were able to achieve a full year 14% adjusted EBITDA margin, which is within our long-term target range of 14% to 16%.
We also generated a record $1.1 billion in operating cash flow, testament to the strength of our business model and ability to navigate a downturn.
Turning our attention to our fourth quarter performance.
Consolidated revenue fell 12% to $4.8 billion and fee revenue declined 19% to $2 billion in local currency.
Adjusted EBITDA of $417 million represented a decline of 18% from the prior year, although adjusted EBITDA margin increased 50 basis point to 21.3% as reported, driven by cost mitigation initiatives and some government COVID programs.
Adjusted net income totaled $276 million for the quarter and adjusted diluted earnings per share totaled $5.29.
As I alluded to on the third quarter earnings call, Capital Markets transaction volumes, especially in the Americas came back faster than Leasing as investors began to adapt to the current environment to put capital to work.
Logistics and multifamily housing continued to demonstrate resiliency.
However, though our transactional pipelines are building, the market remains uncertain in the near-term and activity has not yet normalized.
Throughout 2020, a key priority of management has been our revenue and corresponding refinement of our capital allocation strategy.
Our strategy is underpinned by a framework that considers allocation across three main pillars, maintaining an investment grade balance sheet, driving future growth through organic and inorganic investments in the business and returning cash to shareholders.
Our commitment to an investment grade balance sheet, enables access to the Capital Markets throughout the cycle.
We repaid the debt associated with the HFF transaction one quarter earlier than expected, which speaks to our diligent cash management and operational focus.
Our current approach is to operate within a reported net leverage range of 0.5 to 1.25 times, recognizing that there may be periods outside of this range due to seasonality and other short-term factors.
The strengths of our balance sheet and ability to generate meaningful cash flows and enable us to reinvest significantly into our business.
Funding initiatives that will drive profitable organic growth and attractive returns on capital and that are aligned with our beyond 2025 goals, remains the main priority for JLL.
This includes technology investments, which we believe is a significant differentiator for JLL.
M&A will continue to be an avenue of growth for JLL in a consolidating industry.
We will strategically evaluate opportunities as they arise.
There are no gaps in our portfolio, so our bar is high.
Any opportunity must meet our already rigorous standards specifically, they must be value-accretive acquisitions that are appropriately priced, have a strong cultural and strategic fit and generate a return on invested capital of at least 12%.
Over the long-term, we are committed to returning approximately 20% our free cash flow to shareholders.
The percentage will vary year-to-year depending on the investment opportunities we identify.
Before 2020, our primary method of returning cash has been through a dividend.
During 2020, we made the decision to shift our primary distribution method to share repurchases, due to the increased flexibility and attractive market conditions.
We evaluate share repurchases the same way we evaluate an acquisition or investment, by analyzing capital invested and expected returns.
If we expect to earn a higher return repurchasing JLL shares, then we will allocate capital accordingly.
Our 2020 repurchase activity was reflective of this approach.
We repurchased 100 million worth of shares at an average price of $111.
For perspective, this is slightly more than twice the amount we returned to shareholders via dividends in 2019.
We have 100 million remaining on our existing repurchase authorization and the Board of Directors recently authorized an incremental 500 million share repurchase program for a total of $600 million.
Our overall fourth quarter performance exceeded the upper end of our expectations, driven largely by Capital Markets.
I'll briefly highlight two notable items that speak to our cautious optimism for 2021, particularly the second half of the year.
First, the year-over-year Real Estate Services fee revenue percentage decline in the fourth quarter improved modestly versus the third quarter, indicative of solid performance of Americas Capital Markets.
Second, our continued focus on capital and operating efficiency coupled with earnings.
Once again, it yielded strong cash generation in the quarter, which we use to fully pay down our revolving credit facility and return an additional $50 million of cash to shareholders via repurchases.
Moving to a detailed review of operating performance.
Our transactional, Leasing and Capital Markets' businesses reflected ongoing uncertainty regarding the evolution of the pandemic and its impact on decision-making by corporate occupiers and investors.
While we are encouraged by the trends in our pipelines and recent performance in both service lines, we expect transactional activity to remain subdued over the near-term before picking up in the second half of the year with Leasing lagging Capital Markets.
Fourth quarter Capital Markets fee revenue declined 15% from 2019, a market improvement from the 43% decline in the third quarter.
The improvement was broad-based across our geographic segments and service offerings.
The resiliency of our multifamily business and notable improvement in our Americas investment and debt advisory businesses speaks to the breadth and strength of our platform, as well as synergies from the HFF acquisition.
It is also worth noting that we decreased our loan loss credit reserves in the Americas by $9 million, partly offsetting the $31 million charge we took in the first quarter.
I'd like to highlight one of many examples that demonstrate the power and cross-selling opportunities of our combined JLL-HFF Capital Markets platform.
The sale and financing of the iconic Transamerica Pyramid Center in San Francisco for $650 million and $390 million respectively during the fourth quarter.
Despite the pandemic, the expanded JLL-HFF footprint drove a strong and diverse bidder pool, ultimately securing a joint venture partnership between a domestic and cross-border buyer.
In addition to representing the seller, procuring the buyers and arranging the financing, JLL retained the property management and project and development services contracts, and successfully secured the Leasing mandate during the sales process.
Looking at the global capital markets environment, investment sales dropped 21% in the quarter and 28% for the year according to JLL Research.
While the secular trend of increasing capital allocations to commercial real estate remains evident, activity remains somewhat muted as investors continue to adjust valuations and pricing to reflect the current environment.
However, we saw an even more broad-based tightening of the bid-ask spreads than the prior quarter, particularly for higher quality assets and resilient sectors, such as industrial and logistics and the U.S. multifamily.
Turning to our 2021 Capital Markets outlook.
Our pipeline is reasonably consistent with our 2020 Capital Markets geographic fee revenue mix, and is well distributed across sectors.
We see a high degree of resilience in residential, and industrial and logistics, which are expected to continue that momentum in 2021.
Our pipeline coupled with improving liquidity in the market gives us confidence in generating growth in Capital Markets fee revenue in 2021.
The renewed lockdowns and economic uncertainty do present headwinds, particularly for the first half of the year.
Consolidated leasing fee revenue declined 28% compared with the prior year quarter, a slight improvement from the 30% decline in the third quarter as clients continue to delay significant decisions regarding future real estate strategies.
Our investments in the higher growth asset classes of industrial, supply chain, life sciences and data centers continue to provide partial offset to ongoing softness in the office sector.
Looking at the Leasing market environment, global activity continued to modestly recover from mid-year lows, driven mostly by smaller transactions.
Global office leasing volumes declined 43% in the fourth quarter compared with the 46% decline in the third quarter.
In the U.S. office market shorter terms and renewals have been preferred by occupiers.
In offices across major U.S. cities, we saw continued declines in net effective rents, which may eventually spur activity.
Our U.S. gross leasing pipeline has improved from mid-year lows and is up 5% year-over-year, though we emphasize closing rates and timing remain highly uncertain.
Based on our leasing pipeline and our overall view of the market, we expect leasing activity to remain tempered in the first half of the year before gradually starting to recover in the back half of the year.
Property and Facility Management remains a growth area, driven largely by new business wins and contract expansions in the Americas as corporate occupiers and investors seek our services due to increased building management standards.
Our Corporate Solutions business fee revenue declined 7% in the quarter, a strong growth in Americas Facility Management was more than offset by ongoing headwinds in our project and development services and U.K. mobile engineering businesses.
We continue to be encouraged by the secular outsourcing trend, especially as clients increasingly seek our sustainability consulting services.
LaSalle's quarterly and full-year comparisons were impacted by outsized incentive and transaction fees in 2019.
Advisory fees were resilient for the full year within a backdrop of continued capital raising.
Coming off a record $8 billion of capital raised in 2019, LaSalle raised $6.1 billion in 2020 demonstrating that capital continues to flow to investment managers with proven track records.
LaSalle's assets under management grew about $3 billion from the prior quarter to $69 billion.
For 2021, we anticipate around $25 million of incentive fees with very little in the first quarter.
Now, I'll provide some details around our cost mitigation actions.
Consistent with my statements on the third quarter call, we expect $135 million of annualized fixed cost savings from actions taken in 2020.
It is important to note that we see opportunities in the current environment and we will continue to invest for growth.
For the full year 2020, non-permanent cost savings totaled about $330 million, including about $85 million in the fourth quarter.
Major items that benefited our full-year profitability included approximately $250 million of cost mitigation savings in T&E, marketing and other expense areas and $80 million of government COVID relief programs.
Just under half of the $330 million of savings will not be repeated in 2021, as they represent finite actions, including government programs and temporary reductions to compensation and benefits.
The remainder of the non-permanent savings in 2020 are likely to return gradually as business volumes recover, and will often precede the revenue generation, for example, marketing expenses.
Considering our cost saving initiatives, business mix and growth initiatives, we expect to operate within our 14% to 16% long-term adjusted EBITDA margin target range in 2021 and the years ahead.
However, due to timing of expenses and the length of the sales cycle, particularly in the more transactional businesses, we expect adjusted EBITDA growth to lag fee revenue growth this year.
As we gain more visibility into the trajectory of the recovery as the year unfolds, we will provide more details on our 2021 expectations.
Shifting now to an update on our balance sheet and our thoughts on capital structure and efficiency.
The sequential improvement in earnings, our enhanced focus on improving asset efficiency and modest capex and investment spending allowed us to reduce net debt by $560 million in the quarter, which ended the year at $192 million.
At the end of December, reported leverage was 0.2 times, down from 0.8 times at the end of September and we had $3.3 billion of liquidity, including full availability of our $2.7 billion revolving credit facility.
As Christian mentioned, we are targeting reported net leverage ratio of 0.5 to 1.25 times over the long term, though there may be variances due to operational seasonality as well as timing of business reinvestment, M&A and share repurchases.
We are very focused on continuing to improve our capital efficiency, which was a key factor in our strong cash generation and debt reduction in the quarter and full year despite the operating environment.
Looking ahead to the full year 2021, we are encouraged by our pipelines and the momentum in our business and anticipate our business will grow this year.
However, the seasonality of our business and the recent renewed lockdowns across the world, create considerable uncertainty across the entire industry, making it premature to provide fee revenue and profitability targets for the year at this time.
We currently anticipate progressive improvement in the second half of the year, but much will depend on the evolution of the pandemic, the pace of vaccinations and economic activity globally.
Long-term, we remain focused on achieving our 2025 beyond targets, we have a steadfast commitment to meeting the evolving needs of our clients, people and broader community.
This coupled with our constant efforts to improve both, our operating and capital efficiency, positions us to improve our returns and free cash flow, consequently, generating significant stakeholder value in the years ahead.
Back to Christian for further remarks.
With the distribution of vaccines, the general sentiment supports a meaningful recovery in 2021, with some analysts forecasting global economic growth in excess of 5%, much of it coming in the second half of the year.
Our people are committed to aligning with our clients' objectives and providing advice about how to navigate the transitions ahead.
As corporate occupiers begin to reimagine the future of work, they will rely on best-in-class firms like JLL to help them with this transition.
Additionally, we will be working closely with our investor clients and leverage the firm's broader perspective to provide necessary insights.
As we enter 2021, we remain focused on achieving our long-term priorities.
Though we are mindful of the near-term challenges and uncertainty that remains, we are poised to seize the considerable opportunities in front of us while maintaining financial discipline, important to long-term sustainable growth.
In summary, I'm pleased with the way that JLL was able to navigate through such turbulent and trying times of the past year.
Results that we were able to achieve would not have been possible without the commitment and relentlessness of our employees as well as the resilience of the communities within which we operate.
At JLL, we are committed to our stated purpose of shaping the future of real estate for a better world.
We are cognizant of the important role that we play in today's challenging and evolving environment, we are well positioned to deliver on our purpose through JLL's thought leadership, the strong growth in our sustainability services and our ability to bring to market differentiating technology products.
I'm confident in our ability to generate long-term profitable sustained growth and shareholder value.
Operator, please explain the Q&A process. | compname reports qtrly adjusted earnings per share $5.29.
q4 revenue $4.8 billion.
qtrly adjusted earnings per share $5.29.
cash provided by operating activities was a record $1,114.7 million in 2020, compared with $483.8 million in 2019.
no amounts drawn on credit facility as of december 31, 2020. | 1 |
Before we begin, I want to mention that we'll be referring to slides, which can be viewed in the investor relations section on nordstrom.com.
Participating in today's call are Erik Nordstrom, chief executive officer; Pete Nordstrom, president and chief brand officer; and Anne Bramman, chief financial officer, who will provide a business update and discuss the company's fourth quarter performance.
Our fourth quarter results were marked by sequential sales improvement, strong digital growth, improved profitability, and continued progress in executing on our long-term strategy.
Looking back on the fiscal year, revenue increased 38% versus 2020 and we delivered an EBIT margin of 3.4%, in line with our guidance.
Importantly, we've made progress on our strategic initiatives and have line of sight to achieving, in the coming year, the financial targets we presented at our 2021 Investor event.
Our team continues to work with urgency to build additional capabilities to better serve customers, expand market share, and deliver greater profitability.
We are laser focused on the three key areas we outlined in the third quarter: improving Nordstrom Rack performance, increasing profitability and optimizing our supply chain and inventory flow.
Starting with Nordstrom Rack.
Last quarter, we undertook a thorough analysis of the business and developed prescriptive plans to optimize the customer experience and improve our performance.
As we raised inventory levels and improved average price points in our stores, we posted a sequential sales improvement of 320 basis points in the fourth quarter.
Though we are in the early stages of implementation, the Rack results and improving store customer satisfaction scores reaffirm our confidence in the plans we've outlined.
Nordstrom Rack is a unique mix of brands with limited distribution in the off-price sector.
Customers are drawn to the Rack to purchase sought-after brands at a terrific price.
Rack faces a unique challenge as off-price procurement of the same top brands that we carry at Nordstrom is particularly difficult in the current environment with production constraints and lower levels of clearance product.
As a result, we are executing a multilayered plan to both expand our offerings of the most coveted brands we carry as well as source from new vendors to ensure we have the selection our customers want.
In Q4, we improved our in-stock position at the Rack by increasing the flow of inventory, making more frequent deliveries to our stores, partnering with brands to prioritize Rack deliveries and focusing our sourcing efforts on core categories that matter most to customers such as shoes and apparel.
We're also increasing our opportunistic use of pack and hold inventory, allowing us to buy larger quantities of select relevant items when available then hold a portion of it to deploy in periods with high demand, tight supply, or system constraints.
As we improve our supply of premium brands and fine-tune our assortment to better align with customer needs, we expect to achieve a better balance of price points at the Rack.
Finally, we are taking action to strengthen Rack's brand awareness and drive traffic.
We are pleased with the results of our more reasons to Rack marketing campaign, which showed a meaningful increase in future purchase intent.
Through this comprehensive set of actions, we anticipate continued improvement in Rack performance throughout fiscal 2022.
To be clear, we are confident in our ability to profitably grow our Rack business and won't be satisfied until we do so.
We delivered significant improvement in merchandise margin this quarter.
Pete will take you through our progress to date and our plans to deliver incremental improvement in 2022 through strategic pricing and category management.
Within SG&A, we rationalized our overhead cost structure in 2020 and remain committed to sustaining our expense discipline.
Given the significant macro-related pressure in fulfillment and labor costs that we're facing currently, the team is taking action to mitigate the overall impact from those pressures, including optimizing our supply chain to drive efficiencies.
We expect that the supply chain optimization work streams we began implementing this quarter will enhance the customer experience and drive top line growth while also driving efficiencies in labor and fulfillment in 2022.
Pete will provide more detail on our plans for supply chain improvement in a moment.
Turning to fourth quarter performance.
In addition to sequential improvement in our Rack banner, we saw strong enterprise digital growth of 23% versus 2019 and increased utilization of the interconnected capabilities delivered by our market strategy.
Nordstrom banner sales were flat, while gross merchandise value, or GMV, increased 2% in the fourth quarter versus 2019.
We continue to see significant disparity in geographic performance.
The Southern U.S., where 44% of our stores were located, was a source of strength for the Nordstrom banner, outperforming the Northern U.S. by approximately 7 percentage points.
Notably, suburban locations outperformed our urban locations by 10 percentage points in the fourth quarter as city centers have been disproportionately impacted by the effects of the pandemic.
In addition to the three focus areas that I've discussed, the team continues to make progress in the key strategic growth priorities we laid out at our investor event last year, winning in our most important markets and increasing our digital velocity.
Starting with our priority to win in our most important markets.
We are leveraging a strong store fleet that positions us physically closer to the customer.
Our strategy links our omnichannel capabilities at the local market level, allowing us to drive customer engagement through better service and greater access to product no matter how customers choose to shop.
This platform is a unique differentiator, delivering unmatched convenience and providing customers with four times more product available for next-day pickup, a one-day reduction in average shipping time and the ability to pick up orders at the Nordstrom, Nordstrom Local, or Nordstrom Rack location of their choice.
We continue to scale the enhanced options we launched in 2020, like the expansion of order pickup and ship to store to all Nordstrom Rack locations with order pickup reaching a record high 11% of Nordstrom.com sales this quarter.
And one-third of next-day Nordstrom.com demand was picked up at Rack stores, demonstrating the power of integrating capabilities across our two banners and across our digital and physical platforms.
We are encouraged by increases in order pickup demand, a leading indicator of future growth as customers utilizing in-store pickup have higher engagement and spend three and a half times more than customers who don't utilize the service.
Increasing Buy Online, Pick Up In-Store utilization is advantageous as it is both our highest satisfaction customer experience and most profitable customer journey.
Customers clearly value the strength of our omnichannel model as evidenced by a dramatic increase in spend when they engage across our multiple channels, banners, and services.
For example, the average customer that shops across both banners, in-store and online spends over 12 times more than a customer utilizing a single channel and banner.
We also continue to evolve our approach to get closer to our customers than ever before, building deeper connections through our loyalty program and differentiated service model.
Our Nordy Club loyalty program is a powerful engagement driver with 67% sales penetration in 2021.
Our core customers remain highly engaged with loyalty customer accounts exceeding 2019 levels.
We're also pleased to see customers responding well to our assortment and services with new customer acquisition activity returning to 2019 levels.
We continue to advance our digital tools, including virtual style boards and style links to allow our salespeople to offer our customers highly relevant recommendations, both in-store and digitally.
This year, remote selling sales volume increased 63% versus last year.
We're encouraged by the results of this program with very high customer satisfaction scores and average customer spend over six times that of an average Nordstrom customer.
With regard to increasing our digital velocity, we maintained strong growth at Nordstrom.com and NordstromRack.com this quarter with digital sales increasing 23% over the fourth quarter of 2019.
With continued growth in digital, our total penetration has increased by 9 percentage points over the past two years to 44%.
In the fourth quarter, we also saw a record high mobile app usage with mobile users representing approximately 70% of total digital traffic.
Though we still have much work to do on our transformation, progress we've made gives us confidence in our strategic plans and business outlook for 2022.
We believe there is a meaningful opportunity ahead for us to better serve customers by improving Rack performance and transforming our supply chain, leading to increased profitability and shareholder value creation.
We have line of sight to achieving the financial targets outlined at our 2021 Investor event while building the capabilities to profitably grow market share beyond that.
We look forward to sharing our continued progress in the quarters ahead.
Our people are truly our greatest asset.
I'd like to talk about our category performance during the fourth quarter then follow with an update on our initiatives to increase gross margin, improve supply chain and inventory flow, and transform our merchandising model.
Starting with the category performance.
We were pleased to see continued strength in our luxury categories in the fourth quarter with designer and fine jewelry posting strong double-digit growth over 2019.
Beauty also had a double-digit increase driven by strong growth in our Nordstrom banner and the launch of an expanded offering in the Rack.
And pandemic-related categories continued to outperform, particularly home and active with sales up 52 and 22%, respectively, compared to 2019 levels.
Our core categories in apparel and shoes, which collectively make up more than 70% of our business, are not quite back to 2019 levels but they are recovering.
We saw signs of renewing customer interest in post-pandemic occasion-based categories with improving trends in dresses, men's sportswear, outerwear, and women's shoes.
Now on to our initiatives.
We believe we have a meaningful opportunity to improve both the customer experience and our financial outcomes through our efforts around merchandising and inventory flow.
This quarter, we made significant progress improving our merchandise margin versus 2019.
As we enter the holiday season, our team focused on driving sales and engaging customers through our compelling holiday offering while also increasing profitability.
Leveraging advanced analytical tools, we identified opportunities to expand holiday gifting and increase our promotional effectiveness by optimizing the pace and depth of markdowns.
We're very encouraged by the results with merchandise margins up 235 basis points over 2019, and we see more opportunity to drive additional margin improvements in '22.
To provide the best possible assortment for our customers, we are also using a data-driven, customer-centric approach to optimize our category management.
Through this work, we are defining the role of each category at Nordstrom and Nordstrom Rack and then optimizing our assortment for the role each category plays.
Our goal is to attract new customers, increase share of wallet with existing customers, and improved merchandise margins by focusing on the most highly sought-after items.
Women's Denim is a great example of the potential in our category management work.
Denim has always been an important category for our customers and a strong performer for us too.
But our analysis highlighted an opportunity to lean into it as more of a destination category.
In response to our analysis, we increased inventory depth for the most highly sought-after jeans to ensure that we are in-stock for our customers, piloted a dedicated in-store Women's Denim shop to better highlight our extensive selection and make it easier to shop, and planned a campaign aligned with April's Earth Month to showcase a curated group of denim brands with a focus on sustainability.
We are very pleased with the initial results we've seen with our category management initiative and plan to build on this momentum in 2022.
While we continue to develop these merchandising capabilities, we're simultaneously focused on improving our supply chain and inventory flow.
We've all been dealing with global supply chain disruptions for a while now with product scarcity, order cancellations, and shipment delays.
Entering the fourth quarter, we took an aggressive approach to securing product for the holiday season and early spring.
This helped to ensure that we are in stock for our customers.
However, these supply chain challenges have recently begun to improve a bit, and order cancellations weren't as significant as we anticipated.
As a result, our ending inventory was higher than planned but we expect to cut our sales to inventory spread in half by the end of the first quarter.
We've learned a lot from our experience navigating pandemic-related supply chain disruptions and revolving our network processes and capabilities across several fronts.
First, improving the consistency and predictability of unit flow through our network; second, improving velocity and throughput in our distribution and fulfillment centers; third, increasing delivery speed; and finally, expanding the selection for in-store shopping as well as same day and next day pickup.
These actions will improve the customer experience, increase sell-through, and reduce markdowns by allowing us to place the right assortment with the right depth closer to the customer.
They will also help us improve our expense efficiency.
We expect to see benefits from these actions beginning in the first half of fiscal 2022 with more to follow in the second half.
As we look ahead, we are excited about the ongoing transformation of our business and our plans to deliver enhanced experiences to our customers and value to our shareholders.
We continue to scale our Nordstrom Media Network, which allows our brand partners to directly connect with Nordstrom customers through on and off-site media campaigns to increase traffic, sales, and engagement.
We grew the concept in 2021 with some of our best brands, and we're pleased with the value it brought to our customers and partners.
We look forward to expanding this program over the next two to three years.
We are also delivering newness, selection and inspiration to our customers by partnering with brands in new ways.
Our alternative partnership models have gained approximately 300 basis points as a percent of Nordstrom banner GMV since 2019, reaching 10% today.
We launched over 300 new brands in partnerships this year, including Open Edit, Farm Rio, Fanatics, and ASOS DESIGN.
We also grew and scaled top brands through 2021, including Nike, Ugg, Tory Burch, Adidas, Free People, and Luxottica.
We've also scaled brands that started out as direct-to-consumer partners such as SKIMS, On Running, LL Bean, Good American, and Vuori.
And we continued to grow our business in designer and luxury brands, including Chanel, Gucci, Saint Laurent, Dior, and Burberry.
After growing choice count by 50% this year, we entered 2022 with record-high selection.
We'll continue to significantly expand our choice count, leveraging our category management process and enhanced analytics to deliver a curated, relevant assortment that attracts new customers while expanding wallet share with our existing customers.
In closing, as we enhance our capabilities, the customer remains at the center of our work.
We are transforming our approach and leveraging deeper insights to give the customer more choices while increasing relevance and profitability.
As we improve our supply chain and merchandising ecosystems, we'll deliver a better experience through faster and more flexible fulfillment, providing newness at the right price with the right quantities where and when our customers want it, all while improving our agility and productivity.
I'd like to begin with a review of our results, then take you through our outlook for fiscal 2022.
Overall, net sales increased 23% in the fourth quarter compared to the same period in fiscal 2020, and decreased 1% compared to the same period in fiscal 2019.
Total revenue finished the year up 38%, in line with our guidance.
In the fourth quarter, Nordstrom banner sales were flat while GMV increased 2%.
As alternative vendor partnership models have become a more significant portion of the business, GMV provides an additional measure of our top line performance.
Nordstrom Rack sales declined 5% in the fourth quarter, a sequential improvement of 320 basis points over the third quarter as we raised inventory levels and improved average price points in our stores.
And as Erik mentioned, we are executing a multilayer plan to improve Rack's performance and capture market share in the off-price sector.
Our digital business continues to grow with fourth quarter sales increasing 23%.
Gross profit as a percentage of net sales increased 340 basis points primarily due to increased promotional effectiveness, fewer markdowns, and leverage in buying and occupancy costs.
Ending inventory increased 19%, with approximately half of the inventory increase due to planned investments to ensure in-stock merchandise availability.
As Pete indicated, we plan to reduce our sales to inventory spread by half by the end of the first quarter.
Total SG&A as a percentage of net sales increased 340 basis points in the fourth quarter as a result of continued macro-related fulfillment and labor cost pressures.
We made purposeful investments in both store and fulfillment center staffing as we prioritize serving our customers and navigating the continued COVID-related disruption.
These increased expenses were partially offset by continued benefits from resetting the cost structure in 2020 and a $32 million noncash asset impairment charge in 2019.
EBIT margin was 6.8% of sales for the fourth quarter, an improvement of 10 basis points.
For the year, EBIT margin was 3.4%, toward the high end of our guidance.
We continue to strengthen our financial position, ending the year with $1.1 billion in liquidity, including $800 million fully available on our revolver a leverage ratio of 3.2 times.
Now turning to our outlook for fiscal 2022.
I'll begin by outlining the macroeconomic assumptions underlying our projections.
We expect that wage growth and higher employment levels will support consumer spending in 2022.
Potential headwinds include the impact of inflation, which could reduce overall discretionary income, and geopolitical risk to the economy and financial markets.
We are seeing encouraging early signs of a resumption of activities such as travel, in-person social events, and return to office after being delayed by the omicron variant.
At the same time, we continue to be prepared for the potential of further pandemic-related disruptions in consumer behavior and global supply chain.
Taking all these factors into consideration, we are assuming a roughly even balance of upside and downside macroeconomic risk relative to current conditions and are planning accordingly.
Our 2022 outlook reflects our plans to drive top line growth through our interconnected digital and physical assets and deliver continued improvement in Nordstrom Rack performance.
As we derive more benefits from our pricing and category management improvements as well as planned mid-single-digit average retail price increases, we expect continued merchandise margin improvement.
Finally, we plan to partially offset inflationary freight and labor costs with greater productivity from the actions we were taking to optimize our supply chain.
Today, we are providing our fiscal 2022 business outlook with comparisons to 2021.
For the fiscal year 2022, we expect revenue growth of 5% to 7%.
We anticipate that seasonality between the first and second half of the year will be consistent with pre-COVID levels, resulting in higher year-over-year growth rates in the first half as we lap softer comparisons from early 2021.
We also expect that year-over-year sales growth will be roughly consistent between Q1 and Q2, with the anniversary sales shifting back to the second quarter.
We expect EBIT margin of approximately 5.6 to 6% for the full year.
We anticipate that EBIT margin improvements will also be consistent between the first and second half of 2022 as a result of increased operating leverage, improvements in gross and profit margins and greater expense efficiencies.
Our plan assumes that first quarter EBIT will be slightly better than breakeven.
Our effective tax rate is expected to be approximately 27% for the fiscal year.
Given solid top line growth, coupled with progress on our productivity initiatives, we expect diluted earnings per share of $3.15 to $3.50 for the year, which excludes the impact of share repurchases, if any.
Turning now to capital allocation.
Our first priority is investment in the business to serve our customers and deliver the highest quality experience.
We're planning capital expenditures at normalized levels of 3% to 4% primarily to support supply chain and technology capabilities.
Our second priority is reducing our leverage.
We are committed to an investment-grade credit rating and remain on track to decrease our leverage ratio to approximately 2.5 times by the end of 2022.
Our third priority is returning cash to shareholders.
Subject to completion of our year-end audit and the related certification process with our bank group, we expect to be in a position to resume returning cash to shareholders in the first quarter.
We anticipate completing that process by mid-March and discussing with our board shortly thereafter the resumption of a quarterly dividend at an appropriate rate.
As you've heard today, we delivered results in line with our guidance and demonstrated progress against our strategic initiatives.
We now have a clear line of sight to achieving our investor event targets in the coming year.
Though there is more work ahead, the early indicators we're seeing was improving Rack performance and increased merchandise margin give us confidence in our plan.
We also made significant progress on our merchandising strategies throughout 2021.
Choice count is now at an all-time high with more than 300 new brands launched last year in growth and alternative partnership model, all of which position us to grow sales by delivering newness, selection and inspiration to our customers.
Our stores and fulfillment centers are fully staffed and ready to serve customers no matter how they want to shop.
We continue to act with a sense of urgency to achieve greater profitability and cash flow as we optimize across platforms and drive scale.
In closing, we remain excited about the future of our business, the work ahead and our ability to deliver significant shareholder value over the long term.
We'll now move to the Q&A session. | expects fiscal 2022 earnings per share of $3.15 to $3.50.
qtrly sales in the home, active, designer, beauty and kids categories had the strongest growth compared with q4 2019.
nordstrom - continued to navigate supply chain disruptions throughout q4 by accelerating receipts and investing in improved in-stock levels.
nordstrom - inventory levels at q4 were higher than planned, but co expects to reduce inventory relative to sales during q1 2022.
nordstrom - anticipates that it will be in a position to resume returning cash to shareholders in q1 2022.
nordstrom sees 2022 ebit margin of 5.6 to 6.0% of sales.
nordstrom sees 2022 revenue growth, including retail sales and credit card revenues, of 5 to 7 percent versus fiscal 2021. | 1 |
Neil, you may begin.
We are fortunate to have some encouraging news in the macro environment that could provide a tailwind to our team's efforts across the last eight months.
Emerging consensus around the split government removes an area of uncertainty for business and local governments.
And Monday's announcement of a vaccine and other therapeutics, while not a panacea should ultimately be a catalyst for business and international travel.
It will take time to distribute and it will likely be several more months for large companies to encourage travel again, but there is more visibility today than there has been across the last few quarters.
This said, the hotel sector is still has plenty of wood to chop and the seasonally slower fourth and first quarter will make continued gains in RevPAR and reductions in cash burn more challenging.
We continue to plan for a sluggish recovery in 2021, gaining momentum in the back half, followed by a more robust growth in 2022 and 2023.
We are encouraged by the recent news, but remain razor focused on reducing cash burn and shoring up liquidity as we close out this challenging year.
I'm going to touch on operations and capital allocation before turning it over to Ash for a deeper dive on cash burn and liquidity planning.
Last March, we took immediate action to shore up our liquidity and mitigate expenses by temporarily closing hotels.
Our primary goal in the second and third quarter was to minimize cash burn while reopening our hotels.
We achieved this goal as we now have 37 of our 39 wholly owned hotels open and operational with the two remaining closed hotels under contract for sale.
This sets up our portfolio to capture incremental demand through the end of the year and to continue to gain market share during the early stages of the recovery in 2021.
Our ability to stay nimble and leverage our flexible operating model in close connection with our independent franchise operator allowed us to reopen our hotels in a timely and cost-efficient manner.
This relationship coupled with our cluster strategy to maximize revenues and generate marketing advantage and economies of scale has given us the opportunity to reduce our cash burn rates and breakeven levels and sets up our portfolio to generate cash flow earlier than our peers as we continue to navigate this recovery.
It has also yielded positive results over the prior few months.
Of the 28 comparable hotels that were open throughout the third quarter, 21 of these hotels broke even on the GOP line with nine achieving EBITDA breakeven levels.
Leisure travel remained strong post Labor Day.
Weekends at many of our resorts outpaced pre-COVID performance and even provided a base during the week as many travelers have been able to take advantage of remote working and learning, lower gas prices and limited weekend sports engagements and other social activities.
TSA data continues to improve sequentially week over week.
Drive-to resorts have been our strongest performers since the inception of the pandemic and that continued through the typically robust summer months.
Our Sanctuary Beach Resort was the best performing asset again during the third quarter, ending the period at 81% occupancy with a $570 ADR, which led to 16% RevPAR growth.
Success continued in October, despite worries that leisure travel would subside after Labor Day as the resort grew RevPAR by 22% aided by 55% ADR growth and 70% occupancy.
Down the California coast, the hotel Milo in Santa Barbara continued its momentum from the second quarter and finished the summer on a strong note with third quarter ADR in line with last year, aided by a very strong September, which saw 70% occupancy and 11% ADR growth.
Down in Miami in South Florida, the case count escalation in June and July led to beach closures, restaurant and bar restrictions and curfews which stifled demand all summer.
Since Labor Day, drive-to traffic began to return as Miami and Key West have opened beaches and have loosened restrictions on restaurants and bars.
We have been able to win market share and saw an occupancy bump of 1500 basis points versus August for our South Florida portfolio and that momentum continued into October, as our portfolio occupancy grew another 500 basis points for the month.
By the third quarter, we began to see Northeastern and Midwesterners flying to Key West and Miami despite COVID-19 concerns.
This pent-up demand has continued in the fourth quarter as we are seeing positive trends for our portfolio entering the peak travel season for South Florida.
Rates around the holiday week between Christmas and New Year's are already in line with last year and with a strong 30% occupancy already on the books across our South Florida portfolio, we believe demand will continue to pick up as we move through the holiday season.
Pre-COVID our resorts portfolio, all the drive-to from one of our gateway market clusters contributed 25% of our EBITDA.
In 2020, these hotels will be among our top cash flowing hotels.
75% of our portfolio remains gateway urban markets.
These markets have lost not only business, international and group travel but have very few attractions for leisure travelers until cities open back up.
Our teams have done an admirable job reducing cash burn and ramping to breakeven in this very low demand environment.
As we continue to reopen hotels across our markets, we saw a change in traveler walking through our doors.
During the summer, we moved from first responder business to our new normal traveler, elective health-care workers and patients, design and construction teams outfitting offices to become COVID-compliant, professional sports teams quarantining during their abbreviated seasons and personnel related to content and entertainment production on-site around the country as studios remain shut and even the occasional micro wedding or corporate buyout.
Traditional corporate travel didn't return with its usual force post Labor Day, however across our urban markets there were employees staying in our hotels to avoid mid-week commutes, smaller businesses utilizing hotel rooms for office day use and even corporate buyouts for smaller meeting space.
September and October have seen a continued increase in these unique travelers staying in our hotels.
We've been working with local universities, housing students at The Boxer in Boston allocating inventory at our Annapolis Waterfront Hotel approximate to the US Naval Academy and continuing to work with universities in many of our urban clusters for the upcoming spring semester by offering alternatives for the new housing protocols that are likely to persist through the end of the school year in 2021.
In New York we saw success around staycation packages in Brooklyn, production teams in Tribeca hosting virtual Fashion Week events, government census workers in White Plains and a pickup in higher rated corporate business from the leading financial services and consulting firms that stay at our Hyatt Union Square.
In California, our select service hotels in Sunnyvale housed relief business related to the wildfires while in Washington DC, our Capitol Hill Hotel has seen increased bookings from elevated Supreme Court and congressional activity.
On the West End in Washington, our St. Gregory successfully contracted with various media outlets for increased coverage leading up to the election last week.
We've expected that a lodging recovery is likely to be in lockstep with medical investments as it pertains to rapid testing, therapeutics and ultimately a widely distributed vaccination.
Recent developments point to a recovery year in 2021 and we believe the recovery will be most pronounced in our core markets, highlighted by Washington DC, which is a historically strong market following an election year.
New administrations bring jobs, increase lobbying on the hill, the likely return of higher rated foreign delegations and an overall increase in corporate and leisure travel.
The Washington DC market has been an underperformer during the past few years, but we believe that a new administration will spark growth to the region aided by the aforementioned catalysts, reduced supply and the reopening of the city's unique demand generators.
We've seen from prior years that the first quarter, following the election and January specifically, proved to be a very strong period in this market, whether it's an incumbent or a de novo president.
During President Obama's second inauguration in 2013, our portfolio generated 23% RevPAR growth during the quarter.
In the first quarter of 2017, following President Trump's inauguration, our portfolio RevPAR grew by 15% with 57% growth on the night of the inauguration.
The upcoming inauguration is leading to early reservations across our portfolio at rates we have not seen in Washington DC in many years.
We believe our unique portfolio in Washington spanning select service, independent and lifestyle and luxury is very well positioned to capture the increased demand to the market during the first quarter as well as throughout 2021.
The recovery in 2021 is not just predicated on favorable comps and increased travel but also on deteriorating supply.
We have already seen the headlines and consultant forecasts for New York City.
20% of New York's total hotel room count, about 25,000 keys could permanently close and every week we seem to be seeing this forecast come to fruition with another permanent closure.
New York City is dominating the headlines but there are corners of every market filled with distressed assets that were troubled to produce margin growth even before the pandemic.
These assets were functionally obsolete prior to the pandemic and their closures will improve the long-term supply picture in many of our markets.
The other side of the supply picture is the development pipeline.
Recent reports from Smith Travel have showed a large increase in the number of development projects that have moved from either the planning or final planning stages into either the deferred or abandoned buckets.
Industry experts believe this could equate to more than 13,000 rooms.
Year-to-date through September, 211 projects in the US representing 56% decrease in the pipeline over the same period last year.
These are staggering figures that could continue to increase as our industry works through the recovery and even mirror the great financial crisis when the supply pipeline declined from a peak of 212,000 rooms at the end of 2007 to 50,000 rooms in early 2011.
Before Ash takes a deeper dive into expense savings and burn rate reductions I want to spend a few minutes on our capital allocation strategy and sources of additional liquidity.
As a quick reminder we have announced accretive binding sales agreements on four assets in our portfolio with total expected net proceeds of $70 million.
We remain optimistic that these transactions will close but we have provided extensions to the buyers through Q1.
With today's release we announced a fifth disposition, the Sheraton Wilmington, Delaware.
We began this process in the summer and are very pleased with a relatively quick execution in today's environment.
New Castle County of Delaware is acquiring the hotel for an additional $19.5 million in proceeds.
This is about a 2% cap on 2019.
These first five transactions are all smaller, non-core hotels and we are pleased with the pricing within 10% to 20% of pre-COVID values and at a combined 21 times EBITDA multiple on 2019.
Last quarter we discussed exploring additional asset sales if we saw improvement in the transaction environment.
Across the last 90 days, even before the election or the vaccine, there has been a meaningful improvement in the availability of debt for higher quality, lower cash burn hotels.
In addition to private equity firms, there has been an increasing diversity of buyers, credible family offices, international capital and new domestic entrance to hospitality.
We assessed future sale candidates in our portfolio by triangulating buyer interest, capital requirements or age of hotel and expected growth rate.
The additional five hotels we launched for sale in September and October are emblematic of our portfolio and are highly sought after in this environment.
These simple hotels that have remained open throughout the pandemic are unencumbered of management and onerous labor contracts or are even unencumbered of brands and in some cases have assumable financing and are approaching break-even levels.
These characteristics do make these hotels more valuable as visibility increases.
We will see where values come out in the coming months and balance liquidity today with reversionary growth tomorrow.
But judging by early interest, we do expect to complete several more dispositions across the next couple of quarters.
At this time we view hotel sales as the lowest cost alternative for capital today as discounted hotel sales provide relatively quick liquidity and do not encumber our capital structure or permanently dilute our equity.
As you may know, the management and board of Hersha are among its leading shareholders and across this year we have continued to buy our common equity in the open market as we consider it a remarkable value for an exceptional portfolio.
We've constructed a portfolio with high absolute RevPAR, sector leading margins and minimal capex requirements for the foreseeable future, all in the most valuable markets in the United States with few if any encumbrances.
Our portfolio is both attractive to a vast buyer pool and still offers incredible operational and financial leverage to this recovery.
This quarter's successful completion of our hotel reopening strategy that began during the second quarter and concluded with the opening of our two Ritz Carltons would not have been possible without the close working relationship we have with our third-party independent operator.
Due to our focused service strategy we were able to comfortably restart our hotels with the confidence that we can attain GOP breakeven levels within 45 days of reopening.
Results this quarter at our open hotels validated this confidence as the number of hotels that achieved GOP breakeven levels rose over the balance of the quarter.
During July, 21 of our 28 open hotels broke even on the GOP line.
This increased to 22 hotels in August and 25 hotels in September.
Our team's expense saving and revenue management strategies also yielded positive EBITDA results for a portion of our open hotels over the course of the period.
Once again during July, nine of our 28 open hotels achieved break-even EBITDA levels which increased to 11 hotels in August and 16 in September.
Our operational strategy allows us to run our hotels on very lean labor models until demand reaches levels warranting additional staffing.
We're able to do this by applying various cost cutting strategies such as cross utilizing management personnel as well as outsourcing and job sharing within the hotel and across our clusters to lower our overall expense base.
As demand begins to pick back up and occupancy levels start to improve from these low levels, we will begin to phase back in staffing levels and other operating expenses in a very deliberate and calculated manner.
Our model allows us the flexibility to continue to operate our hotels at current staffing levels at our break-even occupancies approximating 35% all the way up to 55% and even 60% at some of our hotels.
With our open portfolio generating 37% occupancy in the third quarter, we estimate that revenue from the next 20 percentage points of occupancy gains should drop down to the GOP line at 75% to 80% flow-through, generating outsized margin gains and highlighting the operating leverage inherent in our portfolio.
We would anticipate seeing these gains in the first half of 2021 as the recovery progresses and margins should continue to see momentum as we get deeper into the recovery in the back half of 2021 and 2022.
We also anticipate labor force headwinds to be much more favorable over the next few quarters with reduced F&B and smaller ancillary service departments such as salons and spas.
This development along with the various expense savings implemented by our asset management and sustainability teams such as grab and go breakfast options, reduced in-room amenities, housekeeping optimization and utility savings should bolster our margins through the recovery and post pandemic.
We estimate that many of these changes will lead to a 10% reduction in housekeeping labor and our preoccupied room cost for items such as breakfast and in-room amenities.
We also believe that there are significant opportunities to reduce our non-housekeeping labor expense.
Through zero-based budgeting we've found ways to operate more efficiently and are confident that these savings will exist even when occupancies return to more normalized levels.
As an example, we currently maintain an average FTE count at our hotels of 21 employees versus 60 FTEs in February of 2020.
Employee counts will increase as occupancies rise but changes in our operating model should allow for additional labor cost reductions in the 5% to 8% range leading to sustainable margin expansion of 150 basis points to 200 basis points post-pandemic.
During the third quarter, steadily increasing occupancies and expense savings enacted during the prior quarter resulted in a reduction of our cash burn across the portfolio.
Our property level cash burn ended the second quarter at $3.4 million and decreased sequentially over the balance of the third quarter with a $2.5 million cash loss on property in July and ending September with a $1.7 million property level cash loss.
This brought total property level cash burn for the third quarter to $5.7 million, 25% below our forecast at the beginning of the period.
At the beginning of the pandemic, our corporate level cash burn which includes all hotel operating expenses, corporate SG&A and debt service was originally projected to be $11 million per month.
Our corporate level burn rate steadily declined over the six-month period ending in September reducing from $10.5 million for April to $6.6 million for July and ending the third quarter with a $5.9 million burn rate in September.
Our corporate cash burn for the third quarter totaled $18.2 million, 32% below our second quarter burn rate and 27% below our initial downside scenario forecast.
Our third quarter and October results which saw occupancies advance over the period despite precarious COVID-19 conditions and fear of a post Labor Day headwind for leisure travel resulted in breakeven levels that improved since our second quarter earnings call.
Based on this quarter's results and our forecast for the fourth quarter, we are comfortable that on a property level basis our entire portfolio breaks-even with a 65% RevPAR decline with occupancies approaching 35% to 40% and a 25% to 30% ADR decrease.
At the corporate level, our RevPAR breakeven occurs at a 45% RevPAR decline factoring in 55% to 60% occupancies at a 20% ADR discount.
Transitioning to an item that is cash flow positive.
After more than two years we've settled our insurance claim related to hurricane Irma which significantly damaged our two largest South Florida hotels the Cadillac and the Parrot Key hotel.
During the fourth quarter, we expect to collect insurance proceeds between $7 million and $8 million which will be recorded in our fourth quarter results.
During the third quarter we spent $5.4 million on capital projects bringing our year-to-date spend to $21.8 million.
We anticipate a significantly reduced capex load for 2021, primarily focused on maintenance capex and life safety renovation, roughly 40% below our 2020 spend.
Since 2017, we've allocated close to $200 million for product upgrades and ROI generating capital projects across more than 50% of our total room count.
Entering 2020 we had substantial built-in growth projections for our portfolio based not only on market demand trends but on these recent capital improvements driving new and loyal customers to our hotels which was unfortunately upended by the pandemic.
The majority of our rooms oriented transient hotels have been renovated to the tastes and preferences of today's traveler and with very minimal capex moving forward, our portfolio will experience very little disruption at the onset and through the recovery.
As of November 1, we've drawn $126 million of our $250 million senior credit facility and ended the quarter with $20.2 million in cash and deposits.
We remain very encouraged by the resiliency of the capital markets throughout this pandemic.
The markets remain open and available at every tier of the capital stack and we've seen the first signs of traditional asset level financing from commercial and regional banks looking to deploy capital into the sector.
We believe there is a significant amount of capital forming both on the debt and equity front that will be seeking attractive opportunities in lodging over the next several years and we're still in the early stages of this capital formation.
We continue to have an active dialogue with our bank group and we plan to accelerate conversations over the next few months regarding the parameters surrounding our covenant waiver test on June 30, 2021.
Until then our lines of communication with our bank group remain open and constructive.
We remain in constant contact with suppliers of the four assets that we announced earlier this year and we recently granted the buyer of the Dwayne Street hotel an extension before in the first quarter of 2021 and this resulted in our receipt of an additional deposit of $500,000 for the transaction.
As none of the buyers need material financing we remain confident these transactions will close in a timely fashion next year.
Over the past week we went under contract for sale for the Sheraton Wilmington in Delaware for $19.5 million and we've received a material hard deposit from the buyer.
We anticipate this sale will close before the end of 2020.
The proceeds from these five transactions will be utilized to pay down our debt and we plan to utilize any additional proceeds received from any of the five assets we currently have on the market for debt pay down and for additional working capital to bolster our liquidity.
As we enter the final months of this unprecedented year for our company and our industry, we look toward our pillars of strength to navigate our passport, our unique owner operator relationship which has yielded significant expense savings over the past nine months, our cluster strategy which maximizes revenues and economies of scale while capturing unique demand opportunities in our market and the more than 20 years of experience in the public markets as a team for Jay, Neil and I. All the while we continue to explore various opportunities to fortify our balance sheet, to give the portfolio extensive runway as we navigate toward stabilized demand over the next several years.
This concludes my portion of the call.
We can now proceed to Q&A, where we're happy to address any questions that you may have. | not providing full-year 2021 guidance at this time. | 0 |
Joining me on the call today are Gene Lee, Darden's Chairman and CEO; Rick Cardenas, President and COO; and Raj Vennam, CFO.
Any reference to the pre-COVID when discussing fourth quarter performance is a comparison to our fourth quarter of fiscal '19.
And anyone -- annual reference to pre-COVID is the trailing 12 months -- ending February of fiscal '20.
This is because last year's results are not meaningful due to the pandemic's impact on the business as dining rooms closed and we pivoted to go-only model during the fourth quarter of fiscal '20.
We plan to release fiscal '22 first quarter earnings on September 23 before the market opens followed by a conference call.
During our call a year ago, I talked about the resiliency of the full-service dining segment and the confidence we had in the industry's ability to bounce back from the impacts of the pandemic.
And we've begun to see demand come back at strong levels.
As we think about the industry, our consumer insights team has done a lot of good work to better understand the size of the full-service dining segment.
There are multiple sources of data that offers sales estimates for the restaurant industry and the size of the industry and the full service industry specifically varies considerably across these sources.
This year we are adopting Technomic as our data source, which we believe better reflects the sales contribution from independent operators, provides a broader view of the restaurant industry and aligns more closely with the census data.
Going forward, we will be referencing industry data provided by Technomic which sizes the casual dining and fine dining categories for fiscal 2020 at $189 billion and for fiscal 2019 at $222 billion.
Given the strong demand we're seeing in the financial health of the consumer, we believe the categories will return to that size or greater, it's quite having approximately 10% fewer units than before the onset of the pandemic.
Over the last 15 months, we have made numerous strategic investments.
At the restaurant level, we've invested in food quality and portion size that will help strengthen the long-term value perceptions for each brand.
We also made considerable investments in our team members to ensure our employment proposition remains a competitive advantage.
And we invest in technology, particularly within our To Go capabilities, I mean our guest growing need for convenience and desire for the off-premise experience.
Our business model has evolved and is much stronger today.
As we begin our new fiscal year, we will remain disciplined in our approach to growing sales.
More specifically, our focus is on driving profitable sales growth.
Given the business transformation work we have done and the demand we are seeing from the consumer, we are well positioned to thrive in this operating environment.
This was without a doubt the most challenging year in our company's history.
Our results this quarter are a combination of the business model transformation work that Gene referenced as well as a simplification efforts we implemented throughout the year.
Significant process in menu simplification at each brand has enabled us to drive high levels of execution and strengthen margins, further positioning our brands for long-term success.
As we began the quarter, our restaurant teams remain disciplined, while continuing to operate in a difficult and unpredictable environment.
This enabled us to deliver record setting results.
For example Olive Garden broke its all-time single day sales record on Mother's Day.
Additionally, both Olive Garden and LongHorn Steakhouse achieved the highest quarterly segment profit in their history.
Even as capacity restrictions eased and we were able to utilize more of our dining rooms, off-premise sales remained strong during the quarter.
Off-premise sales accounted for 33% of total sales at Olive Garden, 19% at LongHorn and 16% at Cheddar's Scratch Kitchen.
Guest demand for off-premise has been stickier than we originally thought, and this is driven by the focus of our restaurant teams and the investments we made to improve our digital platform throughout the year.
Technology enhancements to online ordering and the introduction of new capabilities such as To Go capacity management and Curbside I'm Here notification improved the experience for our guests, while making it easier for our operators to execute.
As a result, during the quarter, 64% of Olive Garden's To Go orders were placed online, and 14% of Darden's total sales were digital transactions.
Nearly half of our guest checks were settled digitally, either online on our tabletop tablets or via mobile pay.
The business model improvements we have made also reinforce our ability to open value creating new restaurants across all of our brands.
During the quarter, we opened 14 new restaurants and these restaurants are outperforming our expectations.
While, Raj will discuss specific new restaurant targets for fiscal '22, we are working to develop a pipeline of restaurants and future leaders that would put us at the higher end of our long-term framework of 2 %to 3% sales growth from new units as we enter fiscal 2023.
Finally, the strength of the Darden platform has helped our brands navigate near term external challenges.
The employment environment has been an issue for the industry.
However, the power of our employment proposition strengthened by the investments we have made in our people continue to pay off as we retain our best talent and recruit new team members to more fully staff our restaurants.
So, while there are staffing challenges in some areas, we are not experiencing systematic issues.
Additionally, the strength of our platform has helped us avoid significant supply chain interruptions.
Our supply chain team continues to leverage our scale to ensure our restaurant teams have the key products they need to serve our guests.
Notably, the few spot outages we have experienced are related to warehouse staffing and driver shortages, not product availability.
To wrap up, I also want to recognize our outstanding team members.
During my restaurant visits, I'm inspired by the positive attitude and flexibility you demonstrate every day.
Total sales for the fourth quarter were $2.3 billion, 79.5% higher than last year, driven by 90.4% same restaurant sales growth and the addition of 30 net new restaurants, partially offset by one less week of operations this year.
The improvements we made to our business model combined with fourth quarter sales accelerating faster than cost grows strong profitability, resulting in adjusted diluted net earnings per share from continuing operations of $2.03.
Our reported earnings were $0.76 higher due to a non-recurring tax benefit of $99.7 million.
This benefit primarily relates to our estimated federal net operating loss for fiscal year 2021, which we will carry back in the preceding five years.
Looking at our performance throughout the quarter, we saw same restaurant sales versus pre-COVID improving from negative 4.1% in March, positive 2.4% in May.
And same restaurant sales for the first three weeks of June were positive 2.5% compared to two years ago.
To Go sales for Olive Garden and LongHorn continue to be significantly higher than pre-COVID levels.
We have seen a gradual decline in weekly To Go sales, however that decline is being more than offset by an increasing dining sales.
Turning to the fourth quarter P&L, compared to pre-COVID results, food and beverage expenses were 90 basis points higher, driven by investments in both food quality and pricing below inflation.
For reference, food inflation in Q4 was 4.3% versus last year.
Restaurant labor was 190 basis points lower driven by hourly labor improvement of 320 basis points due to efficiencies gained from the operational simplification and was partially offset by continued wage pressures.
Marketing spend was $44 million lower, resulting in 200 basis points of favorability.
G&A expense was 30 basis points lower driven primarily by savings from the corporate restructuring earlier in the year.
As a result, we achieved record restaurant level EBITDA margin for Darden of 22.6%, 310 basis points above pre-COVID levels and record quarterly EBITDA of $412 million.
We had $5 million in impairments due to the write-off of multiple restaurant-related assets and our effective tax rate for the quarter was 12% excluding the impact of the non-recurring tax benefit I previously mentioned.
Looking at our segments.
We achieved record segment profit dollars and margins at Olive Garden, LongHorn, and the other business segment this quarter.
Fine dining improved segment profit margins versus pre-COVID despite sales declines.
These results were driven by reduced labor and marketing expenses as we continue to focus on simplified operations while also continuing to invest in food quality and pricing below inflation.
Fiscal 2021 was a year like no other and despite the challenges of constantly shifting capacity restrictions and an uncertain guest demand, we delivered $7.2 billion in total sales.
The actions we took in response to COVID-19 to solidify our cash position and transform our business model help build a solid foundation for recovery and resulted in over $1 billion in adjusted EBITDA and over $920 million of free cash flow.
As a result, we repaid our term loan, reinstated our pre-COVID dividend and quickly built up our cash position.
Our disciplined approach to simplifying operations and driving profitable sales growth positions us well for the future.
This results in a yield of 3.2% based on yesterday's closing share price.
Finally, turning to our financial outlook for fiscal 2022, we assume full operating capacity for essentially all restaurants and we do not anticipate any significant business interruptions related to COVID-19.
Based on these assumptions, we expect total sales of $9.2 billion to $9.5 billion, representing growth of 5% to 8% from pre-COVID levels, same restaurant sales growth of 25% to 29% and 35 to 40 new restaurants.
Capital spending of $375 million to $425 million, total inflation of approximately 3% with commodities inflation of approximately 2.5%, and hourly labor inflation of approximately 6%.
EBITDA of $1.5 billion to $1.59 billion, and annual effective tax rate of 13% to 14% and approximately 131 million diluted average shares outstanding for the year.
All resulting in a diluted net earnings per share between $7 and $7.50. | qtrly adjusted diluted net earnings per share was $2.03.
sees fiscal 2022 total sales of about $9.2 to $9.5 billion.
sees fiscal 2022 same-restaurant sales versus.
fiscal 2021 of 25% to 29%.
sees fiscal 2022 diluted net earnings per share from continuing operations of $7.00 to $7.50.
qtrly same-restaurant sales (open 16 months or greater) for consolidated darden up 90.4%.
darden restaurants - qtrly same-restaurant sales (open 16 months or greater) for olive garden up 61.9%. | 1 |
Daphne, I believe you were referring to maybe a different earnings call.
Actual results may differ materially.
We undertake no obligation to update these statements as a result of future events, except as required by law.
In addition, we will refer to both GAAP and non-GAAP financial measures.
Over the past few months, we have discussed in detail the unprecedented nature of winter storm Uri.
The impact it had on the entire energy system, the steps that we took to prepare our Texas platform and the support we provided to our customers and communities.
Today, and with the benefit of additional information, we are providing more clarity on the financial impact to our company, the steps we're taking to mitigate this onetime event and reinstating 2021 financial guidance.
We continue to work closely with legislators, regulators and all market participants to introduce comprehensive solutions across the entire energy system to address issues and shortcomings that were appearing during the storm.
NRG remains committed to helping our customers and communities recover from the devastating winter storm and to bring solutions that ensure an event like this never happens again.
We also want to provide you an update on the progress made in advancing our customer-centric strategy by reorganizing around the customer and strengthening our platform.
I want to start on Slide four.
We have now processed 100% of the information received from the mid-April 55-day resettlement and issued all expected invoices to our customers.
The updated financial impact from winter Storm Uri, net of our mitigation efforts, is expected to be a net loss of $500 million to $700 million.
In order to provide you with more transparency to better understand and make your own judgment on how our platform perform, I am going to break down the components of the gross financial impact into two categories: controllable and uncontrollable.
On the controllable side, throughout the event, we maintained a balanced position while absorbing very high natural gas prices, operational issues at our plants and protecting our residential retail customers from high electricity prices.
In total, our platform was positive $17 million with estimated bad debt, primarily from C&I customers accounting for $109 million.
Moving to the three uncontrollable items.
First, the recently acquired Direct Energy portfolio had a heat recall option with a counterparty that did not perform, resulting in a $393 million gross loss.
Following the event, we reexamined the entire hedge book from Direct and determined that this was an isolated issue.
We're currently engaging discussions with the counterparty and if satisfactory result is not reached, we plan to vigorously pursue recovery through all avenues.
Next, we are recognizing a $95 million gross loss due to ERCOT default allocations.
These losses comprised of a $83 million cash short pay, plus $12 million NPV of the remaining $102 million on to ERCOT over the next 96 years.
As a reminder, ERCOT realized defaults of $3 billion, primarily from through regulated co-ops, Brazos and Rayburn.
The state legislature appreciates the impact of the co-op defaults in the broader market and is considering securitization as a way to soften the impact to customers and other market participants.
Finally, we are recognizing a $395 million loss due to ERCOT's management of the grid, particularly during the last 32 hours, when ERCOT kept the market clearing price at the cap, despite having more than 10 gigawatts in reserves.
Our platform was balanced during this time, but nonetheless, we were uplifted these extraordinary charges.
To help put this in context for you, over no time in history has this charge exceeded $5 million.
The state legislature is considering also securitization for these charges, given they are the result of unforeseen and unhedgeable actions by ERCOT.
We are focused on supporting the PUCT and ERCOT in the implementation of policies and procedures to ensure the market functions properly in the future.
In total, we expect our estimated gross financial losses to be reduced by $275 million to $475 million through bad debt mitigation, recovery of Direct Energy hedged nonperformance, ERCOT default and uplift securitizations and onetime savings, resulting in a net loss of $500 million to $700 million.
We have a high level of confidence in the net range and see manageable risks around the 180-day settlements and further bad debt escalations.
Now I want to take some time and discuss the solutions we're focused on -- in Texas.
We believe they will improve grid reliability, strengthen our market, and more importantly, avoid a systemic failure of the energy system in the future.
Since the storm, we have actively engaged in discussions with legislative members and propose various changes to make Texas more resilient.
While there are many proposals in the Texas legislator right now, including many of which we are working actively on.
I want to focus here on three concepts that the legislature has made a priority, and I believe are critical to ensure what happened in February never happens again.
Hardening of the system, improving communication and market design changes.
Beginning with system hardening.
Weatherization of assets is key to improve the overall reliability of the grid.
NRG has a strong and comprehensive winterization program that begins with lessons learned from prior winter seasons and ends with our annual declaration of completion of the winter weatherization preparations to ERCOT and the PUCT by November 30.
The implementation of formal winterization rules and force through penalties and audits is something we support.
With that said, one of the biggest lessons learned from this storm is how interactive and interconnected the electric and natural gas sectors are, and our focus is not just on hardening the power generation side of the equation.
Instead, we believe the entire system, including natural gas, needs to be hardened as they say from wellhead to lightbulb.
Next, I want to talk about communications.
During the storm, the lack of communication between all market participants and stakeholders was unacceptable.
Formal coordination between the Public Utility Commission, ERCOT, the Railroad Commission and key stakeholders will greatly improve the amount of information available as well as informed decision-making during future events.
In addition, improving the dialogue between TV used during load-shed events and retailers will greatly improve the amount of information available to customers.
Improved communication coupled with a statewide emergency alert system will ensure all Texas can stay informed about the status of the grid during times of emergency.
Finally, regarding market design changes, our focus is on improving reliability through competitive solutions in the energy and reserve markets, not through reregulated generation solutions with guaranteed profits or a one-size-fits-all capacity procurement.
For residential customers, banning index wholesale products, as we already do as a company, is a solution that will protect residential customers from being exposed to the volatile swings in the market.
Addressing these three key areas will significantly enhance grid stability, and we look forward to continuing to engage with the Texas legislature in the coming weeks.
Now moving to our regular business highlights on Slide six.
We have excluded the impact of winter storm Uri from all our numbers as we have done previously from onetime events.
Our intention is to provide transparency to the investment community regarding the recurring earnings power of our business, particularly given this was the first quarter of our ownership of Direct Energy.
And separating what we believe to be nonrecurring impacts of the combined business as a result of Uri.
NRG delivered $567 million of adjusted EBITDA in the first quarter, excluding onetime financial impacts from the storm.
This is a 62% increase from the same period last year, primarily driven by the acquisition of Direct Energy.
Notably, the addition of Direct Energy's East electric and natural gas businesses helps flatten our quarterly earnings and free cash flow seasonality.
As I mentioned before, we are reinstating our previous financial guidance of $2.4 billion to $2.6 billion for 2021, excluding Uri.
Just to remind everyone, on March 17, we temporarily suspended the 2021 guidance to reflect the significant uncertainty of Uri.
While some uncertainty remains, we believe we have received enough data to provide a range of outcomes.
Beyond Uri, we continue to advance our Direct Energy integration plan.
Following the close in early January, we immediately began the integration process, achieving $51 million of our 2021 synergy target.
We remain very confident in our ability to achieve both the 2021 and full plan targets.
As part of the Direct Energy integration, and to further simplify our business operations, today we're announcing the designation of Houston at the sole location of our corporate headquarters.
Texas is already home to our largest customer and employee base.
It's a great place to do business, and Houston continues to be at the forefront of energy and technology with one of the most diverse workforces in the country.
We will continue to maintain regional offices in the markets that we serve, as we expand our business outside of Texas.
We're also making good progress in executing our customer-centric strategy.
In January, we closed on the Direct Energy transaction, forming the leading North American integrated energy and home services company, serving a network of six million customers.
In March, we announced the agreement to sell a 4.8 gigawatt portfolio of noncore fossil assets which helps simplify and decarbonize our portfolio.
And since the last earnings call, we increased our ERCOT renewable purchase power agreements by nearly 400 megawatts now totaling approximately 2.2 gigawatts.
Last on our credit metrics.
Despite the impact of winter storm Uri, we expect to be at 3 times leverage by the end of 2021 after paying down $385 million of debt from cash available for allocation.
We're working with the credit agencies to review the impact of winter storm Uri on the timing of achieving investment-grade ratings.
An extension in timeline could give us an opportunity to achieve our metrics either through debt reduction and/or EBITDA growth.
I will be providing more details on capital allocation and our full strategic outlook during our Spring Investor Day.
Now turning to Slide seven for our summer outlook.
First, from a high level, we're expecting neutral-to-favorable summer weather and continued economic recovery to result in a year-on-year load growth.
Despite this low growth, we're expecting reserve margins to be robust, resulting in stable-to-lower power prices.
Just to remind everyone, high load, low price is good for our business.
As you can see on the upper left-hand chart, NOAA is predicting a slightly harder than normal summer within the Eastern Texas markets.
We expect this outlook to trend toward normal with a positive bias as we near summer.
Moving to the bottom left-hand side of the slide.
COVID-related electric demand continues to recover across markets with ERCOT demonstrating resilience.
As a reminder, COVID stay-at-home impact on load is most pronounced during the shoulder season and less in the summer.
From a market perspective, we see 2021 as a recovery year across all our markets.
In ERCOT, we expect a return to normal 2% annual load growth with residential usage in ERCOT remaining slightly elevated as stay-at-home trends remain, while C&I usage improves throughout the year, returning to pre-pandemic levels by the end of the year.
In the East, we see similar trends, although we believe C&I recovery to be pre-pandemic levels could take an additional 12 to 18 months given stronger stay-at-home trends.
Now as it relates to NRG, we continue to see strong residential load across all markets, and we expect to be a relative winner given our multi-brand and multichannel platform.
In ERCOT, we're seeing lower attrition rates, and incremental growth opportunities through our multichannel approach and flight to quality following Uri.
In the East, we're also realizing lower attrition.
But given the less favorable regulatory framework, we depend more on face-to-face sales to win customers.
For planning purposes, we are assuming normal customer growth in ERCOT and a slight contraction in the East as it more closely tracks the economic reopenings.
On retail supply cost, we see a little risk of sustained high prices this summer, given robust summer reserve margins across all our core markets.
While it is still early, we're eager for the earlier evolution and implementation of the Biden infrastructure plan.
As we believe it will amplify the electrification of the economy through smart technology and cleaner energy choices.
So with this positive backdrop, we continue to make good progress in executing our customer-centric strategy, as you can see on Slide eight.
On the Direct Energy integration, this transaction presented a step change for us as we move closer to the customer by significantly expanding our customer network and home services.
During the first quarter, we achieved $51 million or 38% of our 2021 synergy target.
We remain very confident in our ability to achieve both the 2021 and full plan targets, and we plan to update this scorecard quarterly in order to provide transparency and keep you informed of our progress.
We are on track to close on the 4.8 gigawatt asset sale in the fourth quarter.
This is a good transaction for us as it further streamlines our business and address terminal value and earnings concerns that otherwise would have masked our retail growth.
Our portfolio repositioning and optimization is a continuous process.
We are committed to our business model, and we'll continue to provide updates on our progress.
Finally, we are preparing for our Investor Day.
We continue to target late spring, and given the flexibility afforded by the virtual format, we will announce the event two or three weeks prior to best manage around the Texas resolution.
So with that, I will pass it to Gaetan for the financial review.
On the upper left side of the slide, we have shown our quarterly results and reinstated guidance after excluding the onetime impact of winter storm Uri, which we are showing separately on the right.
As mentioned by Mauricio, we believe that this better reflects the recurring earnings power of our business following the acquisition of Direct Energy, and it is consistent with our established practice of excluding extraordinary events.
For the quarter, NRG delivered $567 million in adjusted EBITDA or $218 million higher than the first quarter of last year, excluding $967 million impact from winter storm Uri.
This increase is driven by the acquisition of Direct Energy, which generates approximately 2/3 of its EBITDA during the winter months, given the seasonal shape of East electric and natural gas load.
This seasonality will help flatten NRG's future earnings profile throughout the year.
Specific to Direct Energy, we are on track to realize $500 million of adjusted EBITDA in 2021.
We are also on track to achieve $135 million of synergies for 2021 as well with $51 million realized in the first quarter, and a goal of at least $300 million annual run rate by 2023.
Turning now your attention to the table on the right, the total anticipated growth impact from winter storm Uri is now $975 million.
The increase since our last communication is primarily driven by the 55-day resettlement information from ERCOT, which affected our uplift cost and load estimates and added some incremental results for counterparty credit risk, all of which were partially offset by discounting the ERCOT default charges.
We continue to pursue various offselling solution estimated to be in the range of $275 million to $475 million.
This would reduce the economic impact to a net amount of $500 million to $700 million.
From a cash standpoint, based on $150 million of estimated bill credits owed to large commercial and industrial customers in 2022, the total negative cash impact in 2021 is expected to be approximately $150 million lower at $350 million to $550 million, including the effect of the offsets previously mentioned.
Finally, we are reinstating our 2021 guidance at the original ranges of $2.4 to $2.6 billion for our adjusted EBITDA and $144 billion to $164 billion for our free cash flow before growth.
Changes on this slide from last quarter are indicated in blue.
Starting from the left, on the third column, the net capital required for the Direct Energy acquisition was reduced by $38 million based on the latest estimate of the post-closing working capital adjustment.
Moving on to the next column.
The estimated winter storm Uri capital allocation impact is $825 million, net of anticipated customer bill credit outstanding at the end of the year, and would be at $450 million after deducting the midpoint of our estimated mitigation efforts of $375 million.
This has reduced our original deleveraging plan in 2021.
However, we remain committed to maintaining a strong balance sheet and improving our credit metrics over time.
Absent any mitigation offset recoveries, which are shown in the far right of the chart, the company will still pay down debt by $385 million in 2021 and continue to delever over time to meet its credit profile goals.
Importantly, this does not include any deleveraging associated with the sale of our East and West assets, which is still slated to close later this year.
Moving on to Slide 12.
I will start on the left with our 2021 credit metrics.
After adjusting our corporate debt balance for the reduction from our 2021 capital allocation and minimum cash, our 2021 net debt balance will be approximately $7.8 billion.
This, when based on the midpoint of our adjusted EBITDA, implies a ratio of just under 3 times to adjusted EBITDA at the end of the year.
This notably excludes the onetime impact of winter Storm Uri, which we also expect to be excluded by the rating agencies.
On the topic of raining, we continue to work with the agencies to review winter Storm Uri's impact on the time line and the requirements to achieve investment grade.
We remain committed to strong credit metrics and continue to operate under the assumption that investment-grade ratings will be awarded shortly after achieving the targeted metrics.
But we're not controlling this process.
And we realized that given the circumstances, it could take the agencies much longer than previously anticipated to be comfortable granting us an IG rating.
I would note that if the timeline is extended, it could also give us an opportunity to achieve our metrics either through debt reduction and/or EBITDA growth.
Turning to the right side of the slide.
We also wanted to update you on our latest liquidity position, which are -- which had $4.1 billion as of a few days ago, remains very strong and sufficient to continue supporting our business even during a period of stress.
In conclusion, we are reinstating our EBITDA and free cash flow before growth to the original guidance provided in the last earnings call, excluding the impact of winter Storm Uri.
While the storm has impacted our capital allocation plan, we have maintained a strong liquidity position before, during and after the event, what our core business continues to perform as otherwise expected.
With this, I will hand it back to Mauricio.
I want to provide a few closing thoughts on Slide 14.
I recognize that winter Storm Uri has impacted investor confidence in ERCOT's market design and the durability of our cash flow.
But I want to be clear.
Given the steps being discussed in the Texas legislature and the actions by market participants, I don't believe an event like this can happen again.
The systemic failure was the result of a lack of winter stress planning, which was then amplified by poor electric and natural gas coordination and protocols to orderly restore the energy system and communicate with customers.
Energy is a key pillar to Texas outsized growth and all stakeholders are focused on addressing winter reliability swiftly and comprehensively.
ERCOT's winter planning parameters will be enhanced.
Grid coordination will be improved and protocols for a large-scale emergency will be established.
Now finally, today, following our extensive CFO search, I am pleased to announce that Alberto Fornaro will join our team as Executive Vice President and Chief Financial Officer, effective June 1.
Alberto is a seasoned finance expert who brings over 30 years of experience and a unique combination of consumer, technology, manufacturing and risk management experience.
Alberto joins us from Coupang, the world's fifth largest e-commerce platform, where he served as Group Chief Financial Officer and Senior Advisor.
Before that, he served as CFO for public and private companies, including International Game Technology, a leading gaming company; Doosan, compact and heavy construction equipment company; and Technogym, the world's second largest manufacturer of fitness equipment.
I believe Alberto's expertise is the ideal fit to enhance our decisive move closer to the customer.
I also want to take a moment to recognize Gaetan Frotte for stepping in as interim CFO and leading the finance organization during this challenging time.
Gaetan is a very important and valuable member of our leadership team. | nrg energy inc - winter storm uri expected net cash impact of $500 to $700 million over time .
nrg energy inc - reinstating 2021 adjusted ebitda and fcfbg guidance.
nrg energy inc - during quarter ended march 31, winter storm uri's financial impact was a loss of $967 million.
nrg energy - currently planning to begin returning certain employees to offices through phased approach expected to be completed by end of summer. | 1 |
We look forward to discussing our third quarter 2021 results with you today.
Joining me for Assurant's conference call are Alan Colberg, our Chief Executive Officer; Keith Demmings, our President; and Richard Dziadzio, our Chief Financial Officer.
Yesterday, after the market closed, we issued a news release announcing our results for the third quarter 2021.
The release and corresponding financial supplement are available on assurant.com.
We'll start today's call with remarks from Alan, Keith and Richard before moving into a Q&A session.
During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance.
Our third quarter results were strong, driven by double-digit operating earnings growth in Global Lifestyle.
The strength of our Global Automotive and Connected Living offerings continue to validate our long-term strategy of focusing on our higher growth fee-based and capital-light businesses.
We continue to make progress in building a more sustainable company for all stakeholders.
During the quarter, a few key highlights included.
For the first time, Assurant was awarded a Bronze accreditation by EcoVadis, one of the largest sustainability ratings companies, ranking Assurant among the top 50% of all 75,000 participating companies.
In addition, this quarter we provided additional transparency to track our progress on our journey to build a more diverse and inclusive Assurant, with the recent disclosure of our EEO-1,which provides gender, race and ethnicity data by job category for our U.S.-based employees.
We believe a diverse and inclusive workforce will best foster innovation, a key ingredient to sustaining our outperformance longer-term.
Looking at our financial performance year-to-date, net operating income per share excluding reportable catastrophes was $8.75, up 12% compared to the first nine months of last year.
Net operating income and adjusted EBITDA also excluding cats, both increased by 10% to $528 million and $862 million, respectively.
These results support our full year outlook of 10% to 14% growth in net operating income per share excluding reportable catastrophes, marking our fifth consecutive year of strong profitable growth.
Given year-to-date results and our expectations for the fourth quarter, we would expect to end the year closer to the top half of this range.
We've also now completed our three-year $1.35 billion capital return objective from our 2019 Investor Day, a quarter ahead of schedule.
Following the close on the sale of Global Preneed in August, we've also made meaningful progress in returning an additional $900 million to shareholders.
Our 2021 earnings per share outlook is driven by at least high single-digit net operating income growth, excluding cats, as well as share repurchases.
Turning to our business performance.
In Global Lifestyle, we are on track to grow adjusted EBITDA by double digits in 2021 from $637 million in 2020, driven by Global Automotive and Connected Living.
We have benefited from the stable recurring revenue stream of our installed base of mobile subscribers and our success in launching additional offerings and capabilities for mobile carrier, cable operator, OEM and retail clients globally.
Additionally, our mobile trade-in upgrade business and expanded service delivery options are increasingly important to our profitability and also on providing a differentiated and superior customer experience.
Within Global Automotive, we benefited from increased scale, growing the number of vehicles we protect by 20%, over 52 million since The Warranty Group acquisition in 2018.
We believe Auto will continue to be one of our key growth businesses in the future.
In Global Housing, we continue to be on track for another year of better than market returns, with an annualized operating ROE of nearly 15% for the first nine months of this year.
This includes $113 million of catastrophe losses, which further demonstrates the superior returns of this differentiated business.
Our counter-cyclical lender placed insurance business remains an integral part of the mortgage industry framework in the U.S. Within lender placed, as we renew existing clients and add new partners, we will continue to enhance the experience through the ongoing rollout of our single source processing platform.
Our Multifamily Housing business now supports over 2.5 million renters across the U.S. and has more than doubled earnings since 2015 through our strong partnerships with our affinity and property management company clients.
Our investments in digital capabilities, such as our cover 360 property management solution continues to drive more value for our partners and an enhanced customer experience.
Overall, we believe our portfolio of high growth, fee based capital-light offerings and high return Specialty P&C businesses sets us apart as a long-term outperformer and sustained value creator for our shareholders.
Most of all, I'm humbled by our 15,000 employees, who through their dedication to serve our clients and our 300 million customers worldwide have successfully transformed Assurant.
Together, we have significantly strengthened our Fortune 300 company that should continue to deliver above-market growth and superior cash flow.
With our President, Keith Demmings, succeeding me as CEO in January, I'm confident Assurant will accelerate our strategy and continue to differentiate our superior customer experience will further deepen in client relationships.
I've been fortunate to have had a front-row seat and a role in supporting Alan's vision and the transformation of Assurant.
Importantly, he has continued to evolve the purpose of our company to drive value for all stakeholders, customers, employees, communities and shareholders.
The impact he has had on our people and the overall culture of our company has been exemplary.
And I appreciate Alan personal mentorship and partnership and wish him the very best in his retirement.
As we build on Assurant's momentum over the long-term, I believe our talent and innovation will be critical factors to achieving success and growth, especially as we focus more on the convergence around the connected consumer.
From a talent perspective, Assurant has developed a deep and diverse bench of internal leaders.
A few weeks ago, I announced our refreshed Management Committee effective in January, including two new leadership appointments illustrating our strong bench.
First, Keith Meier, our current President of International will succeed Gene Mergelmeyer as Chief Operating Officer, as Jim will be retiring at year-end.
Gene's significant contributions to Assurant over the last 30 plus years, including as COO over his last five years have been instrumental in creating market-leading positions, producing profitable growth and transforming the organization.
In succeeding Gene, Keith Meier brings nearly 25 years of experience at Assurant to the COO role.
Since 2016 as President of Assurant International, he has driven growth across our global markets, most recently with strong success in Asia Pacific.
In this new role, Keith will be focused on advancing Assurant's business strategy and market leadership positions as well as identifying additional opportunities to deliver a superior customer experience.
Second, Martin Jenns, will become President of Global Automotive.
With over 30 years of experience, he currently leads the transformation and growth strategy for Auto and has been instrumental in our introduction of innovative new products like EB-1, our electric vehicle warranty protection.
In addition to emerging opportunities and innovation, Martin will be focused on driving growth and improving the customer experience, including working with our partners to deliver best-in-class dealer training.
These two new appointments along with recent appointments of Biju Nair as President of Connected Living and Manny Becerra as our Chief Innovation Officer, as well as the other management committee members represent a strong team to help lead us into the future.
In addition to talent, innovation is an important strength of the organization.
, not only the development of new digital products and offerings for our clients, but also through new path to grow and scale Assurant's businesses.
Within Connected Living, innovation was a significant theme this quarter through ongoing enhancements of our mobile service delivery options.
As part of the recently finalized multi-year contract extension with T-Mobile, we're expanding the services Assurant provides to continuously improve the customer experience for millions of T-Mobile customers.
As of November 1st, Assurant is partnering with T-Mobile to begin the nationwide rollout of in-store device repair services to approximately 500 stores, provided by Assurant's industry certified repair experts.
In addition, we have also transitioned all of the legacy Sprint protection subscribers to the new T-Mobile Device protection offering.
As a result, this significantly adds to our mobile device count, now at roughly 63 million as of November 1st.
Overall, the expansion of our service delivery options is critical to sustaining our competitive advantage.
We also recently signed a multi-year renewal with Spectrum Mobile, continuing to provide a comprehensive and Pocket Geek mobile [Technical Issues] on-device diagnostic tool.
With the renewal, we will also be expanding the offering to include Pocket Geek privacy, which enables consumers to better protect and manage their personal information online through various features.
This is another example of how we're able to grow by adding services and capabilities to existing clients.
In addition, the mobile business continues to see strong attachment rates given the increased reliance on mobile devices as well as rising device prices.
Our fee-driven trade-in and upgrade business, including the previous acquisitions of Hyla and Alegre have performed extraordinarily well already this year as we enter the early innings of the 5G upgrade cycle.
In fact, almost a year after the transaction of Hyla closed, I'm happy to report the acquisition has performed better than expected, ahead of the low-teens forward EBITDA the acquisition was valued on.
With the growing availability and popularity of 5G-enabled smartphones, we expect to see our 30 plus trade-in and upgrade programs continue to grow.
Our progress is demonstrated through our ability to manage large scale programs with superior technology.
This is further supported by increasing our attach rates for trade-in programs as our clients promotional efforts encourage consumers to upgrade.
Overall, we have processed nearly 18 million devices so far this year, reducing e-waste and increasing digital access with high quality, affordable phones.
Through the scale and capabilities of our trade-in and upgrade programs, we benefit from an additional source of profits and improved client economics and customer retention.
This quarter, we are pleased to announce that we have signed a multi-year contract extension with AT&T to manage their device trade-in program.
This includes providing analytics as well as device collection and processing for all of their sales channels, including retail, B2B, dealer and direct to consumer.
AT&T was the key client added with the Hyla acquisition and we look forward to continuing to do business with them, specifically as we help support the growing adoption of 5-G-enabled devices.
In Global Automotive, policies increased by $4 million or 8% year-over-year and production is well above pre-pandemic levels as we continue to take advantage of our scale and talent.
So far this year, the business has also the benefited from strong used car growth which tends to earn faster than new car sales.
This along with the fact that earnings from the business are recognized over a multi-year period provides good visibility into future performance of the business.
As we drive innovation within Auto, we continued the global rollout of EV-1, an electric vehicle and hybrid protection product to North America.
EV-1 has now been rolled out in seven countries.
While the electric vehicle market is still in its infancy, our EV-1 product will allow Assurant an opportunity to better evaluate customer demand and leverage our learnings to position us well for the expected increase in electric vehicle adoption in the future.
Our Multifamily Housing business grew policies by 7% year-over-year from growth in our affinity partners as well as our PMC relationships, where we continue the rollout of our innovative cover 360 product.
In addition, we have seen other digital investments create opportunities for future growth.
Our newly designed digital sales portal, which makes it faster and easier for residents to sign up for a policy is driving significantly higher product attachment rates.
Our new portal has seen an increase in conversion rates versus our legacy website since it was first introduced last year.
In summary, our ability to strengthen insurance talent and innovation, supported by critical investments has and should continue to drive momentum for the future.
As Alan noted, we are pleased with our third quarter performance as our results reflect strong growth across Global Lifestyle and solid earnings in Global Housing.
For the quarter, we reported net operating income per share excluding reportable catastrophes of $2.73, up 5% from the prior year period.
Excluding cats, net operating income and adjusted EBITDA for the quarter, each increased 4% to $162 million and $262 million, respectively.
Now let's move to segment results, starting with Global Lifestyle.
This segment reported net operating income of $124 million in the third quarter, continued earnings expansion within Connected Livings mobile business.
In Global Automotive, earnings increased $8 million or 21% from continued global growth in our U.S. national dealer and third-party administrator channels, including contributions from our AFAS and international OEM channels.
Better loss experience in select ancillary products and higher investment income also supported earnings growth in the quarter.
Connected Living earnings increased by $6 million or 9% year-over-year.
The increase was primarily driven by continued mobile subscriber growth in North America and better performance in Asia Pacific, as well as higher trading volumes, led by contributions from our Hyla acquisition and carrier promotions.
This quarter, Global Automotive and Connected Living results also included a modest one-time tax benefit that improved earnings.
For the quarter, Lifestyle's adjusted EBITDA increased 17% to $177 million.
This reflects the segments increased amortization resulting from higher deal related intangibles from more recent transactions in mobile in Global Automotive.
IT depreciation expense also increased, stemming from higher investments.
As we look at revenues, Lifestyle revenues increased by $158 million or 9%.
This was driven mainly by continued growth in Connected Living and Global Automotive.
Within Connected Living, revenue increased 10% boosted by mobile fee income that was driven by strong trade-in volumes, including contributions from Hyla.
Trade-in volumes were supported by new phone introductions and carrier promotions from the introduction of new 5G devices.
Higher revenue from growth in domestic mobile subscribers was offset by declines in run-off mobile programs.
Mobile subscribers were up slightly year-over-year and flat year-to-date as mid-single digit subscriber growth in North America was offset by declines in other geographies mostly due to three factors.
First, the 750,000 subscribers related to a run-off of European banking program previously mentioned, which is not expected to be a significant impact in our profitability.
Second, subscriber growth for existing programs moderating in Asia Pacific.
And third, a slower than expected recovery from the pandemic in Latin America.
In Global Automotive, revenue increased 8%, reflecting strong prior period sales of vehicle service contracts.
Industry auto sales remained elevated in the third quarter and we benefited from this trend as reflected in the year-over-year growth of our net written premium by 12%.
We have though seen this trend begin to normalize beginning into the fourth quarter.
For the full year, Lifestyle revenues are expected to increase modestly compared to last years $7.3 billion, mainly driven by Global Auto and Connected Living growth.
For all of 2021, we still expect Global Lifestyle's net operating income to grow in the high single digits compared to 2020.
Adjusted EBITDA for the segment is expected to grow double digits year-over-year, which continues to grow at a faster pace in segment net operating income.
As previously reported, we began our investment in the [Technical Issues] capability this quarter.
However, due to the timing of the rollout, most of our associated start-up costs will occur in the third quarter.
These costs primarily relate to technician hiring and parts sourcing.
We do expect these costs to meaningfully impact Connected Livings profitability as we end the year.
In addition, we expect our effective tax rate to return to a more normal level, approximately 23%.
Looking ahead to 2022, we expect earnings expansion to continue, but more likely at more moderated levels as we continue to invest for growth including additional implementation start-up costs for in-store service and repair.
Moving to Global Housing, net operating income excluding catastrophe losses was $81 million for the third quarter, including the $78 million of pre-announced catastrophe losses mainly from Hurricane Ida, net operating income totaled $3 million.
Excluding catastrophe losses, earnings decreased $19 million due to anticipated higher non-cat losses, which returned to levels more in line with historical averages.
As a reminder, favorable non-CAT losses in 2020 were not representative of historical trends and third quarter 2020 marked the lowest point of last year, mainly driven by loss experience within lender placed and specialty products.
The year-over-year earnings decline was nearly all driven by unfavorable non-cat loss experience from several factors.
The largest driver which contributed close to half of the increase was from the expected normalization of the non-cat loss ratio.
The balance of the decline was split relatively evenly between increased reserves related to our Specialty P&C offerings, primarily in our on-demand sharing economy business as well as higher claims severity.
Claims severity included moderate impacts from inflationary factors such as higher labor and material costs.
While there is always a lag.
If this trend continues, we would expect higher loss cost to be offset by increased rates over time.
In Multifamily Housing, underlying growth was offset by increased investments to further strengthen our customer experience, including our digital first capability.
Global Housing revenue decreased slightly year-over-year from lower Specialty P&C revenues as well as a cat reinstatement premium resulting from Hurricane Ida and lower REO volumes in lender placed.
This was partially offset by higher average insured values and premium rates in lender placed and growth in Multifamily Housing.
We continue to expect Global Housing's net operating income excluding cats to be flat for the full year compared to 2020.
For the fourth quarter and into 2022, we would expect non-cat losses to continue to be above 2020, but in line with year-to-date 2021 experience, which is consistent with long-term trends.
We also continue to monitor the REO foreclosure moratoriums and any additional extensions that may be announced.
At Corporate, the net operating loss was $21 million, an improvement of $4 million compared to the third quarter of 2020.
This was driven by two items.
First, lower employee-related expenses and third-party fee.
And second, expense savings associated with reducing our real estate footprint.
In the fourth quarter, we do anticipate a higher loss due to the timing of spend.
For the full year 2021, we now expect the Corporate net operating loss to be approximately $80 million, driven by favorable year-to-date results mainly from the one-time tax and real estate joint venture benefits in the second quarter.
This compares to our previous estimate of $85 million.
As we look forward to 2022, we would expect our net operating loss in Corporate to be closer to $90 million, more in line with historical trends.
Turning to the holding company liquidity, including the net proceeds from the sale of Preneed in August, we ended the third quarter with over $1.3 billion, well above our current minimum target level.
In the third quarter, dividends from operating segments totaled $127 million.
In addition to our quarterly corporate and interest expenses, we also had outflows from three main items, $323 million of share repurchases, $39 million in common stock dividends and $11 million mainly related to Assurant ventures investment.
In addition to completing our 2019 Investor Day objective of returning $1.35 billion to shareholders from 2019 through 2021, we have also completed roughly one-quarter of our objective to return $900 million in Global Preneed sale proceeds through share repurchases.
For the year overall, we continue to expect dividends to approximate segment earnings subject to the growth of the businesses, rating agency and regulatory capital requirements and investment portfolio performance.
I also want to provide a quick update on the Assurant Ventures, our venture capital arm.
In the third quarter, three investments in our portfolio went public via SPACs.
We are pleased with the results as the three investment exceeded a 7 times multiple on investment capital under their respective SPAC transaction terms.
These transactions combined with strong performance in the broader ventures portfolio led to a $75 million after-tax gain flowing through net income in the quarter.
In addition to strong returns, these investments also provide key insights into emerging technologies and capabilities within our Connected Consumer businesses.
In addition to positioning Assurant for long-term success and growth, he has created an environment of inclusion in community, truly representative of our core values, common sense and common decency.
Alan, I wish you all the very best in retirement, well deserved. | q2 operating earnings per share $2.99 excluding items.
continue to expect to grow eps, ex.
catastrophes, by 10 to 14 percent for 2021. | 0 |
All of these materials can be found on our website at travelers.com under the Investors section.
Speaking today will be Alan Schnitzer, Chairman and CEO; Dan Frey, CFO; and our three segment Presidents, Greg Toczydlowski of Business Insurance; Tom Kunkel of Bond & Specialty Insurance; and Michael Klein of Personal Insurance.
They will discuss the financial results of our business and the current market environment.
Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures.
We are very pleased to report third quarter core income of $798 million or $3.12 per diluted share, and core return on equity of 13.5%.
Our bottom-line result this quarter reflects strong underlying underwriting income resulting from record net earned premium of $7.4 billion and an underlying combined ratio that improved 2.6 points to a strong 91.5%.
We're pleased with the underwriting results in all three segments with improved underlying profitability in both Business Insurance and Personal Insurance.
In Business Insurance, the underlying result improved due to margin expansion as earned rate exceeded loss trend.
In Personal Insurance, the benefits from lower frequency in the auto business more than offset higher levels of non-catastrophe weather and wildfire losses.
In Bond & Specialty Insurance, the underlying combined ratio was elevated, consistent with the outlook we shared on the call last quarter.
I'll note that the combined and underlying combined ratios were still under 90% generating a solid return in a challenging environment.
Profitability in all three segments continues to reflect the benefit of our strategic focus on productivity and efficiency, resulting in a sub-30% consolidated expense ratio.
Core income for the quarter also included catastrophe losses of $397 million pre-tax, which were meaningfully above the 10-year average per quarter.
We hope for a quick recovery for all those who have been impacted.
I also want to express my gratitude to our dedicated claim team for taking care of our customers during these extraordinary times.
Of the 100,000 or so claim notices we received so far this year, arising out of the record number of PCS catastrophes in the US, our claims team has met our objective of closing over the 90% of the claims within 30 days.
A quick resolution results in a better experience for our customers and a more efficient outcome for us.
In addition to the Property Cat Aggregate Treaty which has mitigated our losses, recent actions to improve the balance sheet and risk reward meaningfully reduced our exposure to wildfires.
To illustrate the point, in the areas impacted by the five costliest California wildfires this season, our exposure is about a third lower than it was two years ago.
Turning to our investment portfolio.
This quarter, we again benefited from our well-defined and consistent investment philosophy with our high-quality investment portfolio generating net investment income of $566 million after tax.
Lastly, before I turn to the top-line, I'll share that the uncertainty surrounding business interruption claims continues to resolve favorably and consistent with our expectations.
So we remain confident on that front.
In terms of the top-line and production, we continue to generate strong results.
Net written premiums in the quarter grew by 3% driven by strong renewal rate change and retention in all three segments.
In our commercial businesses, exposure change on renewed accounts was only modestly negative for both the quarter and year-to-date compared to a much more significant reduction in economic activity.
We believe that in addition to generating a better underwriting result, our high-quality portfolio of accounts is more resilient to economic hardship.
In Business Insurance, we achieved record renewal rate change of 8.2%, 4 points higher than the prior year quarter, while retention remained strong.
We achieved higher renewal rate change year-over-year and sequentially in each of our lines of business other than workers' compensation.
In Bond & Specialty Insurance, net written premiums increased by 4% as renewal premium change in our domestic management liability business rose to 8.1%, including record renewal rate change while retention remained at an historical high.
In Personal Insurance, net written premiums increased by 8%, driven by strong retention and new business in both Agency Auto and Agency Homeowners.
In our Agency Homeowners business, we achieved renewal premium change of 8.2%, its highest level since 2014.
Across all of our businesses, we've made good progress achieving rate gains and managing other levers of profitability to improve the outlook for returns in those lines that need it, and we'll continue to execute to meet our return objectives.
For all the reasons we've discussed previously, from the loss environment to the interest rate environment, we expect continued momentum in the marketplace.
Notwithstanding our focus on successfully managing through the pandemic and addressing other headwinds impacting the industry, it's important to note that we haven't been distracted from pursuing our strategic agenda.
We remain focused on leveraging our scale and resources to continue to invest and innovate.
As we said before, we believe the winners in our industry will be those with deep domain expertise that can deliver industry-leading results, while innovating successfully on top of a foundation of excellence.
From a position of strength, we continue to focus our efforts on extending our advantage in risk expertise, providing great experiences and improving productivity and efficiency.
In our commercial businesses, we continue to make progress in digitizing virtually every aspect of the value chain, while at the same time, enhancing our advanced analytics.
Just as one example, our BOP 2.0 small commercial product, which we launched in 2019 benefits from both.
In the states in which we rolled it out, we've seen about a 15% increase in both submissions and new business premiums.
This product uses AI and third-party data to improve underwriting segmentation, operational efficiency and the agent experience.
That point, the artificial intelligence eases the burden on the agent and has resulted in a substantial improvement in classification accuracy.
In Personal Insurance, we're balancing sophisticated total account solutions that streamline the agent and customer experiences.
For example, we completely redesigned the experience of our IntelliDrive auto-telematics offering and introduced a distraction reading.
We rolled this out in nine states during the second and third quarters and have plans to launch in an additional 10 states in the fourth quarter.
We're observing a nearly 30% increase in the rate of adoption for IntelliDrive and have received strong agent feedbacks.
Also, in the fourth quarter, we're rolling out an enhanced customer self-service tool in a new mobile app.
In our Claim organization, we're advancing the rollout of virtual end-to-end claim service tools, embracing the pandemic-driven trends at accelerated digital adoption by individuals and businesses.
Customer and agent satisfaction are up, while payout discipline remains strong.
To sum it up, we see [Phonetic] better performance in the face of a pandemic and a challenging underwriting environment.
It reflects the importance of the strong underwriting culture, the benefit of data and analytics and the franchise value we offer to our customers and distribution partners.
All of that, together with our highly engaged and talented workforce, we're confident that we're well-positioned to capitalize on opportunities as the economy continues to reopen.
Our core income for the third quarter was $798 million, generating core ROE of 13.5%, both up significantly from core income of $378 million and core ROE of 6.5% that we reported in the prior year quarter.
These increases resulted primarily from this year's favorable third quarter QID compared to net unfavorable QID in last year's thrid quarter, as well as a significant increase in underlying underwriting profit.
More on both of those items in a minute.
Our third quarter results include $397 million of pre-tax cat losses compared to $241 million in last year's third quarter.
This quarter's cats included Hurricane Laura, Tropical Storm Isaias, the severe straight line winds that impacted the Midwest in August, and several large wildfires in the Western United States.
The increase in the level of cat activity was even more pronounced than those numbers suggest as our net cat results in the quarter was tempered by recoveries under the Aggregate Catastrophe XoL Treaty.
We have recognized a full recovery under that treaty in our third quarter results with $233 million pre-tax benefit in the cat line and $47 million pre-tax benefiting non-cat weather in our underlying results.
Recall that last year, we did not have any recoveries under the treaty until the fourth quarter.
Of course the full recovery in this year's third quarter means that there is no coverage remaining from this treaty as we enter the fourth quarter.
The underlying combined ratio of 91.5%, which excludes the impacts of cats and QID improved by 2.6 points from 94.1% in last year's third quarter.
The underlying loss ratio improved by 2.4 points, and benefited from favorable auto frequency related to COVID-19 and the impact of earned pricing in excess of loss trends, partially offset by an increase in non-cat weather losses including wildfires.
The expense ratio of 29.3% is two-tenths of a point favorable to last year's third quarter results, and reflects our strategic focus over a number of years on improving productivity and efficiency.
Setting aside quarter-to-quarter variability, our year-to-date expense ratio of approximately 30% is a figure we're comfortable with.
Our top-line proved to be resilient with a 3% increase in net written premium, as continued strong renewal rate change and retention, in all three segments, more than offset modestly lower insured exposures in the commercial businesses.
For the quarter, losses directly related to COVID-19 totaled $133 million pre-tax with $92 million in Business Insurance driven primarily by workers' comp and $41 million in our Bond & Specialty business predominantly driven by management liability.
More than offsetting those losses were lower levels of auto claims and to a lesser extent, fewer non-COVID workers' comp NGL claims due to lower levels of economic activity.
The net impact of the COVID environment on the consolidated underlying combined ratio amounted to a benefit of about 2 points, mostly in Personal Insurance.
Given the ongoing uncertainty in this environment, we continue to take a cautious approach in estimating the net impact of COVID-19-related losses.
Consistent with my commentary last quarter, the majority of direct COVID losses that we booked year-to-date through September is still sitting in IBNR.
Looking at the year-to-date impact of direct COVID losses, net of related frequency benefits and other underwriting items, our underwriting results have benefited by a little more than $100 million pre-tax or about 0.5 point on a consolidated underlying combined ratio, including the impact of premium refunds to policyholders.
However, year-to-date net investment income reflects the significant adverse impact on our non-fixed income portfolio.
Turning to prior year reserve development.
As previously disclosed, third quarter includes approximately $400 million of pre-tax benefit from the PG&E subrogation.
About 80% of that benefit is reflected in Personal Insurance, with the remainder reflected in Business Insurance.
Setting PG&E to the side, QID results in the quarter were as follows.
In Personal Insurance, net favorable development of $40 million pre-tax was driven by auto results coming in better than expected for recent accident years.
In Bond & Specialty Insurance, there was no net impact from QID.
In Business Insurance, we recognized unfavorable development of $295 million pre-tax as a result of our annual asbestos review.
While there was some slight improvement in several of our asbestos indicators, the overall level of paid losses and general claim activity has persisted at levels higher than we had anticipated.
This year, as we do every few years, we reviewed certain macro assumptions underlying our actuarial analysis.
Our updated view of ultimate asbestos-related losses resulted in an increase in the low end of the actuarial range.
This year's asbestos charge is greater than last year's charge as a result of our updated view of the range for ultimate losses, not as a result of increases in paid losses or severity.
There are some indications that the environment is improving in terms of the emergence of new asbestos claims going forward.
Of note, as you can see on the bottom two lines of the table, the decline in mesothelioma deaths was much more pronounced in all of the younger age groups.
This trend is directionally consistent with our expectation that over time, the high risk group of people actually exposed to asbestos in the workplace prior to the late 1970s will get smaller and will not be replaced by younger people as those who entered the workforce sometime in the 1980s should not have been exposed to asbestos to nearly the same degree as their predecessors.
Excluding the impacts of the PG&E settlement and the annual asbestos review, there was virtually no net prior year reserve development in Business Insurance.
Favorable development in workers' comp was offset by an increase to the reserves from legacy liabilities in our run-off book, related to a single insured arising out of policies issued more than 20 years ago.
After-tax net investment income increased by 7% from the prior year quarter to $566 million.
The increase was driven by our non-fixed income returns where results for our private equity, hedge funds and real estate partnerships are generally reported to us on a one quarter lag.
Because of that reporting lag, the recovery experienced in the broader markets during the second quarter benefited our non-fixed income results in the third quarter.
Fixed income returns decreased by $31 million after tax as the benefit from higher levels of invested assets was more than offset by the decline in interest rates, consistent with our comments on last quarter's call.
Also consistent with our prior commentary, we expect after-tax fixed income NII in the fourth quarter to be down $35 million to $40 million compared to a year ago.
Looking ahead to 2021, our current expectation is for after-tax fixed income NII to be between $420 million and $430 million per quarter.
Turning to capital management.
Operating cash flows for the quarter of $2.3 billion were again very strong, all our capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $2.3 billion, well above our target level.
Recall that in April we pre-funded the $500 million of debt coming due in November with a new 30-year $500 million debt issuance.
So our holding company liquidity at September 30 is temporarily elevated by that amount [Phonetic].
Investment yields decreased as credit spreads tightened during the third quarter, and accordingly, our net unrealized investment gain increased from $3.6 billion after tax as of June 30 to $3.8 billion after tax at September 30.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $94.89 at quarter end, up 2% from year-end of 2019 and up 5% year-over-year.
We returned $218 million of capital to our shareholders this quarter via dividends.
We did not repurchase any shares during the quarter.
Looking ahead, there is no change in our approach to capital management.
Until there is more clarity on the state of the economy, we may buy back some shares in the coming quarters or we may continue to choose to buy none.
Business Insurance produced $365 million of segment income for the quarter, a significant increase over the prior year quarter with prior year development, underlying underwriting income and net investment income, all contributing to the year-over-year increase.
The underlying combined ratio of 94% improved by almost 2 points, driven by more than 1 point of earned rate in excess of loss trend.
A modest favorable net impact from the pandemic contributed about 0.5 point to the improvement.
As for the top-line, net written premiums were 1% lower than the prior year quarter, with strong rate and high retentions mostly offsetting modestly lower insured exposures and lower levels of new business.
As Alan mentioned, we are very pleased with the resilience of our top-line in the face of the ongoing macroeconomic challenges.
Turning to the domestic production.
We achieved record renewal rate change of 8.2%, up 4 points from the third quarter of last year and almost 1 point from the second quarter of this year, while retention remained high at 83%.
We feel very good about the headline numbers, but as we've shared before, the quality of the execution and segmentation underneath the headline numbers are just as important.
To that point, while we achieved meaningful rate increases in all product lines, set workers' comp, our underwriters are making deliberate and granular decisions with respect to rate and retention and account-by-account or class-by-class basis.
New business of $505 million was 9% lower than the prior year quarter.
We attribute the decline to lower levels of economic activity, as well as careful risk selection by our underwriters.
In our core middle market business, for example, while submissions are up, our quote ratio is lower as we are taking a disciplined approach, given our view of quality of new business in the market.
As for the individual businesses, in select, renewal rate change increased to 2.9%, marking the seventh consecutive quarter in which renewal rate change was higher than the corresponding prior-year quarter.
Retention of 80% was down a couple of points from recent periods, largely driven by policy cancellations that were deferred to the second quarter due to our pandemic-related billing relief program.
In middle market, renewal rate change increased to 8.3%, while retention remained strong at 85%.
The 8.3% was up by more than 4.5 points from the third quarter of 2019, and we achieved positive rate of more than 80% of our accounts this quarter, up from about two-thirds in the third quarter of last year.
To sum up, we feel terrific about our results and execution in a challenging underwriting environment.
We also feel very good about the investments we're making for the future and the benefits we're seeing from those investments.
Those investments include enhancing the experiences for our customers and distribution partners, digitizing the underwriting transaction, and creating efficiencies.
For example, we've recently launched multiple pilots to automatically incorporate data from our distribution partners' agency management systems directly into our systems, substantially reducing the time and friction in the process, while also improving data quality.
We're as confident as ever, there are meaningful competitive advantages to position us well for long-term profitable growth.
Bond & Specialty delivered solid returns and growth in the quarter despite the ongoing headwinds of COVID-19.
Segment income was $115 million, a $24 million decrease from the prior year quarter as the benefit of higher volumes was more than offset by a higher underlying combined ratio.
The underlying combined ratio of 89% increased 5.4 points, primarily driven by estimated losses from COVID-19 and related economic conditions.
Given the products that we write, we expect the results of the segment to be impacted in times of severe economic downturn.
We experienced that during the financial crisis and we're seeing elevated loss activity in the current environment.
We contemplate economic volatility in our underwriting and in our pricing, and as Alan said, in these circumstances, we feel good about the returns we generated in the quarter.
We expect that the underlying combined ratio will continue to be elevated at around this level over the near term.
Net written premiums grew 4% for the quarter, reflecting strong growth, driven by improved pricing in our management liability business, partially offset by lower surety production due to the continued economic impact of COVID-19 on public project procurement and related bond demand.
In our domestic management liability business, we are pleased that the renewal premium increased to 8.1%, driven by record rate.
This marks the eighth consecutive quarter in which RPC is higher than the corresponding prior-year quarter.
Retention remained at a historically high 90%.
These production results demonstrate the successful execution of our strategy to pursue rate where needed, while maintaining strong retention of our high quality portfolio.
We will continue to pursue rate increases where warranted.
Domestic management liability new business for the quarter decreased $14 million, primarily reflecting our thoughtful underwriting in this elevated risk environment.
Similar to what you heard from Greg in Business Insurance, submissions are up, while quote activity is down.
So Bond & Specialty results remained resilient despite the challenges brought on by COVID-19.
We continue to be pleased with our strong execution and feel confident about our ability to navigate through this challenging environment and continue to deliver strong returns over time.
In Personal Insurance, this quarter, we are very pleased with our continued execution in the marketplace as we delivered excellent profitability and grew net written premiums by 8%, achieving record levels of domestic policies in force.
Personal Insurance segment income for the third quarter was $392 million, up $261 million from the prior year quarter, driven by the pre-tax impacts of an improvement of $163 million in the underlying underwriting gain, and $343 million of higher net favorable prior year reserve development, partially offset by $174 million of higher catastrophe losses, net of reinsurance.
Our combined ratio for the quarter was 86.4%, an improvement of 11.6 points from the prior year quarter, driven primarily by the increase in net favorable prior year reserve development.
Higher catastrophe loss experienced in the quarter was largely offset by improvement in the underlying combined ratio.
The improved underlying combined ratio reflects the continuation of favorable auto loss experience in the quarter, partially offset by higher non-catastrophe weather-related losses.
I'll discuss both of these dynamics in a bit more detail next.
Agency Automobile profitability was very strong with a combined ratio of approximately 80% for the quarter.
The underlying combined ratio of 81% improved nearly 12 points, continuing to reflect favorable frequency levels.
Approximately 8 of the 12 points of improvement relate to current quarter favorability.
The remainder results from favorable reestimates of activity in the first half of 2020.
We continue to observe lower claim frequency as a result of fewer miles driven in light of the COVID-19 pandemic.
For the third quarter, data from our IntelliDrive program indicates that miles driven increased relative to last quarter, but continue to be down from pre-COVID- 19 levels.
In response to this continued favorable loss experience, we filed modest rate reductions in a handful of states during the third quarter.
We will continue to analyze and incorporate current trends into our underwriting and pricing decisions as we balance business volumes and profitability.
In Agency Homeowners and Other, the third quarter combined ratio was 92.8%, an improvement of 9.2 points from the prior year quarter, resulting from 26 points of higher net favorable prior year reserve development, mostly from the PG&E subrogation recoveries, partially offset by elevated levels of catastrophe losses and an increase in the underlying combined ratio, driven by higher non-catastrophe weather-related losses.
Our catastrophe and non-catastrophe experience reflects a very active quarter with a record 31 PCS events.
West Coast wildfires represented almost half of the total PCS events in the quarter.
Consistent with Dan's comments earlier, the quarter's catastrophe losses for Personal Insurance were also impacted by the Midwest Derecho, Tropical Storm Isaias, and to a lesser extent, Hurricane Laura.
In addition to pursuing rate increases in property, as we have been for some time, we continue to review and modify terms and conditions and implement loss mitigation actions in response to the elevated loss activity.
Our actions to date have enabled us to reduce or avoid losses we would have otherwise incurred and improved returns as we continue to grow the line.
Turning to quarterly production.
Our domestic Agency results were again very strong.
Our retentions remained high, quotes in new business were up versus the prior year quarter, and we remain pleased with our policies-in-force growth.
Agency Automobile retention was 84% and new business increased 9% from the prior year quarter, both contributing to accelerating growth in policies-in-force.
Renewal premium change was again lower as we continued to moderate pricing in response to favorable loss activity.
Agency Homeowners and Other delivered another very strong quarter with retention of 86% and a 22% increase in new business.
Renewal premium change increased to 8.2% as we remain focused on improving returns and property while growing the business.
During the quarter, we continued to respond to the needs of our customers and distribution partners.
At the same time, we continue to deliver new capabilities in the marketplace.
Alan already mentioned both IntelliDrive and our new MyT [Phonetic] mobile app, both of which are key tools in helping us attract and retain customers.
We also expanded the availability of our digital quote proposal that gives agents and brokers the ability to send a Travelers Insurance quote for their clients mobile phone and interact with them digitally about the terms of the proposal, making the transaction more seamless for both the agent and the customer.
And after reaching our goal of planting 1 million trees for customer enrollment and paperless billing, we extended our partnership with American Forests to plant an additional 500,000 trees by Earth Day 2021.
We have already achieved that milestone well ahead of schedule, providing our customers the digital experience they seek, while benefiting the environment.
These examples and others, illustrate our ability to develop and deliver the capabilities our partners and customers value.
Operator, we're ready to start Q&A. | compname reports qtrly core earnings per share $3.45.
july 20 (reuters) - travelers companies inc: :qtrly core earnings per share $3.45 ; qtrly earnings per share $3.66.
qtrly catastrophe losses, net of reinsurance, $475 million pre-tax versus loss of $854 million pre-tax.
qtrly net written premiums $8.14 billion, up 11%.
higher underwriting income, net favorable prior year reserve development, lower level of catastrophe losses, led to higher core income in quarter. | 0 |
Our SEC filings can be found in the Investors section of our website.
Net income for the first quarter of 2021 included: first, the net after-tax loss from the second phase of the closed block individual disability reinsurance transaction of $56.7 million, which is $0.27 per diluted common share.
Second, the after-tax amortization of the cost of reinsurance of $15.8 million, which is $0.08 per diluted common share and a net after-tax realized investment gain on the company's investment portfolio and this excludes the net realized investment gain associated with the reinsurance transaction of $13.5 million or $0.06 per diluted common share.
Net income in the first quarter of 2020 included a net after-tax realized investment loss of $113.1 million, which is $0.56 per diluted common share.
So excluding these items, after-tax adjusted operating income in the first quarter of 2021 was $212 million or $1.04 per diluted common share compared to $274.1 million or $1.35 per diluted common share in the year-ago quarter.
Mark is an experienced leader in the insurance industry, and we're very happy to have him here at Unum.
Our first-quarter results represent a solid start to 2021.
With improving trends, we entered the quarter with positive momentum and -- I'm sorry, entering second quarter with positive momentum and increasing optimism.
We expect to see a strong second-half recovery from the COVID-related pandemic.
It certainly has been a tumultuous period, but we believe we are well-positioned both strategically and financially to return to our pre-pandemic levels of profitability and margins in the coming quarters.
Each quarter over the past year, we've described how the COVID-19 pandemic and resulting economic impacts have influenced our operations and financial results across our business.
Each quarter has had its own set of dynamics.
This quarter was no different with the sharp increase in infections and deaths through the year-end period.
We have seen rapid changes since that period of time, but nonetheless, it has had an impact on the quarter.
First, COVID has significantly impacted mortality experience in our life insurance businesses and generated higher volumes of short-term disability claims and leave requests at the workplace.
Additionally, the severe dislocations to the economy and national employment levels have dampened our premium growth by slowing sales and negating the natural growth we typically see in our in-force premium base.
And finally, the downdraft in the financial markets last spring and the sharp decline in interest rates further pressured new money yields.
We expect each of these trends to turn.
Throughout these challenging times, I've been proud of how our employees have stepped up and successfully met our corporate purpose to help people thrive throughout life's moments.
As we stand today, I'm confident that the challenges posed by COVID-19 and the 2020 recession are largely behind us.
I'm optimistic that while the pandemic certainly is not over, and we expect to see lingering effects into the second quarter, we will also see a strong recovery in our results through the balance of 2021.
Coming back to our first-quarter results, the core business continued to perform well, generating solid sequential premium growth, continued strong persistency, and favorable benefits experience across most lines.
The challenges from COVID continue to be well-defined within our life insurance product lines, primarily within Unum U.S. Group life.
While the human loss from the pandemic continues to be heartbreaking for all of us, COVID-19 related mortality across the U.S. has been trending favorably on a weekly basis from peak levels in December and January.
Our own results mirror these week-to-week improving trends that you see in national statistics, and we look forward to improved results in our life insurance lines, beginning in the second quarter and accelerating further into the second half of 2021.
In addition to improving COVID-related trends for mortality and infection rates, we are very encouraged by the improving economic environment that's emerging.
The forecast for strong GDP growth in coming quarters, along with continued financial fiscal stimulus and further improvement in employment levels and wage growth, we are expecting to see -- expecting both of those to be beneficial to the growth of our business.
Additionally, the improved interest rate environment and ongoing strength in the credit markets are all positives for us.
We believe we are already beginning to see these benefits emerge in our results.
Most notable, the increase of 2.8% in premium income growth we experienced in our core business segments from the fourth quarter of 2020 to the first quarter of 2021.
This growth is reemerging due to continued strong persistency trends in our major product lines, along with the sales rebound that has emerged in our U.S. employee benefit lines combined with the stabilization and natural growth on our in-force blocks as employment levels improve.
We anticipate that this will accelerate through the year as sales momentum continues to build and economic growth reemerges as a tailwind for us.
I mentioned the improving trend that is evident in COVID-related mortality, but as infection rates also subside, we expect to see more favorable trends in our short-term disability and leave services line that have been adversely impacted over the past year.
In our other lines of business, we saw good results with the benefit experienced in the first quarter.
Our voluntary benefits businesses for Unum U.S. and Colonial performed well this quarter.
Outside of the impacts, we felt in our life insurance exposures.
The recently issued individual disability line continued to show favorable benefits experience, and we saw a very good recovery in our Unum UK results this quarter with strong performance in the group income protection and group critical illness lines, offsetting adverse COVID-related mortality there as well in the group life.
The benefits experience for our Unum U.S. long-term disability line was within our expectations and consistent with the trends of the past several quarters.
Though it was up from the very favorable performance of the fourth quarter as we anticipated.
Finally, experience in our long-term care line remained quite favorable relative to our long-term expectations.
Though we believe results in this line are beginning to trend back toward our long-term expected ranges.
A couple of thoughts on our investment portfolio.
This is another area where we've seen meaningful improvement over the past several months.
For the first quarter's performance, our alternative asset portfolio has now fully recovered from the markdowns recorded in the second quarter of last year and are on a solid path to generating the expected returns going forward.
We remain very pleased with the overall performance and quality of the portfolio and are currently seeing very few areas of credit concerns and an increased outlook for upgrades within the portfolio.
Turning to our capital position.
Our strong position gives us significant financial flexibility to execute our growth plans going forward.
Our holding company cash position finished the quarter at $1.7 billion, aided by the successful completion of Phase two of the closed Disability Block Reinsurance transaction.
Risk-based capital for our traditional U.S. insurance companies remained solidly above our targets at 370%, and our leverage is down three points from a year ago.
As the pandemic winds down, we are evaluating alternatives on how to best utilize this capital position to drive growth in line with our strategy as well as shareholder value.
We expect to have more on that for you in the coming months.
As we look to enter an accelerated recovery period, an important area of differentiation for us and is the strong engagement we have continued to have with our commercial markets.
That connection starts with a strong employee engagement, and I continue to be very proud of the work our employees continue to do to provide excellent service to our customers while we have navigated through this disruptive time.
It's no surprise that strong employee engagement drives the strong claimant satisfaction scores we are seeing.
Additionally, I'm very pleased to see the growing acceptance of the various digital capabilities we have invested in over the past several years.
Recently, we rolled out our new total leave offering, which will help employers and employees better manage the complex leave process.
We anticipate that these advanced tools and capabilities will help us further enhance our leadership position in the employee benefits market.
And finally, a couple of words on how we have focused on our culture of the company.
Our purpose is clear in serving the working world at time of need.
It requires a foundation of strong values throughout the enterprise.
We are proud to be recognized as one of the world's most ethical companies designated by Ethisphere.
You can see some of the great work in our newly launched ESG report on our website.
It adds to the totality of who we are at Unum.
Now I'll ask Steve to cover the details of the first-quarter results.
I'll start with the Unum US segment, which reported adjusted operating income for the first quarter of $115.7 million compared to $143.5 million in the fourth quarter.
As I'll describe in greater detail, these results were significantly impacted by COVID-related mortality in our group life business line and the life insurance line within the voluntary benefits business.
Beyond the significant mortality impact, we were pleased with the underlying performance of the rest of the businesses, particularly the 2.7% increase in premium income related to the fourth quarter.
Starting with the Unum US group disability line, adjusted operating income for the first quarter was $64.1 million compared to $64.7 million in the fourth quarter of 2020.
We were very pleased to see premium income increased by 3.5% compared to the fourth quarter, with solid sales this quarter, very good persistency, and natural growth stabilizing.
The benefit ratio was 74.8% compared to the very favorable 72.5% in the fourth quarter.
As we expected, the first quarter benefit ratio was elevated due to the short-term disability line, where we continue to see high COVID-related claims driven by infection rates.
We continue to expect the annual group disability benefit ratio to run in the 73% to 74% range with some quarterly volatility.
There are two other points to mention on group disability: first, net investment income was slightly higher in the first quarter, largely driven by higher miscellaneous investment income.
Second, the expense ratio improved nicely, declining to 28.4% in the first quarter from 30.4% in the fourth quarter.
Some of this improvement relates to timing of expenses.
So the ratio is likely to move up slightly in future quarters those stay below the fourth-quarter level.
We're pleased with the improvement in the expense ratio this quarter as we balance making investments to further enhance our service capabilities with managing through the ongoing pressures on expenses from our leave services offerings related to COVID driven volumes.
Adjusted operating income for Unum US Group Life and AD&D continue to show the impact of COVID-related mortality, with a loss of $58.3 million in the first quarter compared to a loss of $21.9 million in the fourth quarter.
The change from the fourth to the first quarter is largely explained by the national COVID-related mortality trend that showed an increase from approximately 145,000 nationwide observed deaths in the fourth quarter to approximately 200,000 in the first quarter.
Our 1% claims rule of thumb for Unum share of COVID-related mortality did hold consistent in the quarter, and we estimate that we incurred approximately a 2,050 COVID claims with an average claim size of approximately $50,000.
Non-COVID-related mortality did not have a significant impact on results in the first quarter as while incidence was slightly higher on a seasonally adjusted basis, it was largely offset by a lower average claim size compared to the prior quarter.
Now looking ahead to the second quarter, national COVID mortality is trending favorably from the peak level seen in December and January.
Second-quarter estimates of U.S. COVID-related mortality are in the 50,000 to 60,000 range compared to the first quarter level of approximately 200,000.
We are seeing this improving trend in our COVID claims experience as well.
The magnitude of the decline is expected to drive a recovery in our group life results.
However, the 1% rule of thumb we have experienced throughout the pandemic is likely to change somewhat.
If the age distribution of mortality changes and is skewed more to younger people and away from the elderly population due to the vaccine rollout, we would expect to see a higher percentage of national claim counts and a higher average claim size since working-age policies tend to have higher policy amounts than retired and over age 65 individuals.
This does equate to an approximately $40 million impact to group life income from COVID-related claims compared to over $100 million in the first quarter.
In other words, using these estimates, we would expect our group life earnings to improve by approximately $60 million from the first quarter to the second quarter to an approximately breakeven level of earnings in the second quarter.
Now shifting to the Unum US supplemental and voluntary lines, we saw an improved quarter with adjusted operating income of $109.9 million in the first quarter compared to $100.7 million in the fourth quarter.
Outside of the COVID-related mortality impacts we saw in the voluntary benefits life insurance line, we were generally pleased with the trends we saw in this segment.
The individual disability line continues to generate favorable results with a benefit ratio at 42.4% in the first quarter compared to 42% in the fourth quarter and 52.1% in the year-ago quarter, driven primarily by continued favorable incidence and mortality trends in the block.
Benefits experienced for voluntary benefits, excluding life insurance exposure, was generally in line with our expectations.
Finally, utilization in the dental and vision line was higher this quarter, pushing the benefit ratio to 73.2% in the first quarter compared to 65.4% in the fourth quarter.
Dental and vision utilization has been volatile since the significant decline in utilization we experienced in the second quarter of 2020.
Sales for Unum US in total declined by 10.3% in the first quarter compared to the year-ago quarter.
Within that, sales increased 15.9% for the employee benefits lines, which are STD, LTD, group life, and AD&D combined, with a good mix of growth in both large case and core market business.
This is consistent with our outlook that sales in our group employee benefit lines would recover more quickly than our voluntary benefits businesses.
We are currently seeing a good level of quote activity in the group markets, which has recovered to pre-pandemic levels.
Recovery and sales growth in the supplemental and voluntary lines is slower, which is in line with our expectation.
Our recently issued individual disability sales were down 25.1% in the quarter, coming off a strong pre-pandemic first quarter last year.
Voluntary benefit sales were down 21.5% in the quarter, which is consistent with our view that mid and larger case VB sales will take longer to recover.
Large case VB sales, in particular, have a longer sales cycle and are more concentrated around January one effective dates, so we wouldn't expect to see growing momentum there until later in the year.
Finally, sales in dental and vision were 25.9% lower, caused by the disruption in group sales resulting from discounts and other incentives, many carriers are providing in response to the unusually favorable claims trends seen in the second quarter of last year.
We are seeing a positive offset with higher persistency for dental and vision at 87.4% for the first quarter compared to 81.9% in the year-ago first quarter.
Persistency for our major product lines in Unum US were in line to higher this quarter relative to the first quarter last year, giving us a good tailwind of premium growth for the full year.
Now let's move on to Unum International segment, where adjusted operating income for the first quarter showed a strong improvement to $26.4 million compared to $20.7 million in the fourth quarter last year.
A big driver of this improvement was improved results in Unum U.K. with adjusted operating income of GBP18.6 million in the first quarter compared to GBP15.4 million in the fourth quarter.
Benefits experience improved in the U.K. with strong performance in the group income protection line due to improved claim recoveries and higher levels of mortality, and we also experienced improved performance in the group critical illness line.
This improvement offset adverse experience in the group life line, largely resulting from a higher level of COVID-related mortality.
Unum Poland has seen adverse impacts from COVID on its results in the first quarter relative to the year-ago quarter, but we are pleased with the growth we're seeing in this business with growth in premium income of 11.7% on a year-over-year basis.
Although we are encouraged by the improved income in the international operations, we do remain cautious with our near-term outlook as both the U.K. and Poland deal with COVID and related economic impacts.
Next, we are very pleased with the results generated by Colonial Life, with adjusted operating income of $73.3 million in the first quarter compared to $71.2 million in the fourth quarter.
This uptick was primarily driven by a slight improvement in the benefit ratio and a lower expense ratio.
The benefit ratio of 55.4% was slightly improved from 56.6% in the fourth quarter but did remain higher than our historical trends due to the continued impact from COVID on our life insurance line.
Results in the accident, sickness, and disability line, as well as the cancer and critical illness line, were generally consistent with our long-term experience.
Premium income for the first quarter picked up slightly from the fourth quarter, increasing 1.8%, primarily the result of favorable persistency trends.
We will need to see further recovery in new sales to rebuild premium growth back to the historic levels of 5% to 6%.
We're encouraged by the sales trends we saw in the first quarter for Colonial.
Although quarterly sales were down 9.2% year-over-year, that has sharply improved from the 31% cumulative decline we experienced for the last three quarters of 2020.
We look forward to further improvement in sales momentum over the balance of 2021.
We are encouraged by the uptake we are seeing in our recently developed digital enrollment tools, which in the quarter accounted for about 1/3 of our enrollments.
It is also encouraging that face-to-face enrollments are rebuilding as we find new, safe and socially distanced ways to conduct these face-to-face enrollments.
And turning to the Closed Block segment.
Adjusted operating income, excluding the impact of the Closed Block individual disability reinsurance transaction, was $97 million in the first quarter compared to $104.2 million in the fourth quarter last year, both strong quarters relative to our historical levels of income for this segment.
Looking at the primary business lines within the Closed Block, for the LTC block, the interest adjusted loss ratio was 77.7% for the first quarter compared to 60.2% in the fourth quarter, excluding the income of the reserve assumption update in the fourth quarter of last year.
The results for the first quarter remain favorable to our long-term assumption of a range of 85% to 90%, primarily due to the continued impact of COVID-related mortality on our claimant block.
In the first quarter, we estimate the accounts were approximately 15% higher than expected, a similar trend to what we experienced in the fourth quarter.
LTC claim incidence was higher in the first quarter compared to the fourth quarter and remains volatile on a monthly basis.
We anticipate that the interest-adjusted loss ratio for LTC will likely revert to our long-term range over the next several quarters as mortality and incidence trends normalize from the impacts of COVID.
For the Closed Disability Block, the interest adjusted loss ratio was 68.9% in the first quarter and 79.5% in the fourth quarter, both excluding the impacts from the reinsurance transaction in these quarters.
The underlying experience on the retained block, which largely reflects the active life reserve cohort and other smaller claim blocks we intend to retain ran favorably to our expectations, primarily due to lower submitted claims.
Then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $38.9 million in the first quarter.
This is favorable to the fourth quarter 2020 adjusted operating loss of $42.7 million, primarily due to higher net investment income, which offset a slightly higher level of operating expenses.
Keep in mind that the assets backing the required capital, which were freed up from the individual disability reinsurance transaction have now been allocated to the corporate segment and generate a higher level of absolute net investment income for this segment.
As these assets are allocated out to the product lines in future quarters or deployed, the favorable net investment income for the corporate segment is expected to decline.
Now I'd like to turn to the completion of the Closed Block individual disability reinsurance transaction, which we first announced back in December.
Phase two involved the transfer of approximately $767 million of assets to the reinsurer and the recording of a net after-tax loss on the transaction of $56.7 million.
The components are detailed in the statistical supplement.
In addition, the amortization of the after-tax cost of reinsurance was $15.8 million this quarter.
With the transaction now completed, we are very pleased with the ultimate release of approximately $600 million of capital to holding company cash and the flexibility that creates for us.
Now I'd like to next turn to our investment portfolio with a few points to highlight.
First, we recorded an after-tax net realized investment gain of $66.9 million in the first quarter.
Of that gain, $53.4 million was associated with the completion of Phase two of the Closed Block individual disability reinsurance transaction.
These assets had unrealized gains, which were realized and the assets were transferred to the reinsurer at market value.
The balance of this quarter's realized investment gains, which result from normal investment operations was $13.5 million and was largely driven by a positive mark on our Modco embedded derivative balance.
Second, as I mentioned previously, we continue to see a strong recovery in the valuation mark on our alternative invested assets of $35.9 million this quarter, following a positive mark of $29.4 million in the fourth quarter.
Given the current portfolio size, we would expect quarterly positive marks in the portfolio of $8 million to $10 million.
We have now fully recovered the valuation lost from the market decline in early 2020, while also earning our expected returns over that period.
I'd also note that it was a higher-than-average quarter for traditional miscellaneous investment income from bond calls in the first quarter, following an unusually low amount in the fourth quarter.
Third, with Phase two of the reinsurance transaction, we were able to retain approximately $361 million of invested assets that were not transferred to the reinsurer.
Of that amount, $234 million of investment-grade assets with a book value -- with a book yield of 7.4% have been allocated to the LTC portfolio.
And then finally, we remain very pleased with the overall quality of the investment portfolio.
During the first quarter, we saw only $92 million of investment-grade bonds downgraded to below investment grade and $13 million of upgrades of below-investment-grade bonds to investment-grade status.
Our holdings of high-yield fixed-income securities were 7.7% of total fixed income securities at the end of the first quarter, which was down from 7.9% at year-end 2020.
Our watch list of potentially troubled investments remains at very low levels as we've taken advantage of the rebound in the credit market to reduce our exposure of these positions.
Then looking to our capital position, we are very pleased with the financial position of the company and the flexibility it provides us as we come out of the pandemic.
The risk-based capital ratio for our traditional U.S. insurance companies is slightly over 370% and holding company cash is at $1.7 billion as of the end of the first quarter, both well above our targeted levels.
In addition, I'd note that our leverage ratio has declined to 26%, providing additional flexibility.
We are actively evaluating our capital plans as we come out of the pandemic, and we'll have more to update you on in the coming months.
Importantly, we intend to focus on the deployment opportunities that we believe can create the greatest value for the company and our shareholders which historically has included investing in the growth of our core businesses, maintaining a competitive dividend and payout ratio and repurchasing our shares in the market.
I'll close my comments with an update to our expectations regarding our outlook for 2021.
With our fourth-quarter reporting in February, we outlined our expectation of a modest decline of 5% to 6% for full-year 2021 adjusted operating income per share relative to the 2020 level of $4.93 per diluted common share.
In our view, that continues to be a realistic outlook as we look for a strong recovery in the second half of 2021, following some lingering COVID-related mortality impacts in the second quarter.
As you can hear from our comments, we continue to be very pleased with the operational performance of the company through what has been an extraordinary environment.
We believe we're well-positioned to benefit from improving business conditions as vaccines take hold and mortality and infection rates from COVID-19 continue to subside. | q1 adjusted operating earnings per share $1.04.
qtrly total revenue $3,072 million versus $2,871.1 million.
company anticipates a strong recovery in after-tax adjusted operating income per share in second half of 2021. | 1 |
dollargeneral.com under News & Events.
Such as statements about our strategy, plans, including but not limited to our 2021 real estate outlook, our initiatives, goals, priorities, opportunities, investment, guidance, expectations or beliefs about future matters, including but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer and other statements that are not limited to historical fact.
We also may reference certain financial measures that have not been derived in accordance with GAAP.
dollargeneral.com under News & Events.
Despite continued significant uncertainty in the operating environment, our team members have been unwavering in their commitment to fulfilling our mission of serving others, by providing affordable, convenient and close to home access to everyday essentials, at a time when our customers need them most.
I could not be more proud of their efforts.
As always, the health and safety of our employees and customer continues to be our top priority.
We continue to closely monitor CDC and other governmental guidelines regarding COVID-19 and are evaluating and adapting our safety protocols as that guidance evolves.
As one of America's essential retailers, we remain committed to being part of the solution during these difficult times.
And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17,000 stores located within 5 miles of approximately 75% of the US population.
At the same time, we remain focused on advancing our operating priorities and strategic initiatives, as we continue to meet the evolving needs of our customers and further position Dollar General for a long-term sustainable growth.
To that end, and from a position of strength, I'm excited to share an update on some of our more recent plans.
First, as you saw in our release, we plan to further accelerate our pace of new store openings and remodels in 2021.
In total, we expect to execute 2,900 real estate projects next year, as we continue to lay and strengthen the foundation for future growth.
As previously announced, we recently introduced our newest store concept pOpshelf, further building on our proven track record of store format innovation.
We opened our first two locations during the quarter and while still early, we are encouraged by their initial results.
Finally, one of our core values is representing and respecting the dignity and differences of others.
Building on this core value, along with our commitment to diversity and inclusion, we recently updated our fourth operating priority to better capture and express our intent.
We will discuss each of these updates in more detail later in the call.
But first, let's recap some of the results for the third quarter.
The quarter was once again highlighted by exceptional growth on both the top and bottom lines.
We're particularly pleased that for the quarter, our three non-consumable categories once again delivered a combined sales increase, well in excess of our consumable business.
Of note, this represents our 10th consecutive quarter of year-over-year comp sales growth in our non-consumable business, which speaks to the strong and sustained momentum in these product categories.
From a monthly cadence perspective, comp sales for Q3 periods range from the low double digits to mid-teens with the best performance in August followed by modest moderation as we move through the quarter.
Overall, third quarter net sales increased 17.3% to $8.2 billion, driven by comp sales growth of 12.2%.
These results include significant growth in average basket size, partially offset by a decline in customer traffic, as we believe customers continue to consolidate shopping trips in an effort to limit social contact.
Once again this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data, driven by double-digit increases in both units and dollars.
Importantly, our data suggests an increase in new customers this quarter, as compared to Q3 of 2019.
These new customers skew younger, higher income and more ethnically diverse, further underscoring the broadening appeal of our value and convenience proposition.
We are also encouraged by the repurchase rates of new customers and are working hard to retain them, with more targeted marketing and continued execution of our key initiatives.
We're particularly pleased with the -- and how we delivered significant operating margin expansion, which contributed to third quarter diluted earnings per share of $2.31, an increase of 63% over the prior year.
Collectively, our Q3 results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to create meaningful long-term shareholder value.
We operate in one of the most attractive sectors in retail and with our unique combination of value and convenience, further enhanced through our initiatives, we believe we are well positioned to successfully navigate the current environment and emerge even stronger than before.
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 I specifically note otherwise, all comparisons are year-over-year and all references to earnings per share refer to diluted earnings per share.
As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by meaningful increase in sales including the impact of COVID-19.
Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year-over-year gross margin rate expansion.
This increase was primarily attributable to a reduction markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumables categories and a reduction in shrink as a percentage of sales.
These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense.
SG&A as a percentage of sales was 21.9%, a decrease of 62 basis points.
Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales.
Expenses that were lower as a percentage of sales this quarter include, occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance and employee benefits.
These items were partially offset by increases in incentive compensation expense and hurricane-related expenses.
Moving down the income statement, operating profit for the third quarter increased 57.3% to $773 million, compared to $491 million in the third quarter of 2019.
As a percentage of sales, operating profit was 9.4%, an increase of 240 basis points.
Operating profit in the third quarter was positively impacted by COVID-19, primarily through higher sales.
The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers, and approximately $25 million in appreciation bonuses for eligible frontline employees.
Year-to-date to the third quarter, we have invested approximately $153 million in COVID-19 related expenses including about $99 million in appreciation bonuses for our frontline employees.
Our effective tax rate for the quarter was 21.6% and compares to 21.7% in the third quarter last year.
Finally, as Todd noted earlier, earnings per share for the third quarter increased 62.7% to $2.31.
Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times, while continuing to invest for the long term.
We finished the quarter with $2.2 billion of cash and cash equivalents, a decrease of $760 million compared to Q2 and an increase of $1.9 billion over the prior year.
Merchandise inventories were $5 billion at the end of the third quarter, an increase of 11.8% overall and 5.9% on a per store basis.
While out of stocks remain higher than normal for certain high demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels.
Year-to-date to Q3, we generated significant cash flow from operations totaling $3.4 billion, an increase of 103.7%.
Total capital expenditures through the first three quarters were $698 million and included our planned investments in remodels and relocations, new stores and spending related to our strategic initiatives.
During the quarter, we repurchased 4.4 million shares of our common stock for $902 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $88 million.
At the end of Q3, the remaining share repurchase authorization was $1.6 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-EBITDAR.
Moving to an update on our financial outlook for fiscal 2020.
We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business.
As a result, we are not providing guidance for fiscal 2020 sales or earnings per share at this time and are unlikely to resume issuing guidance to the extent such uncertainties persist.
Let me now provide some context as to what we expect in the fourth quarter.
Given the unusual situation, I will elaborate on our comp sales trends thus far in Q4.
From the end of Q3 through December 1, comp sales accelerated increasing approximately 14% during this timeframe, reflecting increased demand in our consumables business.
And while we remain cautious in our sales outlook, we are encouraged with our sales trends, particularly as we move further past government stimulus payments and the expiration of enhanced unemployment benefits under the CARES Act.
That said, significant uncertainty still exists concerning the duration of the positive sales environment, including external factors related to the ongoing health crisis and their potential impact on our business.
Beyond these macro factors, there are number of more specific considerations as it relates to the fourth quarter.
First, we anticipate higher transportation and distribution costs in Q4.
Like other retailers, our business is seeing the effect of higher transportation costs due to a tight carrier market, as a result of driver shortages and a greater demand for services at third-party carriers.
In addition, we are in the process of building, expanding or opening a number of distribution centers across our dry and DG Fresh networks.
And while we expect, these investments will enable us to drive even greater efficiencies going forward and further support future growth, these investments will pressure gross margin rates in Q4.
Also please keep in mind that the fourth quarter represents our most challenging lap of the year from a gross margin perspective filing 60 basis points of rate improvement in Q4 2019.
With regards to our strategic initiatives, we continue to anticipate they will positively contribute to operating margin over time as the benefit to gross margin continues to scale and outpace the associated expense with both NCI and DG Fresh on pace to be accretive to operating margin in 2020.
However, our investment in these initiatives will pressure SG&A rates in the fourth quarter, as we further accelerate their rollouts.
Finally, we expect to make additional investments in the fourth quarter as a result of COVID-19, including up to $75 million in employee appreciation bonuses, which includes our recent announcement to award approximately $50 million in additional bonuses, bringing our full year investment in appreciation bonuses to approximately $173 million, as well as continued investments in health and safety measures.
In closing, we are very proud of the team's execution and service resulting 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 four operating priorities.
Our first operating priority is driving profitable sales growth.
The team once again did a fantastic job in Q3, executing against a portfolio of growth initiatives.
Let me highlight some of our recent efforts.
Starting with our cooler door expansion program which continues to be our most impactful merchandising initiative.
During the first three quarters, we added approximately 49,000 cooler doors across our store base.
In total, we expect to install more than 60,000 cooler doors this year.
The majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.
Turning now to private brands, which remain a priority, as we look to drive overall category awareness and even greater customer adoption through rebranding, repositioning and expansion of select brands as well as the introduction of new product lines.
We're very pleased with the continued progress across these fronts, including the successful rebranding of six product lines and the introduction of two new brands so far this year.
And we're excited about the continued momentum we're seeing across the portfolio.
Finally, a quick update on our FedEx relationship.
During the quarter, we completed our initial rollout of this convenient customer package pick-up and drop-off service, which is now available in more than 8,500 stores.
We're very pleased with the reception this offering is receiving from our customers and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers in convenient and nearby locations.
Beyond these sales driving initiatives, enhancing gross margin remains a key area of focus for us.
In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us.
The team once again did a great job during the quarter, working with our supply partners to ensure product availability.
Looking ahead, we continue to pursue opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.
We also continue to pursue supply chain efficiencies including the continued expansion of our private fleet, the opening of additional DG Fresh facilities and the recent purchase of our future Walton, Kentucky dry distribution center, which should contribute to a further reduction in stem miles beginning early next year.
In addition, we recently began construction on our first ever ground up combination DG Fresh and dry distribution center in Blair, Nebraska.
We anticipate this facility will be completed in early 2022, enabling us to drive even greater efficiencies as we move ahead.
The team is also executing against additional opportunities to enhance gross margin, including further improvements in shrink, as we continue to build on our success with electronic article surveillance.
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.
As previously announced, we recently celebrated a significant milestone with the opening of our 17,000th store.
This is a testament to the fantastic work of our best-in-class real estate team as we continue to expand our footprint and enhance our ability to serve even more customers.
As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities.
These metrics include, new store productivity, actual sales performance, average returns, cannibalization and the payback period.
Of note, we continue to see strong performance across these metrics.
For 2020, we remain on track to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores.
Through the first three quarters, we opened 780 new stores, remodeled 1,425 stores, including more than 1,000 in the higher cooler count, DGTP or DGP formats, and we relocated 76 stores.
We also added produce in more than 140 stores, bringing the total number of stores which carry produce to more than 1,000.
As Todd noted for fiscal 2021, we plan to execute 2,900 real estate projects in total including 1,050 new stores, 1,750 remodels and 100 store relocations.
Additionally, we plan to add produce in approximately 600 stores.
Notably, we expect approximately 50% of our new unit openings and about 75% of our remodels to be in the DGTP or DGP formats.
The remainder of our new store openings and remodels will primarily be in the traditional format with higher capacity coolers.
Our plans also include having approximately 30 stores in our new pOpshelf concept, which Todd will discuss in more detail by the end of fiscal 2021 up from two locations today.
Overall, our real estate pipeline remains extremely robust and we are excited about the significant growth opportunities ahead.
Our third operating priority is to leverage and reinforce our position as a low-cost operator.
Over the years, we've 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 Save to Serve keeps the customer at the center of all we do, while reinforcing our cost control mindset.
We continue to build on our success with Fast Track, which Todd will discuss in more detail later.
As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand, as evidenced by our recent customer survey results where we continue to see overall satisfaction scores at all time highs.
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.
We have three business operating priorities.
But at the heart of them is our foundational fourth operating priority.
This priority is anchored in our people and it's truly foundational to everything we do at Dollar General.
Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.
As Todd noted, this updated language more fully expresses our values and core beliefs and more closely aligns with the investments we continue to make in the development of our people.
Importantly, we believe these investments continue to yield positive results across our store base, as evidenced by continued, record low store manager turnover, record staffing levels, healthy applicant flows and a robust internal promotion pipeline.
As a growing retailer, we also 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 innovate on the development opportunities we can offer our teams.
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 employees across the organization come together to raise funds for a variety of important causes.
I was once again humbled by the generosity and compassion of our people.
This event truly embodies the Serving Others culture that is so deeply embedded at Dollar General.
In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can drive continued growth in the years ahead.
I'm proud of the great progress the team has made in advancing our strategic initiatives.
Let me take you through some of the most recent highlights.
Starting with our non-consumable initiative or NCI.
As a reminder, NCI consist of a new and expanded product offering in key non-consumable categories.
The NCI offering was available in 5,200 stores at the end of Q3, and given our strong execution to date, we now expect to expand the offering to more than 5,600 stores by the end of 2020.
Including approximately 400 stores in our NCI lite [Phonetic] version.
This compares to our prior expectation of more than 5,400 stores at year end.
We're especially pleased with the strong sales and margin performance our NCI stores once again delivered in the quarter.
We also continue to benefit from incorporating select NCI products and planograms throughout the broader store base.
And we are pleased with the performance of our lite stores which incorporates a vast majority of the NCI assortment, but through a more streamlined approach.
As noted earlier, we are also excited about the recent introduction of pOpshelf and the opening of our first two locations, 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, first, continually refresh merchandise, primarily in targeted non-consumable product categories.
Second, a differentiated in-store experience, including impactful displays of our offering designed to create a highly visual, fun and easy shopping experience.
And third, exceptional value with approximately 95% of our items priced at $5 or less.
Importantly, while pOpshelf delivers many of Dollar General's core strengths, including customer insights, merchandise innovation, operational excellence, digital capabilities and real estate expertise, it is specifically tailored to a different shop indication.
We'll primarily be located in suburban communities and initially targets a higher income customer, potentially unlocking additional and incremental growth opportunities going forward.
We're proud of all of the incredible work the team has done in standing up this concept and with the initial work now behind us, we look forward to welcoming additional customers to pOpshelf, as we move forward, our goal of approximately 30 stores by the end of 2021.
Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods.
As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, by removing the markup paid to third-party distributors, thereby enhancing gross margin.
And we continue to be very pleased with the product cost savings we are seeing.
In fact, DG Fresh continues to be the largest contributor to gross margin benefit we are realizing from higher initial mark-ups on inventory purchases.
Importantly, we expect this benefit to grow as we continue to scale this transformational initiative.
Another important goal of DG Fresh is to increase sales in these categories.
We're pleased with the success we are already seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional items, including both national and private brands in select stores being serviced by DG Fresh.
And while produce is not included in our initial rollout plans, we plan -- we plan and continue to believe DG Fresh could provide a potential path forward to expanding our produce offering to even more stores in the future.
In total, we were self-distributing to more than 13,000 stores from eight DG Fresh facilities at the end of Q3.
We expect to capture benefits from this initiative in more than 14,000 stores from 10 facilities by the end of this year and are well on track to complete our initial rollout across the chain in 2021.
Next, our digital initiative, where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience.
In an environment where customers continue to seek safe, familiar and convenient experiences, we believe our unique footprint combined with our digital assets, provides a distinct competitive advantage.
More specifically, I'm pleased to note that during the quarter, we expanded DG Pickup, our buy online, pickup in the store offering to nearly 17,000 stores compared to more than 2,500 stores at the end of Q2, providing another convenient access point for those seeking a more contactless customer experience.
In addition to DG Pickup, our plans include further expansion of DG GO checkout, as we look to make this feature available in select stores that includes self checkout further enhancing our convenience proposition.
By leading our channel in digital tools and experiences, we believe we are well positioned to drive more in-store traffic, grow basket size and offer even greater convenience to new and existing customers.
Moving now to Fast Track, where our goals, including 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 around rolltainer optimization and even more shelf-ready packaging.
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.
During the quarter, we accelerated the rollout of self checkout to more than 900 stores, compared to approximately 400 stores at the end of Q2, with plans for further expansion as we move forward.
And while still early, we are pleased with the initial results, including our customer adoption rates as well as positive feedback from both customers and employees.
Overall, we remain focused on controlling what we can control, while taking actions, including the continued execution of our key initiatives to further differentiate and distance 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 and continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly changing retail landscape.
In closing, we are very proud of the team's performance and our results through the first three quarters of 2020, which further demonstrate that our unique combination of value and convenience continues to resonate with our customers and positions us well going forward. | compname posts q3 earnings per share $2.31.
q3 earnings per share $2.31.
q3 same store sales rose 12.2 percent.
q3 sales $8.2 billion versus refinitiv ibes estimate of $8.15 billion.
declares q4 2020 cash dividend of $0.36 per share.
plan to award a total of up to $75 million in appreciation bonuses to eligible frontline employees in q4.
for fy 2021, co plans to execute 2,900 real estate projects.
since the end of the third quarter, the company has continued to experience elevated demand in its stores.
same-store sales increased about 14% as compared to comparable timeframe in 2019 fiscal year. | 1 |
If you'd like copies, please visit the investor information section of our website, axiscapital.com.
This was a strong quarter for AXIS in a year where we demonstrated meaningful progress in strengthening all aspects of our business and in enhancing the value proposition that we deliver to our customers.
I'm grateful to my access colleagues for their tenacity and commitment in serving our brokers and clients as well as supporting one another, as we collectively navigated to a dynamic environment that included another tough cat year, continued curve balls thrown at us by the COVID pandemic, and rising inflation.
To the credit of our team in 2021, AXIS advanced its efforts to reposition the portfolio, manage down volatility, and drive profitable growth while capitalizing on a favorable market.
We began 2022 as a stronger company than we were just a year ago, committed to further increasing the value that we deliver to all of our stakeholders, and we're confident that we'll continue to build on our progress in the year ahead.
In a few minutes, people will walk us through the fourth quarter results, but I'd like to take a moment to step back and put our annual results in the context of a multiyear transformation.
Let me get to some of the specifics of the evident progress in our performance.
Comparing our results in 2017, we've taken our attritional ratio down by nine points to 55.1 this year and brought our current year ex-cat combined ratio by 10 points to 88.7, the best since 2007.
All the while, we reduced our PML by over 50% across the curve.
The improvement in our performance is attributable to more proactive reshaping of the portfolio, reduction of limits, and modification of attachment points, in addition to good growth in selected lines once they reached rate adequacy.
In 2021, industry cat losses are up about 40%, and but our cat loss ratio stayed flat at nine and a half.
This is still higher than we target, even in a $100 billion-plus cat year, and we're actively continuing our disciplined actions to reduce our cat exposure and deliver more consistent earnings.
Importantly, we continue to build a very successful specialty insurance franchise, which produced $4.9 billion of gross premium in 2021, making up 63% of our writings, up from 50% in 2017.
We expect that number to approach 70% this year as we capitalize on our already well-established presence in some of the most attractive P&C markets today.
Our insurance business is producing excellent results, growing production by 20%, generating record new business and total premiums, while at the same time, strengthening the overall portfolio.
Our insurance segment delivered a combined ratio of 91.6 this year, the best since 2010 and a parent year ex-cat combined ratio of 85.9, the lowest since 2006.
We're confident that the business is on pace to establish its place among the top carriers in the specialty insurance sector.
We continue to be focused on actively growing this business by enhancing the customer experience, and investing in capabilities and services that will increase the value that we deliver to our customers and the greater specialty sector.
Our reinsurance business also delivered improved performance and it's an encouraging sign of progress that in a very high cat year for the industry, it produced a combined ratio below 100.
In addition, the current year ex-cat combined ratio of 86.3 was the best since 2012.
This progress demonstrates the work our team has done to improve the quality and resilience of our reinsurance portfolio.
And as I noted earlier, we're fully committed to driving even more progress.
Indeed, during the recent January 1 renewals, where we write more than 50% of our reinsurance business, we advanced our corporate objectives to reduce volatility, allocate capital rigorously, and produce the most optimized portfolio for the current market.
As such, we took decisive action and reduced our reinsurance property and property cat premiums by 45%.
Our performance over the last few years tells us that our plan is generating tangible results, but we're still not done.
We won't be satisfied until we consistently deliver top quintile performance.
I've said this before, but it repeating, we know exactly what we need to do to sustain this momentum and profitably grow our business.
We'll continue to grow a franchise that leverages our broad global capabilities to deliver value-added products and services that meet our customers' needs.
We'll continue to intelligently grow our portfolio while reducing exposure to catastrophe events.
We're focused on achieving a competitive expense ratio that can support continued investment in long-term profitable growth, and we will continue to invest in our culture, our people, and then making a positive impact in our communities as well as in advancing our ESG objectives.
We're excited to begin 2022 and looking to the future with optimism and enthusiasm.
We're confident in what we can achieve and believe there's significant runway to further grow the business, deliver consistent profitable results, and enhance the value that we provide to all our stakeholders.
And with that, I'll now pass the floor to Pete, who will walk us through the fourth quarter and year and I'll come back to discuss market trends, and we'll have our Q&A.
This was an excellent quarter for AXIS in what was another good year of progress for the company.
During the quarter, we generated net income available to common shareholders of $197 million and an annualized ROE of 16.4%.
Operating income was 182 million, and annualized operating ROE was 15.1%.
The combined ratio for the quarter was 93.1%, with core underwriting results continuing to show improvement.
The company produced a consolidated current accident year combined ratio ex-cat and weather of 89.5 points, or 2.3 points better than the prior year quarter.
The improvement was attributable to both segments.
The consolidated current accident year loss ratio ex-cat and weather was 54.3%, a decrease of more than three points over the prior year quarter.
This was driven by improvements in the insurance segment.
The quarter's pre-tax cat and weather-related losses net of reinsurance were $54 million or 4.3 points.
This compares to 198 million or 18.4 points in 2020.
2020 did include 125 million or 11.6 points attributable to the COVID-19 pandemic.
There was no change in the total net loss estimate of 360 million established in 2020 for the COVID pandemic.
We reported net favorable prior year development of $9 million in the quarter, and this compared to 7 million in the fourth quarter of 2020.
The consolidated acquisition cost ratio was 20.4%, a decrease of 0.9 point over the prior year quarter, and that was attributable to both segments.
The consolidated G&A expense ratio was 14.8%, an increase of 1.7 points compared to the fourth quarter of '20.
The G&A ratio was impacted by year-over-year increase in performance-related compensation costs as well as an increase in personnel costs, partially offset by an increase in net premiums earned.
The personnel costs were largely associated with increased headcount in our insurance segment.
We are really pleased to continue to attract talented individuals to join our team and support the growth.
especially considering the favorable market conditions we see in this sector.
Normalizing the G&A ratio, which was primarily impacted by performance-related compensation.
The fourth quarter '21 ratio was 13.5%, and this would compare to a normalized 4Q 2020 of 13.8%.
We continue to focus on expense efficiency and expect to achieve a mid-13 G&A ratio going forward.
And lastly, on a consolidated basis, fee income from strategic capital partners was 27 million for the quarter, compared to 13 million in the prior year, largely associated with an increase in our investment manager of performance fees.
Now we'll discuss the segments.
I'll start with insurance, where once again, we had continued improvement across the underwriting metrics.
The current accident year combined ratio ex-cat and weather decreased by over five points, reflecting the underwriting actions we have taken to strengthen the portfolio.
Gross premiums written increased by 19% to 1.3 billion, making it our highest fourth quarter ever.
I would also note that the year-to-date gross premiums written of 4.9 billion, was also a record for the insurance segment.
The increase in gross premiums written in the quarter, primarily related to new business and favorable rate changes centered in the professional lines, liability, property, and marine.
The current accident year loss ratio ex-cat weather decreased by 5.3 points, resulting from not only the impact of favorable rate over trend but also driven by improved loss experience in several lines of business.
Pretax catastrophe and weather-related losses net of reinsurance were 23 million.
These were primarily attributable to the Quad-State tornadoes and other weather-related events.
The acquisition cost ratio decreased by over a point in the fourth quarter compared to 2020.
This was mainly related to an increase in ceding commissions due to growth in professional lines.
This is consistent with what we've been discussing throughout the year.
Now let's move on to the reinsurance segment.
During the quarter, our current accident year combined ratio ex-cat weather decreased by a point due to the repositioning of this portfolio.
The reinsurance segment's gross premiums written was essentially flat compared to the prior year quarter.
I would note that the fourth quarter is the smallest quarter for gross premiums written for reinsurance representing less than 10% of their annual gross premiums.
If we look at the full year, gross premiums written increased by a modest half a point as we continue to make changes in the portfolio, to improve balance and profitability of the book.
The current accident year loss ratio ex-cat weather increased by 0.2 point, resulting from the change in business mix as we increased writings in accident and health and liability along with a decrease in premiums earned in catastrophe and credit surety businesses.
This mix impact was offset by favorable rate over trend in all lines of business.
Pretax catastrophe and weather-related losses net of reinsurance were 32 million.
This was primarily attributable to December convective storms, the Quad-State tornadoes and other related events.
The acquisition cost ratio decreased by 0.4 points compared to the prior year quarter.
This was primarily due to the impact of retrocessional contracts.
Net investment income was 128 million for the quarter, and this compared to net investment income of 110 million for the fourth quarter of 2020.
The increase in net investment income was primarily attributable to positive returns from our alternative assets, principally related to private equity funds as well as a positive return on our privately held investment.
This was partially offset by a decrease in income from fixed maturities attributable to lower yields on the portfolio.
With respect to yields, at the end of the year, the fixed income portfolio had a book yield of 1.9% and a duration of three years, and our new money yield was 1.7%.
As we sit here today, given the movements we've seen in rates, our current new money yield is virtually equivalent with our book yield.
It's good to see these two yields coming together so that we can avoid any more headwind to our fixed income portfolio yield going forward.
Diluted book value per share increased to $55.78.
This was principally driven by net income generated, partially offset by a decrease in net unrealized gains related to increased treasury rates, and the widening of credit spreads as well as common share dividends declared.
Overall, the continued improvement in most operating metrics and positive momentum in our core underwriting book, this was a very strong quarter for AXIS.
That summarizes our fourth quarter results.
Market conditions remain quite strong.
Within our insurance segment, this represents the 17th consecutive quarter of rate increases and the 7th consecutive quarter of double-digit increases.
The average rate increase in our insurance book was more than 14% for the fourth quarter.
For the full year, rates also averaged up 14%, which was nearly identical to the increases that we saw in 2020.
Average rate increases were generally equivalent across both our North American and London International businesses.
By class of business, professional lines once again saw the strongest pricing actions with average rate increases of close to 24% for the quarter and nearly 22% for the year.
Continued rapid pricing escalation in cyber remains the key driver.
For the quarter, Cyber increased nearly 80% and averaged 50% for the year.
Excluding cyber, other professional lines are averaging 13% for the quarter and 14% for the year.
Breaking it out further, London is averaging more than 18% for the quarter and the year, Canada is averaging more than 30% for the quarter and 24% for the year, while in the U.S., rates are averaging about 9% for the quarter and about 11% for the year.
Liability, primary casualty, and excess casualty are all averaging increases in the high single digits for the quarter and the low double digits for the year.
Property rates increases were close to 10% for both the quarter and the year.
Among our other specialty lines, we saw high single-digit to low double-digit increases across the portfolio.
This included renewable energy, where we're a global leader at 13% for the quarter and the year.
While in marine and political risks, those increased 11% for the quarter, with an annual average just shy of 8%.
During the quarter, 96% of our insurance portfolio renewed flat to up and about half of the increases were double digit.
As mentioned earlier, we're achieving record new business production and we continue to see new business pricing metrics at least as strong, if not better, than renewal pricing.
In this market, we have terrific positioning and the ability to add value to our customers and partners and distribution while growing quite profitably.
The question on everyone's lips is how long will it last.
Looking forward, we expect that after many years of unsatisfactory performance, the industry will sustain a rational approach to pricing.
And there are enough uncertainties and pressures on loss costs and profitability as well as higher reinsurance costs to bear, that we expect disciplined pricing through 2022 and potentially into 2023.
Let's look at our reinsurance segment.
We estimate that for the full year 2021, we averaged reinsurance rate increases of about 11%.
As Pete just noted, the fourth quarter is a relatively small renewal period for Access REIT.
My comparison, just over half of our reinsurance business renews at January 1.
So I'll focus my comments on 1/1.
There's been a lot of talk already in the industry about 1/1 and there's no doubt that pricing is making further progress.
At AXIS, during the January 1 renewals, we saw average rate increases of about 9%.
Our international book renewed at average increases of more than 10%, while our North American book generated increases of 9%.
By and large, professional lines, casualty, and A&H came in, in the high single to low double digits, and other specialty lines, including marine, aviation, and credit and surety in the low to mid-single digits.
On property cat pricing, you'll have heard that global rates average in the 10-ish percent range.
but pricing was not uniform across the book.
Lower layers of reinsurance towers and aggregate treaties where supply was more constrained, exhibited the strongest pricing increases, especially if they were loss impacted.
In those loss impacted treaties, you would have seen increases in the 25% to 50% range.
As one moves up the towers to layers that are further removed from frequency and where supply was more plentiful, rate increases were more subdued.
As I noted earlier, we took meaningful action to reshape our cat portfolio and reduce our overall earnings volatility.
This was evidenced by a 70% reduction in gross premiums for aggregate treaties and a 75% reduction in gross premiums on low-attaching treaties among our various actions, leading to a 45% reduction in property and property cat reinsurance premiums at the 1/1 renewals as compared to the prior year.
This is consistent with our commitment to build the portfolio that we believe will drive the economic performance that we target.
Given the changes expected to our portfolio to reduce both frequency and severity, our average rate increase on profit was 7%.
With the reduction in profit and deposit [Inaudible] [Technical Difficulty] I'm sorry, my line was going down so I'm replacing it.
So with reduction to the property and catastrophe exposure, these two lines represented about 17% of our 1/1 renewal premiums, down from 27% in the 1/1 renewal portfolio last year.
I'm pleased that despite this meaningful shift in business mix and reduction in property cat lines that generally model well.
We continue to expect an improvement in overall technical ratios, but with much lower volatility.
Our general view of the reinsurance market is that while it's still running overall behind primary pricing, the market is heading in the right direction, but must continue to do so to adequately compensate reinsurers for the risk and volatility they assume.
In the year ahead, with the outlook that we have for the market, we will push for continued growth of our specialty insurance business.
We remain disciplined in our capital allocation to those lines in markets that provide the best balance of both short-term and longer-term opportunity, while working in partnership with our customers and brokers to ensure we maintain transparency on our ongoing support as we help them solve their risk management needs.
We see a bright future for AXIS.
We have a great team that's fully engaged and committed to building on our progress, generating consistent and sustained profitability, and enhancing the value that we deliver to our customers and shareholders. | compname reports q4 earnings per share $2.18.
qtrly earnings per share $2.18.
reached record levels of card member spending in quarter.
expect to generate elevated levels of revenue growth in 2022 in range of 18% - 20% and earnings per share of $9.25 to $9.65.
longer term, co expects to achieve revenue growth in excess of 10% and earnings per share growth in the mid-teens.
plans to increase regular qtrly dividend by about 20%, to 52 cents per share beginning with q1 2022.
compname posts q4 earnings per share $2.18.
american express fourth-quarter revenue increases 30% to $12.1 billion, driven by record card member spending.
q4 earnings per share $2.18. | 0 |
We appreciate you joining us.
With me on the call today are CEO Mick Farrell and CFO Brett Sandercock.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions.
However, our actual results may differ.
I will review progress toward ResMed's 2025 strategic goals, including execution highlights against our quarterly and our annual operating priorities.
A year ago today, when we discussed our March 2020 results, we were only just beginning to understand the scope of the COVID-19 pandemic.
Much of our business, particularly in the United States, had not yet been significantly impacted.
However, outside the U.S., countries including China and Italy were already in the midst of emergency needs.
We quickly mobilized our supply chain and global operations to address and support ventilation needs worldwide, producing over 150,000 ventilators.
We accelerated the production and distribution of noninvasive and life support ventilators and mass systems to those in need, resulting in an incremental $35 million of COVID-related revenue during the March 2020 quarter.
I'm incredibly proud of how we quickly pivoted our business to meet that need, providing life-saving solutions around the world so that healthcare systems were prepared with the resources needed to treat patients who are fighting COVID-19.
Today, one year later, the countries we operate in are at various different stages of the post-COVID peak recovery process in terms of getting to normal patient flow.
We see a range of -- from 70% of pre-COVID patient flow in some countries, up to 90% of pre-COVID patient flow in other countries.
Vaccines are steadily rolling out in the United States, the U.K., and many other countries worldwide.
We still see significant impact from ongoing second, third and fourth waves of infection in some countries in Europe, as well as in South America and Asia, and especially right now in the country of Brazil and particularly India.
Our team is working with hospitals and healthcare providers in those two countries and beyond for preservation of life, making sure that they have ventilators, masks, and the training that they need to use them.
We continue to support the frontline respiratory therapists and the physicians who are there on the ground, as well as providers, patients, and ResMedians throughout the 140-plus countries that we operate in.
We're pleased with the steady progress that we are seeing in getting new sleep apnea, COPD, and asthma patients diagnosed.
Excluding the $35 million of COVID-related ventilator sales in the March 2020 quarter, our team delivered positive sales growth across our core sleep apnea and respiratory care business this quarter on both the headline and constant-currency basis.
We forecast a steady improvement trend of patient flow for sleep apnea and COPD and asthma continuing as we move through 2021 and into 2022.
We expect this progress to accelerate as global vaccination rates continue.
We are encouraged to see that patients, physicians, and providers around the world are adopting digital health tools for remote patient screening, home-based testing, remote patient monitoring, and ongoing patient management.
I'd like to be clear that the ventilation sales that we made in 2020 will be part of our comparables for the next two quarters.
In the June 2020 quarter, we recognized $125 million in COVID-related ventilator sales.
And in September 2020 quarter, we recognized $40 million in such revenue.
Over the coming quarters, we expect to continue to show strong positive year-over-year revenue growth excluding these one-time sales from 2020.
As we look further forward, we see a clear path to double-digit revenue growth in the back half of our fiscal-year 2022 across our full business, powered by opening economies and our pipeline of new technology and innovation.
Our headline results were impacted this quarter by an accounting reserve we took in connection with discussions with the Australian Tax Office, or ATO, regarding their ongoing audit dating back to fiscal-year 2009.
Brett has been leading those discussions and will speak to the details in his remarks.
I will make this statement: ResMed pays significant taxes in countries around the world, and we operate in over 140 countries, helping people sleep better, breathe better and live better lives well away from the hospital.
Brett and his team are working toward a final resolution of these transfer pricing discussions dating back over 12 years with the ATO.
So we have taken this $255 million reserve.
We believe that resolving these discussions is the pragmatic thing to do for all of our stakeholders so that we can put this behind us and focus all of our efforts on our core mission of improving lives in respiratory medicine around the world.
During the third quarter of fiscal-year 2021, we generated over $196 million in operating cash, allowing us to return $57 million in cash dividends to shareholders.
We also increased our R&D investments in the period in digital health technology, as well as R&D for hardware, embedded software, and clinical research while maintaining financial discipline with reduced SG&A and other operating costs.
We have seen increased demand for our digital health solutions from patients, physicians, providers, and healthcare systems around the world as they embrace remote patient engagement and adopt population health management.
We are the clear leader in this field with over 14 million cloud-connectable medical devices in the market.
And our ongoing and increasing investments in digital health innovation will ensure we provide superior value to patients, physicians, and providers to be their partner of choice.
We don't take our leading market share position for granted.
We fight for it every day through innovation.
Our digital technologies are a growth catalyst for our business.
We have an exciting pipeline of innovative solutions that will generate both medium and long-term value, with an industry-leading IP portfolio, including over 8,000 patents and designs.
We now have over 8.5 billion nights of respiratory medical data in our cloud-based platform called Air Solutions.
We have over 15.5 million patients enrolled in our cloud-based AirView software solution.
And we also have over 105 million patients managed within our Software-as-a-Service network for out-of-hospital healthcare.
These incredible data assets allow us to unlock value for all of our customers, patients, physicians, providers, as well as private and government payers.
Let me take a few minutes to share some recent clinical highlights that show how we are working with researchers to advance the field of sleep and respiratory medicine with these data and beyond.
During 2020, an important 30-year duration study was published in the European Respiratory Journal, following over 4,500 diagnosed OSA patients to better understand the long-term impacts of untreated sleep apnea.
The study showed that untreated sleep apnea leads to high incidence of myocardial infarction or heart attack, high incidence and prevalence of Type 2 diabetes, and high incidence of ischemic heart disease.
This real-world clinical analysis is showing that what we've known for over three decades: sleep apnea is a public health epidemic that simply can't be ignored.
In terms of clinical quality of life improvement from CPAP therapy, the data are also clear.
In late 2019, the multicenter, randomized controlled trial called MERGE was published in the journal Lancet Respiratory Medicine.
The results were that patients randomized to CPAP demonstrated clear improvement in quality of life for CPAP patients versus standard of care with symptomatic benefits, including reductions in sleepiness, as well as improvements in fatigue and importantly, depression, a key part of mental health.
Importantly, these results were evident in both mild, as well as moderate and severe, sleep apnea.
In terms of economic data and a dose-response relationship from CPAP therapy, the data are also unequivocal.
In 2019, a study was published in the Journal of Clinical Sleep Medicine showing a quantified dose-response relationship from CPAP therapy.
So for every additional hour of positive airway pressure use, there was an 8% decrease in hospital inpatient visits and a 4% decrease in overall physician visits.
In other words, treating sleep apnea with our CPAP therapy not only improves lives, it also saves money for the healthcare system by lowering total healthcare utilization costs.
During the quarter, we saw the publication of a draft technology assessment from the Agency for Healthcare Research and Quality, or AHRQ, here in the U.S. market.
AHRQ sort input and ResMed-filed public comments, along with comments from many physician groups, sleep apnea patient advocates, provider groups, and beyond.
I won't repeat all the details of those public comments, but I will say this, we presented peer-reviewed and published data showing that CPAP therapy improves quality of life, reduces healthcare costs, and even reduces mortality.
In short, these data prove that in partnership with our physician and provider colleagues in the market, we are saving lives and saving money for the healthcare system through our medical technology.
We have peer-reviewed and published data showing that a reduction in incidence of heart attack, a reduction in hypertension, as well as a reduction in the incidence of solid cell cancer tumors.
All of these are logical sequelae of the elimination of hypoxia that is associated with CPAP therapy in treated sleep apnea patients.
Just last month, NICE made public their 2021 draft guidelines that recommend that CPAP therapy, along with telemonitoring, is the frontline treatment option for patients with mild OSA.
That would be an expansion of coverage in the U.K. and also an expansion of the use of digital health technology in that market.
Similarly, the Ministries of Health in France, Germany, and Japan have seen the value of digital health in sleep apnea therapy and have begun investing reimbursement funds in this space.
It's great to see this expansion of coverage for sleep apnea therapy and digital health around the world as governments see improvement in outcomes and reductions in total healthcare system costs with this technology.
While we respect the work of AHRQ, we, along with many other academic research-focused institutes and practicing physician groups, believe that they bypassed a generation of data in real-world evidence that needs to be taken into account, along with their own select group of RCTs in the draft report.
We are optimistic that the final report when issued will reflect the preponderance of real-world evidence and broader RCTs, showing both the clinical and economic benefits of treating sleep apnea with positive airway pressure.
Let me now update you on our top-three ResMed strategic priorities.
These are, one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop and deliver world-leading medical devices, as well as globally scalable digital health solutions; and three, to innovate and grow the world's best software solutions for care delivered outside the hospital and preferably, in a person's home.
In our core market of sleep apnea, we continue to see sequential improvement in new patient diagnosis trends as we seek to provide solutions for the 936 million people worldwide who suffocate every night.
was impacted by the typical seasonality that we see in the March quarter, primarily as a result of insurance deductibles resetting at the start of each calendar year.
This seasonal impact affects devices more than mass systems, given the incremental cost of diagnosis and the relative price points of the two categories.
We expect sequential growth in sleep and respiratory care as we move past this typical seasonality.
New patient flow during the quarter was impacted by the recent COVID-related case surges in select countries in Asia and Europe, including two large markets, France and Germany.
We see that impact the number of patients going for clinic-based diagnosis pathways in these affected countries.
We expect to see these markets reopen, along with hospitals, as vaccines continue to roll out and as we see further scaling of the remote home-based diagnostic capacity.
Clearly, the kinetics of opening of these economies and the rate of vaccination rollout are beyond our control.
However, we can control our investments in digital solutions for our physician and provider partners, which we are doing at increasing velocity and with scalable systems and processes.
More broadly, we are seeing growth in total sleep -- total new sleep apnea, COPD, and asthma patient flow.
And we expect to see this improve over time in our portfolio of 140 country markets each quarter.
Importantly, our market-leading share position has remained stable across both masks and devices, and we're excited about our future pipeline.
We rarely talk about our future pipeline as those who followed us for a period of time know.
But today, I would like to open up the curtain just a little bit on our next-generation sleep apnea platform.
regulatory filings that we made for our next-generation flow generator platform called the AirSense 11.
Clearly, there are multiple steps in the process to bring this new platform to global markets and these public regulatory filings are simply one important step, but we are making good progress.
Earlier this month, we started a limited controlled product launch of the AirSense 11 in certain parts of the United States.
and then to country markets worldwide in sequence after that.
For now, I can say that as a personal user of our CPAP therapy, I have firsthand knowledge that the AirSense 11 device will benefit patients and their bed partners.
And our early data show that the device and software platform combination will benefit physicians, providers, payers, and beyond, and ultimately continue to catalyze ResMed's global leadership in digital health solutions for sleep apnea and then also accelerate our success in digital health solutions for COPD, asthma, and other key chronic diseases.
We make the smallest, quietest, smartest, and the most comfortable devices on the market.
Importantly, they are all cloud connectable with the latest and greatest digital health technology to increase adherence, improve clinical outcomes, and deliver proven cost reductions within our customers' own healthcare systems.
Let me turn now to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD, or chronic constructive pulmonary disease, patients and the 340 million asthma patients worldwide.
Our goal is to reach more patients with our core respiratory care solutions, including both noninvasive ventilation and life support ventilation, as well as newer therapeutic areas, such as cloud-connected pharmaceutical drug delivery devices and high-flow therapy devices.
Our respiratory care business benefited in the March 2020 quarter as we sold incremental ventilated devices and ventilation mask solutions to meet growing demand worldwide as a result of the pandemic.
During the March 2021 quarter, COVID-related ventilator sales were not material to the global business.
However, we are seeing some demand in select countries affected by these latest COVID surges, such as just this month with the surge in India.
We're getting many thousands of devices to those in need.
The demand is there in that country.
But as in Q3, we do not expect the revenue to be material to our global business, even though the broader impact, particularly with preservation in life in these countries is clearly priceless and incredibly important to not only our local team in India but to all of us here at ResMed worldwide.
Demand for our core noninvasive ventilator and life support ventilator solutions for COPD and other respiratory insufficiency are experiencing the same steady recovery in new patient flow as in sleep apnea.
We are balancing the growth in patient demand there with the supply of ventilators that we made to the market throughout 2020 as customers balance their inventory and their core ongoing patient needs.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe in the midst of the pandemic this time a year ago.
We are now seeing that this technology has expanded to regions around the world.
The value being provided through this cloud-based software solution has been fruitful not only during the COVID pandemic and the peak part of the crisis, but it's also valuable on an ongoing-value basis for physicians, as well as the healthcare systems they operate in.
We are hoping to ensure that digital health is now the new standard of care for respiratory care.
Let me now review our Software-as-a-Service business for out-of-hospital care.
During the quarter, our SaaS business grew in the mid-single digits year on year across our portfolio of markets.
The verticals include home medical equipment, or HME, skilled nursing facilities, home health, hospice, private duty home care, home infusion, senior living, and life plan communities.
Our HME customers are leveraging our advanced resupply solutions, including snap technology and Brightree resupply for our existing portfolio of patients.
And they are contributing to ongoing growth as the flow of new patients in HME continues to recover steadily period by period.
Over the past 12 months, COVID-19 has had a dampening effect on elective and emergent procedures at hospitals, as we all know, and that has slowed hospital discharge rates affecting patient flow and ultimately, the census rates at skilled nursing facilities, home health, hospice and beyond.
As the rate of vaccinations accelerate across the U.S. and the number of COVID-19 cases continues to trend downward in this country, we're seeing improvements in the census rates across skilled nursing facilities, home health, hospice, and across all post-acute care settings.
In addition to the solid organic growth that we are seeing in our SaaS business, we closed an exciting acquisition just this month.
The company is called Citus Health.
Citus is a digital health leader specializing in patient engagement solutions for home infusion and specialty pharmacy, as well as for home health and hospice markets.
Citus enhances the patient experience, and it also improves provider efficiency and reduces the workload for frontline clinicians and caregivers.
We are excited to have the Citus team as part of the ResMed family of solutions and to leverage their digital collaboration and patient support platform in our mission to improve patients' lives outside the hospital.
I'm very impressed by the breadth and depth of talent at Citus and their passion for patient care.
This goes from their CEO and co-founder all the way to the frontline.
We're very excited to have them join our team, and we will be better together.
As we look across our portfolio of solutions from Brightree to MatrixCare to now Citus including HME, specialty pharmacy, home infusion, skilled nursing facilities, home health, hospice, senior living, life plan communities, and private duty home care, we expect this portfolio, this SaaS portfolio of revenue growth to accelerate, increasing from mid-single-digit growth that we saw in this quarter to high single-digit growth as we move forward.
As always, our goal is to meet or beat the sort of market average growth rates, and we continue to take share across the verticals that we're in.
We also see opportunity to drive growth through further acquisitions that will augment and add to our existing portfolio of solutions.
Our offerings are very well received in each of these verticals, and we continue to see and leverage analytics and the technology that we have across our core business and the SaaS business to help people age in place and minimize or eliminate acute care episodes.
Looking at the broader ResMed portfolio of business across sleep and respiratory care, as well as our Software-as-a-Service solutions, we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our mission to improve lives, strives, and motivates ResMedians across the world every day.
COVID has highlighted and continues to highlight the importance of respiratory health and respiratory hygiene.
It has highlighted also the importance of digital health and remote care, and it has also accelerated awareness and adoption of technologies that can be used for remote patient screening, diagnosis, setup, as well as remote patient management and monitoring.
We have continued to invest aggressively in R&D and innovation to ensure our solutions are best in class and are a catalyst for future growth.
With over 1.5 billion people around the world suffering from sleep apnea, COPD, and asthma combined, we see incredible opportunities for greater identification, enrollment, and engagement of people with our digital health pathways.
We are relentlessly driving innovation and development to provide the scale needed to expand the impact of this technology across the 140 countries that we operate in.
Before I hand the call over to Brett for his remarks, I want to, once again, express my sincere gratitude for the more than 7,500 ResMedians for their perseverance, hard work, and dedication during these most unusual circumstances these last 15 months.
This team has helped save the lives literally of many hundreds of thousands of people around the world with ventilators with these emergency needs.
The team is now rapidly pivoted back to our core markets and our core purpose of helping people with sleep apnea, COPD, and asthma.
And for all those who need world-class care delivered well away from the hospital and preferably in their own home.
With that, I will now hand the call over to Brett in Sydney, and then we will move to Q&A.
Brett, over to you.
In my remarks today, I will provide an overview of our results for the third quarter of fiscal-year 2021 and comment on our FY '22 outlook.
Unless noted, all comparisons are to the prior-year quarter.
Group revenue for the March quarter was $769 million, which is consistent with the prior-year quarter.
In constant-currency terms, revenue decreased by 3% compared to the prior-year quarter.
Consistent with our prediction during the Q2 earnings call, we derived negligible incremental revenue from COVID-19-related demand in the March quarter, whereas our prior-year Q3 revenue included an incremental benefit from COVID-19-related sales of approximately $35 million.
Excluding these impacts, our Q3 FY '21 revenue increased by 1% in constant-currency terms.
Taking a close look at our geographic distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada, and Latin America countries were $403 million, an increase of 2%.
Sales in Europe, Asia, and other markets totaled $272 million, a decrease of 5% or a decrease of 13% in constant-currency terms.
By product segment, U.S., Canada, and Latin America device sales were $193 million, a decrease of 2%.
Masks and other sales were $210 million, an increase of 7%.
In Europe, Asia, and other markets, device sales totaled $173 million, a decrease of 11% or in constant-currency terms, an 18% decrease.
Masks and other sales in Europe, Asia, and other markets were $99 million, an increase of 9% or flat year over year in constant-currency terms.
Globally, in constant-currency terms, device sales decreased by 10%, while masks and other sales increased by 4%.
Excluding the impact of COVID-19-related sales in the prior-year quarter, global device sales declined by 3% in constant-currency terms, while masks and other sales increased by 6% in constant-currency terms.
Software-as-a-Service revenue for the third quarter was $94 million, an increase of 5% over the prior-year quarter.
During my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin decreased by 40 basis points to 59.6% in the March quarter, compared to 60% in the same quarter last year.
The decrease is predominantly attributable to higher freight costs, additional manufacturing costs associated with the transition to our new Singapore site with commenced operations during the quarter, and geographic mix changes.
Moving on to operating expenses.
Our SG&A expenses for the third quarter were $160 million, a decrease of 7%, or in constant-currency terms, SG&A expenses decreased by 11% compared to the prior-year period.
SG&A expenses, as a percentage of revenue, improved to 20.9%, compared to the 22.4% we reported in the prior-year quarter, benefiting from cost management and reduced travel as a result of COVID-19 restrictions.
Looking forward, we expect SG&A expenses in Q4 FY '21 to increase in the low single digits relative to the prior-year period.
R&D expenses for the quarter were $56 million, an increase of 9%, on a constant-currency basis, an increase of 3%.
R&D expenses as a percentage of revenue was 7.3%, compared to 6.7% in the prior year.
Looking forward, we expect R&D expenses in Q4 to increase year over year in the high single digits, reflecting our long-term commitment to innovation.
Total amortization of acquired intangibles was $18 million for the quarter and stock-based compensation expense for the quarter was $16 million.
Our non-GAAP operating profit for the quarter was $242 million, an increase of 2%, reflecting well-contained operating expenses.
For the March quarter, we estimated and recorded an accounting tax reserve of $255 million, which is net of credits and deductions for a proposed settlement of transfer pricing audits by the Australian Taxation Office, or ATO.
The audit covered tax years 2009 to 2018.
As previously disclosed, for 2009 to 2013, the ATO issued assessment of $266 million, inclusive of penalties and interest.
The 2014 to 2018 year audits remain open, ongoing and assessments have not been issued.
We have tentatively agreed on a number with the ATO to result in the entire matter for all audit years.
We expect any adjustments to the reserve we have taken this quarter would be immaterial.
Next steps include getting to a written agreement and final board approval.
If the deal falls apart, we will litigate.
We continue to believe we are more likely than not to succeed in litigation.
However, transfer pricing litigation is complex, costly, and uncertain.
So we are looking forward to putting this behind us.
As a result of recording the reserve, on a GAAP basis, our effective tax rate for the March quarter was 136%.
While on a non-GAAP basis, which excludes the reserve, our effective tax rate for the quarter was 19.4%.
Looking forward, we estimate our underlying non-GAAP FY '21 effective tax rate will be in the range of 17% to 19%.
Our non-GAAP net income for the quarter was $190 million, an increase of 1%.
Non-GAAP diluted earnings per share for the quarter were $1.30, an increase of 1%.
As a result of the tax reserve recorded this quarter, our GAAP net loss for the quarter was $78 million and our GAAP diluted loss per share for the quarter was $0.54.
Cash flow from operations for the quarter was $196 million, reflecting solid underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $26 million.
Depreciation and amortization for the March quarter totaled $40 million.
During the quarter, we paid dividends of $57 million.
We recorded equity losses of $5 million in our income statement in the March quarter associated with the Verily joint venture.
And going forward, we expect to record equity losses in the range of $3 million to $5 million per quarter associated with the Verily joint venture.
We ended the third quarter with a cash balance of $231 million.
At March 31, we had $734 million in gross debt and $503 million in net debt.
Our debt levels remain modest.
And at March 31, we had a further $1.5 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
During the third quarter, we completed the acquisition of Citus Health.
Citus Health is a digital health leader specializing in patient engagement solutions that enable real-time secure collaboration between patients and those involved in their care.
We also acquired certain business assets of [Inaudible] medical company based in Korea, which primarily represented [Inaudible] sleep and respiratory distribution business.
Both these acquisitions will not be material to our group results.
Our board of directors today declared a quarterly dividend of $0.39 per share, reflecting the board's confidence in our strong liquidity position and operating performance.
Our solid cash flow and liquidity provides flexibility in how we allocate capital.
During the pandemic, we have focused on paying down debt.
Going forward, we plan to continue to reinvest the growth through R&D.
We will also likely continue to deploy capital for tuck-in acquisitions like Citus Health.
We intend to continue to return cash to shareholders through our dividend program.
We may also resume our share buyback program sometime during the calendar year.
This program has been on hold since our acquisitions of MatrixCare and Propeller Health in fiscal-year 2019.
Turning now to our expectations on the outlook for Q4 FY '21 and FY '22 outlook.
There remains uncertainty in the short term, particularly in predicting the timing of recovery of new patient flow from COVID-19-related impacts across the many countries that we operate in.
Consequently, we expect Q4 FY '21 revenue to reflect low single-digit sequential growth over Q3 FY '21.
As we move through FY '22, we expect to see continued improvement in new patient flow and a return to more normalized underlying revenue growth trends.
Additionally, we are seeing minimal COVID-19 generating demand for our ventilators and do not expect any material benefit going forward.
As a reminder, we recorded $35 million COVID-19 generated revenue in our March quarter last year, $125 million in our June quarter last year, and $40 million in our first quarter of FY '21.
Mask and accessories have continued to demonstrate resilience and growth over the past three months, reflecting the insulating value of the large patient installed base and the success of our resupply service offerings.
We expect to see continued year-on-year growth of our mask sales in FY '22.
Finally, like many other companies, we continue to experience significant uncertainty in the current environment, particularly in relation to the timing of the reopening of economies with the vaccination programs roll out.
As a result, our forecast and possible future revenue outcomes remain dynamic.
And with that, I will hand the call back to Amy.
Celine, are you there?
Ready to run the Q&A portion of the call? | compname reports q3 non-gaap earnings per share of $1.30.
q3 gaap loss per share $0.54.
q3 non-gaap earnings per share $1.30.
qtrly revenue was comparable at $768.8 million; down 3% on a constant currency basis. | 1 |
Both are now available on the Investor Section of our website, americanassetstrust.com.
That was well done as always.
These have been unprecedented times that I've never seen before in my lifetime.
When COVID-19 began, I honestly didn't know how that it would be.
We expect it to be catastrophic, but we just didn't know how bad it would be, now that the second quarter is behind us.
I can tell you that it is not as catastrophic as our worst case projections.
It's still has been no fun.
Office has performed extremely well, unless in the shining light in our portfolio, with high credit tenants in strong markets and that we would like to continue.
Multifamily has also performed well better than we expected.
Occupancy has been slightly lower, but collections have been strong in the mid '90s and we expect a meaningful uptick in occupancy in August 1, as a local private university takes possession of approximately 130 units and our San Diego multi-family portfolio, at good rents by a master lease that has recently been executed.
Retail as expected has been very tough.
Every deal, feels like a street fight in retail.
We try to balance what is best for the company and its shareholders with how to maintain the long-term [Technical Issues] of these retail tenants that are so important to our shopping centers.
We know that some are not going to make it.
Of course, we are hopeful that most will make it.
In that factor, we're hopeful that all will make it.
We have a committee comprised of myself, Chris Sullivan and Adam Wyll that review every tenant requests.
If a tenant ask for deferral, we ask for something from a tenant and return as well.
Each one is a negotiation and we try to make sure that we're getting something fair in return for anything less 100% on time collection of our contractual rents.
I truly believe that our management team is second to none and has done an excellent job strategically navigating through this pandemic.
American Trust is reflective of the quality people that we have working as appreciative of the quality people that we have working in our company that are focused on creating value for our shareholders each and every day.
Lastly, I want to mention that our Board of Directors has approved increasing the quarterly dividend 25% over the second quarter 2020 dividend of $0.20 to $0.25 for the third quarter based on higher rent collections in the second quarter than we had expected, combined with the significant embedded growth that we continue to expect in our office portfolio and the recent master lease signed in our multifamily portfolio.
A year from now, once there is a vaccine, we expect to look back and we hope this is nothing more than a bad memory.
I believe that we came -- we come out of this, we will be as good a company or even better when all this started.
From an operations perspective as coronavirus infection continue to increase in many of our markets.
We remain hyper-focused on the safety and well-being of our personnel tenants and vendors, as 100% of our properties remain open and accessible by our tenants.
We remain committed to ensuring full compliance with the ever-changing regulatory mandates from all levels of government, not to mention, staying in front of and working against proposed regulations that we think would do damage to our industry and economy.
Like SB 939 in California, which did not pass.
In the proposed repeal of Prop 13 for commercial properties in California, which we believe is essentially a targeted tax increase on business, which would ultimately be passed on to tenants and customers most of whom can absorb such increases and could lead to even more business failure.
As Ernest mentioned, we continue to work with our tenants on rent deferments and other lease modifications to assist those tenants as best we can, whose business have been significantly impacted by COVID-19.
We've also renegotiated or bid out most of our vendor contracts to meaningfully reduce operating expenses, many of such reductions on a long-term basis, all the while maintaining our best-in-class properties.
And we've leverage the high unemployment rates in our markets to hire top caliber associates to fill open positions at AAT.
Finally, we appreciate more than ever, the positive impact that ESG including fostering a culture of diversity and inclusion has on the strengthening of our business, our economy and our society.
Particularly in light of current events, our focus on human capital and physical and mental well being both within our company and in our communities, has never been stronger and represents the foundation that our culture was built on.
For more insight on our ESG efforts please take a look at our recently published 2019 sustainability report, which can be found on the sustainability page of our website.
Last night, we reported second quarter 2020 FFO of $0.48 per share and net income attributable to common shareholders of $0.13 per share for the second quarter.
Let's look at the results of the second quarter for each property segment.
Our office property segment continues to perform well during these uncertain times.
Office properties excluding our One Beach Street property located on the North Waterfront in San Francisco which is under redevelopment.
We're at 96% occupancy at the end of the second quarter, an increase of approximately 3% from the prior year.
More importantly, same-store cash NOI increased 16% in Q2 over the prior year, primarily from City Center Bellevue in Washington, Lloyd District Campus, Office Campus in Oregon and Torrey Reserve Campus here in San Diego.
Our retail properties have not fared as well during the pandemic.
Retail properties were at 95% occupancy at the end of the second quarter, a decrease of approximately 2% from the prior year.
However, retail collections have been difficult during the pandemic, as reflected in our negative same-store cash NOI.
Additionally, due to COVID-19, we have taken reserve for bad debts against the outstanding retail accounts receivable and straight-line rents receivable at the end of the second quarter of approximately 14% and 7% respectively.
From a dollar perspective, this translates into approximately $2 million and $1.4 million respectively, for a total of $3.4 million reserve related to our retail sector, which is approximately $0.045 of FFO.
We intend to continue evaluating and potentially revising these reserves each quarter as we monitor the ever-changing viability and solvency of each of our retail tenants.
Our multifamily properties we're at an 85% occupancy at the end of the second quarter, a decrease of approximately 8% from the prior year as also reflected in our negative same-store cash NOI.
But as Ernest mentioned, we expect this to increase back into the low to mid 90% occupancy once our master lease with a local private university commences on August 1.
Our mixed use property consisting of the Embassy Suites Hotel and the Waikiki Beach Walk Retail is located on the Island of Oahu.
The State of Hawaii remains in self quarantine through the end of August, which is significantly impacted the operating results in the second quarter of 2020.
The Embassy Suites average occupancy for the second quarter of 2020 was 17%, compared with the prior year's second quarter average occupancy of 92%.
A good rule of thumb in our view is that a hotel without any leverage on it needs to have approximately a 50% to 60% occupancy to breakeven.
Our team in Hawaii forecasted earlier this month of 46% to 50% occupancy by year-end 2020.
To our pleasant surprise, we ended June with a 29% occupancy, much higher than the average occupancy of 17% for the quarter.
Additionally, in the last 15 days, we have been seeing occupancy ranging from 45% to 55% with our team in Hawaii expecting to end the month of July at 62% occupancy.
Right now, it is our understanding there are only two hotels remained open in Waikiki.
One of which is our Embassy Suites hotel, which has been completely renovated and it's like a brand new hotel.
Let's talk about billings and collections.
On a companywide basis, we collected approximately 83% of the total second quarter billings, which primarily consists of base rent and cost reimbursements.
We have also collected approximately 83% of July's billings as of the end of last week.
We expect those percentages to increase as we continue to work hard on collection efforts.
In Q2, our office rent collections were approximately 98%.
Our retail rent collections excluding Waikiki Beach retail were approximately 62%.
And by the way -- so far in July is about 70%, and our multifamily collections were approximately 95%.
Waikiki Beach Walk Retail had an approximately 30% collection rate in Q2.
As Ernest noted earlier, the Board of Directors has decided to increase the quarterly dividend from $0.20 to $0.25 per share.
The Board took into consideration, the increase in collections over what was expected during Q2, combined with the embedded growth in cash flow from the office sector over the next several years, as well as the master lease in the multifamily sector.
Using the same 83% collection rate applied to our initial targeted dividend of $0.30 per quarter, it gets you to approximately $0.25 per share per quarter.
As we look at the liquidity on our balance sheet, at the end of the second quarter, we had approximately $396 million in liquidity, comprised of $146 million of cash and cash equivalents and $250 million of availability on our line of credit.
And only one of our properties is encumbered by a mortgage.
Our leverage which we measure in terms of net debt to EBITDA was 6.4 times on a quarterly annualized basis, resulting from the lower EBITDA from the added reserves that we took in the retail sector during Q2.
On a trailing 12 month basis, our EBITDA would be approximately 5.8 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 3.8 times on a quarterly annualized basis and at 4.1 times on a trailing 12 month basis.
And finally with respect to $250 million of unsecured debt maturities that come due in 2021, we expect to extend the $100 million term loan up to 3 times with each extension for a one-year period subject to certain conditions and the remaining $150 million Series A Notes does not mature until October 31, 2021, which we would expect to refinance at lower rates.
Regarding our guidance, as we previously disclosed, we withdrew our 2020 guidance on April 3 due to the uncertainty that the pandemic would have on our existing guidance, particularly in our hotel or retail sector.
Unfortunately, the economy continues to change day by day and the current outcome remains uncertain as to impact in duration, which is why we will continue to a draw our 2020 guidance.
At the end of the second quarter, net of One Beach, which is under redevelopments.
Our office portfolio stood at approximately 96% leased, with approximately 6% expiring through the end of 2021.
We were fortunate to renew the IRS and veterans benefits administration leases early in 2020, the First & Main in Portland in a total of 131,000 feet at start rates nearly 20% above the rates of exploration.
Given the quality of our assets and the strength of the markets in which they are located with technology and life science as key market drivers.
We continue to execute new and renewal leases at favorable run rates delivering continued NOI growth.
With leases already signed, we have locked in approximately $29.6 million of NOI growth comprised of $6 million in 2020, $14 million in 2021 and $9.6 million in 2022 in our office segment.
We anticipate significant additional NOI growth in 2022 through the redevelopment and leasing of One Beach Street in San Francisco and 710 Oregon Square in the Lloyd submarket Portland, along with the repositioning of two buildings at Torrey Reserve in the Del Mar Heights submarket of San Diego.
In addition, we can grow our Office portfolio by up to 768,000 rentable square feet or 22% on sites we already owned by building Tower 3 at La Jolla Commons, which is 213,000 feet and Blocks 90 and 103 at Oregon Square totaling up to 555,000 square feet.
Tower 3 at La Jolla Commons is into the city of San Diego for permits and we continue evaluating market condition, prospective tenant interest and hopefully decrease in construction costs, leading to are upcoming commencing construction.
Next, schematic design has completed for Blocks 90 and 103 at Oregon Square with design development of 50% complete.
We are scheduled for our first hearing with the design review committee in Portland on August 20.
We currently have two active request for proposals from prospective tenants for Blocks 90 and 103 totaling 422,000 square feet, but again we will be evaluating market conditions, tenant interest and construction cost prior to commencing construction.
We have a stable office portfolio with little near term rollover, significant built in NOI growth and additional upside through repositioning redevelopment within our existing portfolio plus substantial new development on sites we already own. | american assets trust q2 ffo per share $0.48.
q2 ffo per share $0.48. | 1 |
Also on the call are other members of the management team.
Materials supporting today's call are available at www.
Actual results could differ materially from current expectations.
Important factors that could cause different results are set forth in our SEC filings.
Please read these carefully.
I hope of all you and loved ones are staying healthy safe.
Edison International reported core earnings per share of $0.94 compared to $1 a year ago.
However, this comparison is not meaningful because SCE did not receive a final decision in track 1 of its 2021 General Rate Case during the quarter.
As many of you are aware, a proposed decision was issued on July 9th.
The utility will file its opening comments later today and reply comments on August 3rd.
While Maria will cover the PD in more detail, our financial performance for the quarter, and other financial topics, let me first give you a few observations, which are summarized on page 2.
The PD's base rate revenue requirement of $6.9 billion is approximately 90% of SCE's request.
The primary drivers of the reduction are lower funding for wildfire insurance premiums, vegetation management, and depreciation.
The main reduction to SCE's 2021 capital forecast was for the Wildfire Covered Conductor Program.
Excluding wildfire mitigation-related capital, the PD would approve 98% of SCE's 2021 capital request, much of which was uncontested.
The PD also notes that wildfire mitigation is a high priority for the state and the Commission.
The PD supports critical safety and reliability investments and provides the foundation for capital spending and rate base through 2023.
We believe it is generally well-reasoned, but it has some major policy implications that are fundamentally inconsistent with where the state is headed.
SCE's CEO, Kevin Payne, addressed these implications well during oral arguments earlier this week, and the utility will elaborate on them in its opening comments, which are outlined on page 3.
The largest area of concern is the significant proposed cut to SCE's Wildfire Covered Conductor Program.
This is SCE's paramount wildfire mitigation program and the utility's comments will focus on ensuring the program's scope is consistent with the appropriate risk analyses, state policy, and achieving the desired level of risk mitigation.
The proposed reductions would deprive customers of a key risk reduction tool, so SCE is advocating strongly for a balanced final decision.
We believe additional CPUC-authorized funding for SCE's covered conductor deployment is warranted to protect customers' and communities' vital interests and achieve the state's objective for minimizing wildfire risk.
As noted in prior discussions, SCE has prioritized covered conductor and other wildfire mitigation activities to urgently reduce wildfire risk.
A scorecard of SCE's wildfire mitigation plan progress is on page 4 of the deck.
We believe that through the execution of the WMP and other efforts, SCE has made meaningful progress in reducing the risk that utility equipment will spark a catastrophic wildfire.
Page 5 provides a few proof points of how SCE believes it has reduced wildfire risk for its customers.
First, circuits with covered conductor have experienced 69% fewer faults than those without, which demonstrates the efficacy of this tool.
In fact, on segments where we have covered the bare wire, there has not been a single CPUC-reportable ignition from contact with objects or wire-to-wire contact.
Second, where SCE has expanded vegetation clearance distances and removed trees that could fall into its lines, there have been 50% fewer tree or vegetation-caused faults than the historic average.
Lastly, since SCE began its high fire risk inspection program in 2019, it has found 66% fewer conditions requiring remediation on the same structures year-over-year.
These serve as observable data points of the substantial risk reduction from SCE's wildfire mitigation activities.
The utility will use the tools at its disposal to mitigate wildfire risk.
This includes deploying covered conductor at a level informed by the Final Decision, augmented by using Public Safety Power Shutoffs, or PSPS, to achieve the risk reduction originally contemplated for the benefit of customers.
The PD also included comments on the topic of affordability.
We agree that affordability is always important and must be weighed against the long-term investments in public safety.
I will highlight that SCE's rates have generally tracked local inflation over the last 30 years and have risen the least since 2009 relative to the other major California IOUs.
Currently, SCE's system average rate is about 17% lower than PG&E's and 34% lower than SDG&E's, reflecting the emphasis SCE has placed on operational excellence over the years.
While we recognize that the increases in the next few years, tied to the investments in safety for the communities SCE serves are higher than this historical average, SCE has demonstrated its ability to manage rate increases to the benefit of customers.
Underfunding prudent mitigations like covered conductor is penny wise and pound foolish, as it may ultimately lead to even greater economic pain and even loss of life for communities impacted by wildfires that could have been prevented.
An active wildfire season is underway right now, and I would like to emphasize SCE's substantial progress in executing its WMP.
Through the first half of the year, SCE completed over 190,000 high fire risk-informed inspections of its transmission and distribution equipment, achieving over 100% of its full year targets.
The utility also continues to deploy covered conductor in the highest risk areas.
Year-to date, SCE installed over 540 circuit miles of covered conductor in high fire risk areas.
For the full year, SCE expects to cover at least another 460 miles for a total of 1,000 miles deployed in 2021, consistent with its WMP goal.
Additionally, SCE is executing its PSPS Action Plan to further reduce the risk of utility equipment igniting wildfires and to minimize the effects on customers.
SCE is on target to complete its expedited grid hardening efforts on frequently impacted circuits and expects to reduce customer minutes of interruption by 78%, while not increasing risks, assuming the same weather conditions as last year.
To support the most vulnerable customers living in high fire risk areas when a PSPS is called, the utility has distributed over 4,000 batteries for backup power through its Critical Care Back-Up Battery program.
We believe California is also better prepared to combat this wildfire season.
The Legislature has continued to allocate substantial funding to support wildfire prevention and additional firefighting resources.
Just last week, the state announced that CAL FIRE had secured 12 additional firefighting aircraft for exclusive use in its statewide response efforts, augmenting the largest civil aerial firefighting fleet in the world.
SCE is also supporting the readiness and response efforts of local fire agencies.
In June, SCE contributed $18 million to lease three fire-suppression helicopters.
This includes two CH-47 helitankers, the world's largest fire-suppression helicopters, and a Sikorsky-61 helitanker.
All three aircraft have unique water and fire-retardant-dropping capabilities and can fly day and night.
In addition, a Sikorsky-76 command and control helicopter, along with ground-based equipment to support rapid retardant refills and drops, will be available to assist with wildfires.
The helitankers and command-and-control helicopter will be strategically stationed across SCE's service area and made available to various jurisdictions through existing partnerships and coordination agreements between the agencies through the end of the year.
We also appreciate the strong efforts by President Biden, Energy Secretary Granholm, and the broader Administration.
I was pleased to join the President, Vice President, cabinet members, and Western Governors including Governor Newsom for a virtual working session on Western wildfire preparedness last month.
The group highlighted key areas for continued partnership among the Federal government, states, and utilities, including land and vegetation management, deploying technology from DOE's national labs and other Federal entities, and enabling response and recovery.
Let me conclude my comments on SCE's wildfire preparations for this year by pointing out a resource we made available for investors.
We recently posted a video to our Investor Relations website featuring SCE subject matter experts discussing the utility's operational and infrastructure mitigation efforts and an overview of state actions to meet California's 2021 drought and wildfire risk, so please go check it out.
Investing to make the grid resilient to climate change-driven wildfires is a critical component of our strategy and just one element of our ESG performance.
Our recently published Sustainability Report details our progress and long-term goals related to the clean energy transition and electrification.
In 2020, approximately 43% of the electricity SCE delivered to customers came from carbon-free resources, and the company remains well-positioned to achieve its goal to deliver 100% carbon-free power by 2045.
SCE doubled it's energy storage capacity during this year, and continues to maintain one of the largest storage portfolios in the nation.
We have been engaged in Federal discussions on potential clean energy provisions and continue to support policies aligned with SCE's Pathway 2045 target of 80% carbon-free electricity by 2030.
However, electric affordability and reliability must be top of mind as we push to decarbonize the economy through electrification.
The dollars needed to eliminate the last molecule of CO2 from power generation will have a bigger impact when spent instead on an electric vehicle or heat pump.
For example, the utility is spending over $800 million to accelerate vehicle electrification across its service area, that's a key component to achieve an economywide net zero goal most affordably.
Recently, SCE opened its Charge Ready 2 program for customer enrollment.
This program is going to support 38,000 new electric car chargers over the next 5 years, with an emphasis on locations with limited access to at-home charging options and disadvantaged communities.
We are really proud that Edison's leadership in transportation electrification was recently recognized by our peers with EEI's Edison Award, our industry's highest honor.
SCE has been able to execute on these objectives, while maintaining the lowest system average rate among California's investor owned utilities and monthly residential customer bills below the national average.
As we grow our business toward a clean energy future, we are also adapting our infrastructure and operations to a new climate reality, striving for best-in-class operations, and importantly we are aiming to deliver superior value to our customers and investors.
With that, let me turn over Maria for the financial report.
My comments today will cover second quarter 2021 results, comments on the proposed decision in SCE's General Rate Case, our capital expenditure and rate base forecasts, and updates on other financial topics.
Edison International reported core earnings of $0.94 per share for the second quarter 2021, a decrease of $0.06 per share from the same period last year.
As Pedro noted earlier, this year-over-year comparison is not meaningful because SCE has not received a final decision in its 2021 General Rate Case and continues to recognize revenue from CPUC activities based on 2020 authorized levels.
We will account for the 2021 GRC track 1 final decision in the quarter SCE receives it.
On page 7, you can see SCE's key second quarter earnings per share drivers on the right hand side.
I'll highlight the primary contributors to the variance.
To begin, revenue was higher by $0.10 per share.
CPUC-related revenue contributed $0.06 to this variance, however this was offset by balancing account expenses.
FERC-related revenue contributed $0.04 to this variance, driven by higher rate base and a true-up associated with filing SCE's annual formula rate update.
O&M had a positive variance of $0.11 and two items account for the bulk of this variance.
First, cost recovery activities, which have no effect on earnings, were $0.05.
This variance is largely due to costs recognized last year following the approval of costs tracked in a memo account.
Second, lower wildfire mitigation-related O&M drove a $0.02 positive variance, primarily because fewer remediations were identified through the inspection process.
This continues the trend we observed in first quarter.
Over the past few years, SCE has accelerated and enhanced its approach to risk-informed inspections of its assets.
Inspections continue to be one of the important measures for reducing the probability of ignitions.
For the first half of the year, while we have maintained the pace of inspections and met our annual target, we have observed fewer findings of equipment requiring remediation.
Lastly, depreciation and property taxes had a combined negative variance of $0.10, driven by higher asset base resulting from SCE's continued execution of its capital plan.
As Pedro mentioned earlier, SCE received a proposed decision on track 1 of its 2021 General Rate Case on July 9.
If adopted, the PD would result in base rate revenue requirements of $6.9 billion in 2021, $7.2 billion in 2022, and $7.6 billion in 2023.
This is lower than SCE's request primarily related to lower authorized expenses for wildfire insurance premiums, vegetation management, employee benefits, and depreciation.
For wildfire insurance, the PD would allow SCE to track premiums above authorized in a memo account for future recovery applications.
The PD would also approve a vegetation management balancing account for costs above authorized.
In it's opening comments, SCE will address the PD's procedural error that resulted in the exclusion of increased vegetation management labor costs driven by updated wage rates.
Vegetation management costs that exceed a defined cap, including these higher labor costs, would be deferred to the vegetation management balancing account.
The earliest the Commission can vote on the proposed decision is at its August 19 voting meeting.
Consistent with our past practice, we will provide 2021 earnings per share guidance a few weeks after receiving a final decision.
I would also like to comment on SCE's capital expenditure and rate base growth forecasts.
As shown on page 8, over the track one period of 2021 through 2023, rate base growth would be approximately 7% based on SCE's request and approximately 6% based on the proposed decision.
In the absence of a 2021 GRC final decision, SCE continues to execute a capital spending plan for 2021 that would result in spending in the range of $5.4 to $5.5 billion.
SCE will adjust spending for what is ultimately authorized in the 2021 GRC final decision, while minimizing the risk of disallowed spending.
We have updated our 2021 through 2023 rate base forecast to include the Customer Service Re-Platform project.
SCE filed a cost recovery application for the project last week.
I will note that this rate base forecast does not include capital spending for fire restoration related to wildfires affecting SCE's facilities and equipment in late 2020.
This could add approximately $350 million to rate base by 2023.
Page 9 provides a summary of the approved and pending cost recovery applications for incremental wildfire-related costs.
SCE recently received a proposed decision in the CEMA proceeding for drought and 2017 fire-related costs.
The PD would authorize recovery of $81 million of the requested revenue.
As you can see on page 10, during the quarter, SCE requested a financing order that would allow it to issue up to $1 billion of recovery bonds to securitize the costs authorized in GRC track 2, 2020 residential uncollectibles, and additional AB 1054 capital authorized in GRC track 1.
SCE expects a final decision on the financing order in the fourth quarter.
Turning to page 11, SCE continues to make solid progress settling the remaining individual plaintiff claims arising from the 2017 and 2018 Wildfire and Mudslide events.
During the second quarter, SCE resolved approximately $560 million of individual plaintiff claims.
That leaves about $1.4 billion of claims to be resolved, or less than 23% of the best estimate of total losses.
Turning to page 12, let me conclude by building on Pedro's earlier comments on sustainability.
I will emphasize the strong alignment between the strategy and drivers of EIX's business, and the clean energy transition that is underway.
In June, we published our sustainable financing framework, outlining our intention to continue aligning capital-raising activities with sustainability principles.
We have identified several eligible project categories, both green and social, which capture a sizable portion of our capital plan, including T&D infrastructure for the interconnection and delivery of renewable generation using our grid, our EV charging infrastructure programs, grid modernization, and grid resiliency investments.
Shortly after publishing the framework, SCE issued $900 million of sustainability bonds that will be allocated to eligible projects and reported on next year.
Our commitment to sustainability is core to the company's values and a key element of our stakeholder engagement efforts.
Importantly, our approach to sustainability drives the large capital investment plan that needs to be implemented to address the impacts of climate change and to serve our customers safely, reliably, and affordably.
That concludes my remarks.
As a reminder, we request you to limit yourself to one question and one follow up.
So everyone in line has the opportunity to ask questions. | qtrly core earnings per share of $0.94. | 1 |
I hope you, your colleagues and loved ones are staying safe and healthy.
As the COVID-19 pandemic continues to be a global challenge, we remain dedicated to the safety of everyone in the entire Skechers organization and appreciate their ongoing efforts and resiliency during this difficult period.
While many countries' restrictions are easing, our thoughts are with those regions facing another coronavirus wave.
As is the case with most businesses, the pandemic continued to impact Skechers but the high demand for our comfort technology product resulted in a strong beginning to 2021 and it feels reminiscent of 2019.
In the first quarter, we achieved revenue growth of 15% over the same period last year, which resulted in our first quarterly sales of more than $1.4 billion.
This was done while parts of the world remained closed due to the pandemic.
The $1.43 billion first quarter sales were also an 11.9% increase over first quarter 2019, which was then a record for the period.
Driving the record sales was 20.2% increase in our international business and an 8.5% increase in our domestic business.
This double-digit growth drove international sales to 57.8% of total sales in the first quarter.
Throughout the quarter, we focused on delivering our footwear and apparel to meet the needs of both our consumers and customers.
Our sell-throughs across customer types and categories exceeded expectations in many markets and we were able to deliver double-digit growth.
Skechers' mission of delivering comfort, style and quality and innovation at a value resonated with consumers prior to the onset of the COVID-19 pandemic and the same is true now.
Consumers are returning to a new normalcy, one that involves more walking, more comfort on the job and a casual lifestyle mindset.
We are a natural choice for any demographic worldwide with comfort technology at our core.
The record sales are a testament to the fact that consumers appreciate our product offerings, which we're seeing by the success across many divisions.
Our International Wholesale business grew 23.8% for the first quarter last year and 13% from 2019.
The quarterly sales growth was driven by an increase of 174% in China, which was severely impacted by the pandemic in the prior year.
However, even as compared to 2019, China grew 45.5%.
The International Wholesale growth was partially offset by decreases in our subsidiary and distributor businesses.
Subsidiary sales decreased 4.8% from 2020 but improved 4.2% from 2019.
The first quarter 2021 decrease was due to temporary closures and reduced operating hours in Spain and Italy, and especially in the United Kingdom, where businesses were closed for the entire quarter.
Where markets were open, sales were strong, including in Germany, India and Canada.
Our distributor business was down 6.5% from last year, yet several markets experienced growth in the quarter, specifically Russia, Taiwan, Turkey and Ukraine.
We believe we will continue to see improvements in our distributor business in the second quarter and the remainder of the year.
Sales in our Domestic Wholesale business decreased less than 1% in the first quarter compared to the same period in 2020 but improved 8.1% compared to the first quarter of 2019.
We believe sales in our Domestic Wholesale business were negatively impacted by logistical challenges, which caused slower replenishment and product shipments to some accounts.
Key sales drivers came from multiple categories with the largest gains in our Women's Sport, Kids, Work and Men's Performance.
Additionally, the average selling price per pair increased 2.7%, reflecting the strength and appeal of new comfort products and technologies.
Skechers direct-to-consumer business increased 18.1% over 2020 and 13.1% over 2019, despite the fact that domestic operating hours were reduced by approximately 15% during January and February, and 7% in March.
In our international company-owned stores, we lost 37% of the days available to sell during the quarter.
Our domestic direct-to-consumer sales increased 28.4% compared to the first quarter of 2020 and 18% compared to 2019.
This improvement came from our domestic e-commerce channel, which grew by 143% and our brick and mortar stores, which grew by 13.6%.
Our domestic direct-to-consumer average selling price per unit rose 10.9%, which speaks to the strength of our current product offering.
While we expected our e-commerce business to continue to perform exceptionally well, we were pleased with the increased traffic and sales in our domestic retail stores, especially in March, which we believe improved as more people became comfortable shopping and we ramped up our marketing efforts.
We have now completed the update of our point-of-sale system, which further optimizes our domestic direct-to-consumer channels and will continue to improve our omnichannel capabilities.
We are now focused on rolling out this same platform worldwide.
Our e-commerce channel remains a meaningful growth opportunity as sales increase significantly across the globe.
We plan to expand our e-commerce reach across Europe, beginning with a new site in Ireland and the revamp of our U.K. site this summer.
Our international direct-to-consumer business increased 1.9% over the first quarter of 2020 and 4.4% over 2019.
The growth was largely attributable to our company-owned e-commerce sites and the strength of our sales in Korea, India and Thailand, partially offset by ongoing temporary store closures due to stay at home guidelines across many markets, most notably in the United Kingdom.
While we are seeing some markets reopening this month, including England last week, other countries have extended or reinstated their lockdowns given the unpredictability of the coronavirus and its impact on many markets, we remain cautious about a return to normal traffic and sales in many international stores.
In the first quarter, we opened 12 company-owned Skechers stores, six of which are in international location, including our largest store in India.
We have opened seven stores to-date in the second quarter, including our first in Antwerp.
We closed 20 locations in the first quarter as we opted not to renew expiring leases, and we expect to close one additional store at the end of this month.
An additional net 106 third-party Skechers stores opened in the first quarter, bringing our total store count at quarter end to 3,989.
The stores that opened were across 16 countries with most located in China and India.
To support the open regions during the first quarter, we ramped up our marketing efforts to drive home our comfort message.
This included former professional quarterback and lead NFL commentator, Tony Romo in our Max Cushioning commercial during the Super Bowl and NFL coach, Jon Gruden and sports analyst, Howie Long in new commercials for Skechers Arch Fit, as well as Brooke Burke featured in Arch Fit and Skechers apparel commercials during the quarter.
Our new campaign went on television as well as digital platforms to support key initiatives for men, women and kids.
In the first quarter, we were awarded Company of the Year by leading industry publication, Footwear Plus, for the ninth time in 15 years.
This was due to our efforts during the challenging 2020 year and our ability to deliver to consumers the comfort they wanted.
We are pleased with our performance in the first quarter, I think this was a solid beginning, especially given the ongoing pandemic-related difficulties most recently impacting our international business, which now represents 58% of our total sales.
While many markets continue to face challenges, we are seeing strong signs of recovery and remain focused on delivering our comfort technology and managing the flow of our inventory to fulfill demand where we are open and drive sales where possible.
The Skechers brand performed exceptionally well this quarter, despite ongoing challenges posed by the pandemic, including continuing store closures and operating restrictions in many markets across the world.
The quarter began as expected with the pandemic continuing to influence tepid consumer trends worldwide, especially as many markets reinstituted lockdowns.
However, mid-quarter, we began seeing signs of consumer engagement and optimism domestically that we have not seen in over a year, that led to results in March that even exceeded our own internal expectations, reflecting high demand for the Skechers brand.
Although we remain cautious given the nature of government responses to COVID-19 globally, we are optimistic that our first quarter results are indicative of the power of our brand as the world begins to recover from the pandemic.
Now, let's turn to our first quarter results, where you will note that due to the unusual nature of last year, we will occasionally compare to both 2020 and 2019, where we feel the added measure is beneficial to evaluating the performance of our business.
Sales in the quarter achieved a new record, totaling $1.43 billion, an increase of $186.1 million or 15% from the prior year and an impressive 11.9% increase over the first quarter of 2019.
On a constant currency basis, sales increased $145.9 million or 11.7%.
International Wholesale sales increased 23.8% in the quarter compared with the first quarter of 2020 and 13.4% compared with the first quarter of 2019.
Our joint ventures grew an impressive 120% in the quarter led by China, which grew 174% against prior year results, which contained the most severe impacts of the COVID-19 outbreak.
As compared to the first quarter of 2019, China grew 45.5% driven by strong e-commerce performance.
Subsidiary sales declined slightly in the quarter by 4.8%, primarily as a result of continuing closures in Europe and Latin America.
However, as compared to 2019, our subsidiary sales grew an impressive 4.2% despite the current year operational restrictions.
As expected, our distributor business continued to face pandemic headwinds in the first quarter, decreasing 6.5% but saw a marked improvement as compared to the second half of 2020.
Although we continue to expect this portion of our business to recover more slowly than the overall International Wholesale segment, we remain optimistic that we will ultimately see a full recovery of sales in this important channel.
Domestic Wholesale sales decreased slightly in the quarter by less than 1%, primarily due to the unfavorable timing of shipments to customers, which we now expect to occur in the second quarter.
Compared to the first quarter of 2019, sales increased 8.1%, which we believe is more reflective of the positive underlying trends we are seeing with the majority of our domestic wholesale partners, particularly based on sell-through we observed in the back half of the quarter.
Direct-to-consumer sales returned to growth in the quarter increasing 18.1%, the result of a 28.4% increase domestically and a 1.9% increase internationally.
The results reflect a slight benefit from the pandemic store closures in the prior year but more importantly, also reflect a notable 143% increase in our domestic e-commerce business and a significant increase in store traffic and sales in March, a trend that has continued.
Gross profit was $679.6 million, up 24.1% or $131.9 million compared to the prior year.
Gross margin was 47.6%, an increase of 350 basis points versus the prior year, primarily driven by increases in our average selling price across all segments as well as a favorable mix of online sales.
Total operating expenses increased by $19.9 million or 3.9% to $528 million in the quarter.
Selling expenses increased by $11.2 million or 15.2% to $85.3 million, which was flat as a percentage of sales versus last year.
The dollar increase was primarily due to higher domestic digital demand creation spending as well as the reopening of certain markets internationally.
General and administrative expenses increased slightly by $8.6 million or 2% to $442.7 million, which was primarily the result of volume-driven expenses in warehouse and distribution for both our international and domestic e-commerce businesses.
This was partially offset by lower retail labor costs.
Earnings from operations was $157.7 million versus prior year earnings of $44.8 million.
This represents an increase of 252% or $112.9 million.
Operating margin was 11% compared with 3.6% a year ago and 13% in 2019, reflecting strong combination of top line performance and operating expense leverage despite ongoing pandemic-related challenges.
Net earnings were $98.6 million or $0.63 per diluted share on 155.9 million diluted shares outstanding.
This compares to prior-year net income of $49.1 million or $0.32 per diluted share on 154.7 million diluted shares outstanding.
Our effective income tax rate for the quarter was 20.2% versus 15.3% in the same period last year.
The increase was predominantly due to an unfavorable mix of earnings from higher tax jurisdictions.
And now turning to our balance sheet.
We ended the quarter with $1.51 billion in cash, cash equivalents and investments, which was an increase of $148.2 million or 10.8% from March 31, 2020.
Trade accounts receivable at quarter end were $798.8 million, an increase of $2.6 million from March 31, 2020.
Total inventory was $1.07 billion, an increase of 8.3% or $81.8 million from March 31, 2020.
The increase is largely attributable to higher inventories to support growth in China and government closures in Europe.
Total debt, including both current and long-term portions, was $779.7 million at March 31, 2021 compared to $699.8 million at March 31, 2020.
Capital expenditures for the first quarter were $84.2 million, of which $42.9 million related to the expansion of our joint venture-owned domestic distribution center, $13.8 million related to investment in our new corporate offices in Southern California, $12.4 million related to investments in our direct-to-consumer technology and retail stores and $3.6 million related to our new distribution center in China.
Our capital investments remained focused on supporting our strategic growth priorities, growing our direct-to-consumer relationships and business as well as expanding the presence of our brand internationally.
For the remainder of 2021, we expect total capital expenditures to be between $200 million and $250 million.
Now turning to guidance.
First, let me preface by saying that we remain in a dynamic situation, where conditions can change materially at any point in time.
As a result, assessing the ongoing impact of the pandemic to our business is difficult.
Incorporated into the following guidance is our best estimate of the influence of these factors on our expected results for 2021.
However, if the situation deteriorates and closures continue longer than anticipated, our expected results may differ materially from this guidance.
That being said, we are providing a perspective today for our second quarter and full year 2021 results, based upon current trends, backlogs and other indicators.
We expect second quarter 2021 sales to be in the range of between $1.45 billion and $1.5 billion and net earnings per diluted share to be in the range of between $0.40 and $0.50.
For fiscal year 2021, we expect sales to be in the range of between $5.8 billion and $5.9 billion and net earnings per diluted share to be in the range of between $1.80 and $2.
We also anticipate that gross margins for the full year will be flat or up slightly compared to 2020 and that our effective tax rate for the year will be approximately 20%.
We achieved a new quarterly sales record over $1.4 billion due to the strong demand for our comfort technology footwear and markets where we are open.
International, which is approximately 58% of our total sales was the biggest driver, but we saw strong improvements in our domestic business with increasing traffic in March and now in April.
The achievement came despite ongoing pandemic-related issues.
We drove sales through strong marketing campaigns across multiple platforms, continue to rollout our BOPIS and BOPAC initiative in the United States and plan for additional e-commerce sites in 2021.
To further support our business in the coming years, we are in the process of enhancing our infrastructure with new distribution centers in Peru, the U.K. and Japan.
In addition, our new 1.5 million square foot China distribution center remains on track for full implementation by mid-year.
Given today is Earth Day, I'd like to note that we are continuing to work on the expansion of our LEED Gold certified North American distribution center, which will bring our facility in Southern California to 2.6 million square feet in 2022.
We are also completing construction on Phase 1 of our new LEED Gold certified office buildings and we are increasing efficiencies in our existing corporate office buildings, including the addition of solar panels.
Although we remain cautious given the ongoing temporary closures in many countries, we are seeing the improved traffic that we experienced in March continue in April, where markets are open.
The demand for our product is strong as consumers want familiarity, comfort, quality and value, all of which the Skechers brands delivers together with innovation and style. | compname reports q1 earnings per share $0.63.
q1 earnings per share $0.63.
q1 sales $1.43 billion.
sees q2 earnings per share $0.40 to $0.50.
sees fy earnings per share $1.80 to $2.00.
sees q2 sales $1.45 billion to $1.5 billion.
sees fy sales $5.8 billion to $5.9 billion. | 1 |
We appreciate you joining us.
Let me begin by outlining our plan for this evening's call.
First, I'm going to discuss the details behind our second quarter 2020 financial results, which were strong considering the current economic environment brought upon by the pandemic.
Paul will then comment on the key drivers behind our Q2 results and our outlook for the remainder of the year.
I'll return to provide our financial guidance for the third quarter and an update to the full-year 2020 guidance.
We will then end the call with a question and answer session.
In addition, some of our discussion may include non-GAAP financial measures.
Now let's discuss our second quarter results, in which we achieved a $1.54 in adjusted EPS, an 86% increase over Q2 of 2019, and adjusted EBITDA of $92 million, an increase of 62%.
Average paid worksite employees declined by just 1.8% from Q2 of 2019 compared to our forecast of 1% to 5% decline that took into account the impact of the COVID-19 pandemic on our clients and prospects.
All three drivers including worksite employees paid from new sales, client retention and net losses in our client base from layoffs and hiring were better than expected.
Worksite employees paid from new client sales were approximately 20% above forecasted levels, driven by 15% increase in trained Business Performance Advisors and success in our mid-market segment.
Client retention held up at our historical high level of just over 99% during Q2.
This points to the financial strength and actions taken by our clients during the pandemic and our quick and effective response to assist our clients with our premium level of HR services.
Net losses in our client base in Q2 were lower than expected as the level of worksite employees laid off, returning to work from furlough and general hiring were all favorable.
This was particularly the case in the month of June.
In a few minutes, Paul will share the details on the actions we've taken recently to assist our clients and provide thoughts around more recent trends in our updated 2020 worksite employee outlook.
So let's move on to gross profit, which increased by 27% over Q2 of 2019.
These results included lower-than-forecasted benefits and workers' compensation costs partially offset by our decision to provide comprehensive service fee credits to our clients.
Lower benefit costs were primarily due to lower utilization, especially lower levels of elective healthcare procedures, some of which is expected to be offset in subsequent quarters with the resumption of deferred care and future COVID-19 costs.
Lower workers' compensation costs were primarily a result of the effective management of claims incurred in prior periods and largely unrelated to the pandemic.
Due to the structure of our workers' compensation program, any reduction in the number and severity of workers' compensation claims associated with the work from home status of many of our clients and employees would likely impact our cost in later periods as these claims develop over time.
During the quarter, we proactively engaged with our vendors in successfully negotiating savings to support our clients through this difficult period.
As a result, we provided a comprehensive service fee credit to our clients based upon their worksite employee levels at June 30.
These credits totaled approximately $12 million and were accrued in the second quarter.
Also, under the CARES Act and Family First Act, clients were able to take advantage of payroll tax deferrals and credits offered through government stimulus packages.
These deferrals and credits totaled approximately $45 million during Q2 and were reported as both a reduction to revenue and direct costs.
So in total, these two items reduced Q2 reported revenues by approximately $57 million and gross profit by approximately $12 million.
Second quarter operating expenses increased by 9% and included continued investments in our growth, including costs associated with the increase in the number of Business Performance Advisors.
Other corporate employee headcount has remained level over the first half of this year, even though HR demands have increased with the pandemic and its impact on the economy and a number of HR issues, including diversity and inclusion.
Second quarter compensation costs included an acceleration in the timing of a portion of our corporate employees' annual incentive compensation to reward them in a period of increased service demands.
Additionally, Q2 operating costs included an increased paid time off accrual associated with higher-than-normal unused vacation hours during the pandemic.
These expenditures were partially offset by cost savings in other areas, including travel, training and business promotion costs.
Our effective tax rate in Q2 came in at 27%, and we expect a similar rate over both the latter half of this year and for the full-year 2020.
Our strong financial position and liquidity continued to improve over the first half of 2020 in the face of the challenges and dynamics of the pandemic.
Adjusted cash totaled $269 million at June 30, up from $108 million at December 31, 2019, while borrowings totaled $370 million at the end of Q2, up from $270 million at December 31, 2019.
Over the first half of this year, we have repurchased 879,000 shares of stock at a cost of $61 million, paid $31 million in cash dividends and invested $39 million in capital expenditures.
Today, I'll begin with a discussion of our efforts over the recent quarter to support our small and medium-sized business clients throughout the historic disruption arising from the pandemic.
Secondly, I'll cover our view of the dynamics driving our expectations over the balance of the year for growth and profitability.
And I'll finish my remarks with some thoughts about the long-term effect on demand for Insperity services, which represents a silver lining in the cloud of COVID-19.
This quarter was an eye opener in many ways, including highlighting the absolute necessity and the tangible value of a sophisticated HR function for small to medium-sized businesses.
The unexpected events that played out over the course of the quarter cast a spotlight on the HR department, which, of course, is what Insperity is to our clients.
The sequence of events beginning with the health crisis evolved into economic disruption and the transformation to working from home, followed by the emotionally charged dynamic of prolonged stay-at-home orders and political and social unrest.
When you add in federal, state and local legislative and regulatory responses, with new obligations and opportunities for businesses, you have a monumental challenge and opportunity for an HR services provider to demonstrate value to clients.
Insperity Workforce Optimization has long been the most comprehensive business service offered in the marketplace and our competitive distinction is the breadth and the depth of our services and the level of care of our service providers.
Our clients were relying on us to help them work through decisions that directly affected the livelihood of their businesses, employees and families.
Our service teams continue to serve our clients and worksite employees with genuine care and excellence in an unprecedented time of need and constant change.
In more than 30 years, I've never seen a quarter where clients experienced more of what we are designed to offer in such a compressed time period.
The effort put forth was exceptional and could have only been delivered by the combination of an amazing team and an incredible culture like we have at Insperity.
The workload across the company escalated substantially with call volumes and length doubled, service interactions tripled and a long list of other services spiking.
HR solutions were required for the myriad issues businesses were facing, including layoffs and staffing strategies, PPP loan application forgiveness and reporting, work from home, return to work, FICA deferral, and diversity and inclusion, just to name a few.
Allow me to say we could not be prouder of our staff across the board the way they stepped up and delivered on our mission to help businesses succeed so communities prosper through a very challenging period.
Now in addition to passing this service stress test with flying colors, we also were able to see our business model perform well under the pressure of these unprecedented events.
We were pleased with the dynamics across the business from sales and retention to pricing, direct cost and operating expenses.
On our last call, we indicated our objective in new account sales operating in this virtual selling environment would be to fall within a range of 60% to 80% of our original 2020 pre-COVID sales budget.
As you may recall, the sales budget is the internal metric we use to monitor and track performance in our sales organization.
Our entire sales organization, both core and mid-market performed remarkably well, achieving total booked sales above 70% of our original 2020 pre-COVID sales budget and in the higher end of our own revised targeted range.
As a reminder, once the sales booked, our service teams worked to onboard those clients and actually generate revenue as paid worksite employees.
In this environment, client retention may also be a concern due to an increase in the business failure rate in the marketplace at large.
As Doug mentioned, our client retention has remained solid, reflecting the strong client base we have, and demonstrating the benefit of our strategy of targeting the best small and mid-sized businesses onto our premium services platform.
Another stress test during a period like this was around pricing of our services on both new and renewing accounts.
It is certainly another credit to our staff and further validation of the value of our services that our standard pricing on our book of business did not reflect unusual pricing pressure in this environment.
We were also very responsive to the immediate financial needs of our clients in providing a COVID-19 related service fee credit.
During the quarter, we worked with vendors and negotiated $12 million in fee reductions to pass along to clients.
We felt it was important to act quickly in this regard and get the funds to clients as soon as possible, and clients will begin seeing this credit on invoices starting this week.
Another area to evaluate during this unusual time was the matching of price and cost on our primary direct cost items, including payroll taxes, workers' compensation and employee benefits.
As I mentioned, pricing has remained on track.
And although our quarterly direct cost pattern has changed, we anticipate a strong year overall at the gross profit line.
So we have navigated the disruption and the immediate aftermath of the pandemic and related events of Q2 successfully, and our business model demonstrated substantial resiliency.
Now in order to determine our expectation for the balance of the year, we need to zero in on the most recent behavior of our clients, particularly in layoffs and new or rehires in the base and consider the economic outlook for small business.
Now in the second quarter, layoffs due to COVID drove a 6% reduction in paid worksite employees from March, reaching a low point at the end of May.
Now since then, we've recovered approximately 40% of this reduction, primarily due to the return to work of just over 50% of furloughed employees.
At the same time, approximately 17% of furloughed or temporarily laid off employees have been reclassified to permanent layoffs, so the number of potential rehires has been reduced by two-thirds.
At this point, the rate of both layoffs and furloughed employees returning to work have moderated considerably.
So determining what happens in the near term and that change in employment in our client base is somewhat of a toss-up.
On one hand, it seems the small to medium-sized business community is adapting and dealing well with the new realities they're facing.
We believe our client base has been particularly impressive in this regard.
However, the continuing spread of the virus and the corresponding economic uncertainty may temper the rebound we have seen recently.
Also, in our experience, there is sometimes a pause or hesitancy in decision-making with the uncertainty of an upcoming election, which may weigh in over the second half of the year.
We do expect new account sales to ramp up over the last half of the year.
However, most of the booked sales in Q4 typically do not become paid worksite employees until Q1 of the following year.
These sales would contribute to growth in 2021, but not contribute significantly to this year's results.
With this backdrop, our guidance [Phonetic] for growth is somewhat conservative over the balance of the year.
Although the pandemic-driven circumstances make us appropriately cautious about the near term, recent events have made us even more bullish about the long-term prospects for Insperity.
Our outlook for profitability over the last half of the year also has an appropriate measure of conservatism built in.
The wildcard here is in our direct costs, and particularly our health plan where some portion of lower cost experienced in Q2 is expected to shift to Q3 and Q4.
This creates an unusual quarterly pattern to our profitability for 2020 shifting more of the profits to the first half than usual.
With this in mind, I believe it's very important for investors to look at the range of expectations for the full-year 2020 in context of the pandemic and focus on how we are positioned for 2021.
Our full year guidance for 2020 implies a range of minus 1% to minus 3% unit growth in paid worksite employees.
We expect a range of adjusted EBITDA growth that straddles to the level we achieved last year at minus 6% to plus 2%.
So the big picture for the full-year 2020 is layoffs due to COVID and the economic shutdown, are expected to be partially offset by higher gross profit per worksite employee and lower operating expenses than our original budget.
So while we're continuing to focus on meeting the intense need of our client base in the current environment, we are also looking to the longer term and the straightest path to regaining our growth momentum in 2021 as COVID-19 moves further into the rearview mirror.
We believe we are very well positioned for growth as we look ahead to next year.
The front of our growth engine is the number of trained Business Performance Advisors, which is currently at the highest level in our history.
We have deliberately continued to invest in this team throughout this economic disruption due to the likelihood of a quicker and stronger growth surge once the uncertainty diminishes.
We also believe we have an opportunity to hone our marketing message, utilizing the recent positive client experiences, and we intend to increase our marketing spend in the fall to drive leads and test this new messaging.
In many ways, the unexpected and unusual developments of the last quarter validated the need for our services and the distinct advantage we provide to improve the success equation for small and medium-sized companies.
Even though the pandemic has been quite a challenge, over the long term, we believe this experience will serve to increase demand within the small to medium-sized business community for Insperity services in the years ahead.
At this time, I'd like to pass the call back to Doug.
Now let me provide our guidance for the third quarter and an update to the full-year 2020.
With the first half of the year behind us, we have more visibility as to the impact of the pandemic on our business and have seen signs of gradual improvement as businesses have started to reopen and employees have gradually returned to work.
However, a high level of uncertainty associated with the pandemic, its impact on the economy and any further government stimulus packages continues to exist.
The current political environment and upcoming election adds another element of uncertainty.
Our guidance intends to take this into account and continues to reflect a wider range of possibilities than that provided in the past.
Based upon the details that Paul just shared on our expected worksite employee levels, we are now forecasting a 1% to 3% decrease in the average number of paid worksite employees for the full-year 2020.
This is a substantial improvement over our previous guidance of a 1% to 6% decrease and reflects the more favorable starting point for the second half of the year.
The low end of this guidance assumes a persistent level of pandemic cases, continued economic disruption and ultimately, a recurrence of layoffs in our client base, exceeding both new hires and furloughed employees returning to work.
The high end of our paid worksite employee guidance assumes a gradual improvement in conditions associated with the pandemic and its impact on the economy, and therefore, a nominal level of growth in our client base through both furloughed employees returning to work and general hiring.
For the full-year 2020, we are raising our earnings guidance and now forecasting adjusted EBITDA of $235 million to $255 million, ranging from a decrease of 6% to an increase of 2% when compared to 2019.
This compares to our previous guidance, which ranged from a decrease of 14% to flat with 2019.
A component of this revised guidance is a further shift in the expected timing of healthcare utilization during the pandemic.
As I mentioned a moment ago, the level of Q2 benefit cost savings largely tied to lower utilization and fewer non-essential procedures came in significantly better than our previous expectations.
We expect that a portion of these non-essential procedures were deferred and some will shift into the latter half of the year, including costs associated with participants with chronic conditions that miss treatments.
We also continue to expect ongoing COVID-related testing and treatment costs.
As for our operating costs, we expect continued cost savings in various areas while operating in the current pandemic environment.
As we are ahead of plan on the growth in Business Performance Advisors, we intend to grow BPAs modestly over the remainder of 2020, while we intend to continue to hold our other corporate headcount flat.
We are forecasting for an increase in marketing costs associated with the upcoming 2020 fall sales campaign as we promote our premier HR services in this period of increasing demand.
Finally, our updated earnings guidance assumes a reduction of approximately $3 million in net interest income from our previous guidance due to the recent decline in interest rates.
As for the full year 2020 adjusted EPS, we are now forecasting a range of $3.67 to $4.04, up from our previous guidance of $3.19 to $3.86.
Now as for Q3, we are forecasting average paid worksite employees in a range of 227,500 to 230,000, which is a small sequential increase over Q2.
We are forecasting adjusted EBITDA in a range of $29 million to $38 million and adjusted earnings per share in a range of $0.37 to $0.54. | compname posts q2 adjusted earnings per share of $1.54.
q2 adjusted earnings per share $1.54.
q2 revenue $993.4 million versus refinitiv ibes estimate of $1 billion.
sees q3 adjusted earnings per share $0.37 - $0.54, fy adjusted earnings per share $3.67 - $4.04. | 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.
With me on the call today is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Rustom Jilla.
We will begin by sharing a detailed look into our fourth quarter and the full year 2020 results, and then Rustom and I will highlight the go-forward outlook and opportunity for the new IFF.
I'm really excited and proud to say that as of February 1, we have officially completed our merger with DuPont N&B.
Our teams have hit the ground running establishing our new company as an innovation leader in the global value chain for consumer goods and commercial products.
With the close of the N&B transaction, we also unveiled a new brand identity and purpose intended to unify our organization and best position our divisions for success.
As a purpose-driven enterprise, we share a mission to build from strength and transform our industry.
We are now squarely focused on execution, building on recent performance to leverage the exciting capabilities and broader customer base of our new company.
I'm confident that the direction that we are moving and the opportunity ahead of us will lead to accelerated growth and improve profitability as we generate strong value creation and total shareholder return.
Beginning with Slide 6, I would like to recap what was truly a remarkable 2020.
Amid an unprecedented pandemic that challenged our global organization, we delivered solid financial results while embarking on a transformational journey to create a new industry leader together with DuPont N&B.
I'm pleased to report that we completed 2020 with positive momentum on a comparable basis, and we have seen this trend continue in January 2021 as a combined company.
In 2020, our portfolio remained resilient to an evolving and incredible challenging global environment due to the ongoing COVID-19 pandemic.
IFF generated USD5.1 billion in sales for the full year 2020, about a 1% increase on a currency-neutral basis from last year when excluding the 53rd week of 2019.
This sales growth was primarily driven by strong performance in our Scent division, which we believe is even better positioned to capture further market share in 2021.
We achieved an adjusted operating margin, excluding amortization, of 18.1%, driven by our synergy efforts with Frutarom and pursuing additional productivity initiatives across the business.
As we reflect on the integration of Frutarom, we are pleased with what we have achieved as it relates to cost synergies from procurement, manufacturing and administrative expenses.
Acknowledging the revenue challenges at Frutarom over the past two years, we have restructured the business and, going forward, it will be an integral part of our larger new segment, including Taste, Food and Beverage segments now we have the combined combination with N&B.
We really emphasized free cash flow management throughout the year.
This led to meaningful increases year-over-year as we continued to focus on managing our balance sheet through the pandemic.
We finished the year with an adjusted earnings per share, excluding amortization, of $5.70.
With the completion of our combination with DuPont N&B, we have also achieved the important milestone of completing the integration planning phase related to the merger.
We are now focused on execution going forward as we are committed to realizing the meaningful synergies presented by the transaction.
For capital synergy opportunity, we are encouraging collaboration across divisions and closely aligning with the markets and regions we serve to showcase the full breadth of IFF's new portfolio.
I will provide further details regarding our integration initiatives a bit later.
On Slide 7, let's take a second look at the sales dynamic that we have seen across the business.
Reflecting on 2020, we were off to a very strong start, growing 6% in Q1 2020, until the pandemic had a profound impact on society and, ultimately, our business.
Given the disruption of the year, we want to offer a bit more perspective on the trends we have seen within our business as we cover from the peak of the regulatory restrictions of the pandemic in the second quarter of 2020.
Our growth rates continued to improve in the fourth quarter, up 2% excluding the 53rd week, versus the 1% year-on-year growth seen in the third quarter.
A large part of this improvement came from Fine Fragrance, which returned to growth in the fourth quarter.
As we have noted before, roughly 15% of our business was negatively impacted by COVID-19 and decreased by 16% in 2020, excluding the impact of the 53rd week.
The vast majority of our portfolio, which includes food, beverage, hygiene and disinfection type products, is defensive in nature or benefited from the pandemic.
This was roughly 85% of our pre-pandemic sales and these grew approximately 4% for the full year, excluding the impact of the 53rd week.
Our performance was strong with multinational customers, especially those who benefited from the pandemic.
However, our exposure to local and regional players adversely impacted sales.
I think it's important to remember that while these smaller and regional customers were disproportionately impacted by COVID-19, they have historically been an important source of growth across our industry and we expect them to be important contributors in our recovery.
On the whole, we are proud of the results achieved and resilience of our business in 2020.
Some of our end markets have seen prolonged and significant negative impact that led to inevitable headwinds for certain segments.
However, when you look at the whole of our portfolio, we see strong results with meaningful momentum that affirm our central role in the consumer product good value chain.
That gives me great confidence as we begin to execute as a new IFF with the N&B business in 2021.
As we begin 2021, I'm very pleased to say we, on a combined company basis, had a strong performance in January, with approximately 3% currency-neutral growth against a strong year-ago comparison.
Scent trends continued to be very strong, Taste improved and N&B continued to be pressured by COVID.
It is good to see that the business has had steady improvement since the pandemic lows.
I would now like to pass the call over to Rustom, who will provide a more detailed review of our financial performance in the fourth quarter.
I will cover the P&L high points on this slide and get into additional detail as we go through the following several slides.
In the fourth quarter, IFF generated $1.3 billion in sales, down 2% year-over-year on a currency-neutral basis.
When excluding the roughly $50 million impact of 2019's 53rd week, our comparable currency-neutral growth was plus 2%, and as I'll explain on the next slide, up approximately 4%, counting foreign exchange-related price changes as our peers in many CPGs disclosed.
While Taste performed at levels similar to Q3 2020, we did see a significant acceleration in Scent.
In the fourth quarter, our adjusted operating profit, excluding amortization, decreased by 10% on a currency-neutral basis, or by 9% including a one percentage point benefit of FX, with solid operating performance -- operational performance offset by a challenging year-ago comparable and COVID costs.
We delivered adjusted earnings per share, excluding amortization, of $1.32, mostly as a result of lower operating profit in the quarter.
This was down 11% on a currency-neutral basis, or 10% including the one percentage point benefit of FX.
It was good to finally see foreign currency having a positive impact on sales, operating profit and earnings per share in the quarter.
Now moving to Slide 9.
I would like to focus on the emerging markets and currency impacts on our results, both in the fourth quarter and the full year, to provide better clarity regarding our currency-neutral sales growth.
For the fourth quarter and for the full year, the impact of FX-related pricing was approximately two percentage points.
To be clear, if we simply looked at our revenue in the current period by local currency and applied the average FX rates from the prior period to the current period, our currency-neutral growth of 2% in the fourth quarter would have been up approximately 4%, and our full year currency-neutral growth of 1% would go to approximately 3%, all excluding the impact of the 53rd week.
At the segment level, Scent would have grown 10% in Q4 2020 and 7% in the full financial year, while Taste would have been up 1% in both Q4 and the full year 2020.
Again, all excluding the impact of the 53rd week.
Responding to feedback from our investors and after further review of what our competitors and other CPG companies are doing, starting in Q1 2021, we will align our reporting with our peers' methodology.
For 2021, our plan is to provide this on a consolidated basis and divisional level.
And before our next earnings call, we'll provide a historical restatement of growth by division for 2020.
Moving now to Slide 10.
Let me break down the key factors impacting our Q4 profitability.
I do want to go into more detail on this as the overall results hide some meaningful operational improvements that support our optimism and momentum heading into 2021.
A close look at our operating profit bridge shows that we were able to drive operational improvements, about 8%, largely attained through Frutarom synergy realization, productivity initiatives and reformulation activities, mostly in Scent; higher volumes ex the 53rd week and disciplined cost management.
As expected and communicated earlier this year, there was a negative impact from our annual incentive compensation, or our AIP program reset, which was a direct result of weak Q4 2019 results.
Further negative offsets came from a challenging year-to-year comparable, which included the 53rd week and the Brazilian indirect tax RSA benefit that both occurred in 2019, and in 2020, incremental COVID-19 costs, which we expect will only reduce in the second half of 2021.
Unfortunately, these combined items represent an 18 percentage point year-over-year headwind and were the primary driver of our 10% currency-neutral decline in operating profit.
Now on Slide 11, I'd like to discuss our Scent division results in more detail.
Another strong overall performance from Scent.
Sales totaling $504 million were up 3%, or 7% when excluding the 53rd week comparison.
We've continued to see strong growth from our Consumer Fragrance business with a high single digit increase, driven by strong performances in our Home Care and Personal Wash categories.
Also, the new color is, where we recently gained access in Consumer Fragrance, core to our 2021 strategy, grew more than 60% in the fourth quarter and represented more than 1/3 of our Consumer Fragrance growth.
I'm also happy to share that we returned to growth in our Fine Fragrance business with a mid-single-digit increase as a result of several new wins in North America and Europe.
While this was a nice development in Q4 2020, we're cautious and are not extrapolating the trend for the first quarter of 2021.
In Fragrance Ingredients, we experienced a high single-digit growth, driven by double-digit growth in Cosmetic Actives.
So overall, the Scent division achieved a 15.9% profit margin on the $504 million of sales in the quarter.
Our recent performance across the Scent portfolio is encouraging and will remain a core piece of our growth story moving forward, bolstered over time by expanded sales opportunities from working together with N&B.
The team has done a tremendous job delivering market-leading growth, adjusted for the reporting differences over the past three years, while improving Scent's margin profile.
Turning now to Slide 12.
I'd like to highlight the fourth quarter performance of our Taste division.
Our Taste division, with the exception of our Food Services business, has remained resilient throughout the pandemic.
Taste sales totaling $766 million declined 5%, or 1% when excluding the 53rd week comparison.
Food Service was down roughly 17% on a similar basis.
The Taste division achieved approximately 11.8% profit margin, with $90 million in segment profit.
These numbers also include approximately $42 million in amortization of intangible assets.
If you exclude that amortization, our Q4 margin would be 17.2%.
Frutarom continued to be pressured in the quarter, declining mid-single digits on a currency-neutral basis as COVID-19 has disproportionately impacted Food Service and the end market performance of local and regional customers, both of which represent a large portion of Frutarom's annual sales.
Looking at our performance by region.
Our North American business remains particularly strong, outperforming other markets with mid- single-digit growth.
We have experienced challenges -- experienced challenges in our Flavors segment in Latin America and Greater Asia due to the ongoing pandemic, while our EAME performance was challenged by weakness in Savory Solutions, specifically driven by the Food Services market.
So returning to profitable growth in our Taste division will remain a top priority in 2021.
And we fully expect to deliver improved results and enhanced profitability as we emerge from the pandemic.
Now turning to Slide 13.
I'd like to spend some time on our cash flow.
IFF has always been a strong generator of cash, but given our 2020 starting leverage and the fact that N&B was coming along in early 2021 bringing additional debt, it was even more critical that we focus our people on the importance of cash generation across the company.
So capex and working capital targets were both included in our annual incentives, we launched specific initiatives and we tracked progress throughout the year.
As you will see, operating cash flow for the full year was up from $699 million in 2019 to $714 million this year, an increase of 2%.
Net income was lower as a function of operating profit but also higher year-over-year transaction and integration-related costs.
However, this headwind was more than offset by lower incentive compensation payments in 2020 as a result of our 2019 performance as well as by the timing of payments on some integration-related costs.
Core working capital was a modest use of cash, driven primarily by timing related to accounts receivable, where Q4 2019 was favorably impacted by the 53rd week.
Collections in that extra week ending in January helped 2019's cash flow, and this was always going to be very hard to fully offset this Q4.
Overall, we're satisfied with the 2020 trajectory of our 5-quarter average cash conversion cycle, which improved six days year-over-year.
And this was despite holding additional inventory to avoid any customer disruption due to COVID-19-related supply chain issues.
We also reduced our capex to 3.8% of sales versus 4.6% of sales in the prior year period as we prioritized spending more than ever to manage and preserve cash through the pandemic.
And travel and on-site work restrictions also helped lower 2020 capex.
All this led to a significant 13% increase in free cash flow compared to 2020's $522 million.
And we will be equally focused in 2021 in cash generation and on reducing our overall level of net debt.
Moving to Slide 14.
I would like to address the key assumptions behind our full year 2021 expectations.
While we were certainly encouraged by our business trends in the fourth quarter and in January 2021, we expect COVID-19 to have a similar impact in 2021's first half, as we've seen in 2022's second half.
While we expect improvements in Fine Fragrance, Food Services and our biorefinery business on a full year basis, 2021 sales will likely remain below our 2019 levels.
Assumed in our full year guidance is a euro to U.S. dollar exchange rate of $1.18, which represents approximately 25% of our combined sales.
We expect approximately $50 million of merger-related cost synergies with DuPont N&B, mostly back-end loaded this year, with $45 million coming from cost synergies and an additional $5 million from the EBITDA contribution of revenue synergies.
Now we also provided some additional inputs that should help you model the business moving into 2021.
We expect total annual depreciation and amortization to be $1.165 billion, which includes amortization of approximately $715 million.
Annual interest expense is expected to be around $315 million.
For our annual effective tax rate, we are still working through the details, given that we just completed the acquisition on February 1.
While we do have an estimate, it's still being validated by the team, so my preference is to complete additional work before we communicate.
Lastly, we expect diluted shares outstanding for the pro forma company, for earnings per share calculation purposes, to be approximately 255 million shares, and that's including the approximately 141 million shares from the transaction.
For Q1 2021, please do remember that it's two months of actuals for N&B and three months for IFF when modeling.
And also, please note that we'll continue to dig into these numbers post close, but we did want to share our thinking at this point in time.
So we will update you accordingly should anything change.
Now turning to Slide 15.
I'd like to detail our pro forma full year 2021 financial guidance.
In line with the projections included in our December 22 S-4 filing, plus the synergy realization plan communicated January 11, we expect to generate approximately $11.5 billion in sales at an approximately 23.2% adjusted EBITDA margin.
Please note that this is a 12-month combined company pro forma estimate and includes approximately $507 million of N&B sales that occurred in January 2021.
These metrics reflect our confidence in the combined company's ability to generate strong results in the complex global market as several of our businesses are expected to see improvement throughout the year.
On a pro forma basis, sales are expected to grow nearly 4% and EBITDA margin to expand by approximately 100 basis points.
We should note that we are moving toward reporting and guiding on an adjusted EBITDA basis as part of our broader effort for easier comparability with our peers, which includes our reported sales growth as well.
We are redoubling our efforts to be more transparent and investor-focused as a combined company, and we think EBITDA is a key contributor to that in our sector.
With an even stronger portfolio and enhanced capabilities, the new IFF is starting the year with a strong financial foundation from which to deliver strong results.
Our 2021 guidance reflects the strength of our enhanced platform, our expectation that the impact of the pandemic will have meaningfully subsided in the second half and our rigorous focus on execution.
As such, we expect to deliver 2021 results that are meaningfully better than 2020's.
I'd also like to comment on some of the underlying dynamics that we expect will continue into the first quarter of 2021.
As we face a strong first quarter comparison from both IFF at 6% and N&B at 3%, we will also continue -- we also continue to manage through pandemic-related headwinds.
While the majority of our portfolio delivers essential products and solutions, we expect that Food Service, biorefinery and microbial sales will continue to remain under pressure in the near term or until we lap the COVID-related challenges.
We are closely monitoring trend improvements in our Fine Fragrances business and are cautious not to extrapolate our Q4 -- our Q4 trends in the first quarter as we believe some of the performance was due to a strong holiday period.
Building on what Andreas said earlier, I'm pleased to say that we had solid pro forma results in January, with approximately 3% currency-neutral growth on our new disclosure basis.
In January 2021, N&B finished with approximately $507 million in sales.
Given that N&B became part of IFF's business just -- of IFF just eight business days ago, we are not providing quarterly guidance.
Just one reminder for anyone extrapolating out our January results for the quarter.
While this has no impact on our full year expected sales, please remember that we moved away from our previous 4, 4, five reporting cycle to calendar month reporting from January.
So in Q1 2021, we will have two less working days for legacy IFF.
Therefore, perhaps a better metric for tracking progress is average daily sales.
While we do not know where the pandemic will take us, we're happy with our start to 2021.
We will continue to thoughtfully manage resources, operating expenses and capital to ensure that our business is well positioned to deliver in an uncertain market.
We also want to note that since we closed the deal on February 1, we have been working on getting the investment community pro forma segmentation for our combined company.
Now moving to Slide 16, and before passing it back to Andreas, let me end by summarizing our go-forward reporting and disclosure updates, all aimed at being more investor-friendly and more comparable to our peers.
Starting in Q1 2021, we will align our currency-neutral sales reporting to the more common methodology.
We will calculate currency-neutral sales growth by taking our revenue in the current period in local currency and applying average FX rates for the prior period to the current period.
We've shifted from our previous financial reporting calendar of 4, 4, five weeks to the more commonly used calendar month end to eliminate comparable issues related to the 53rd week.
We're also moving toward reporting and guiding on an adjusted EBITDA basis for easier comparability with our peers.
This includes both at the consolidated level as well at the segment level.
And we will be eliminating our corporate expense line in our segment profit table by allocating corporate expenses accordingly to each division.
Turning to Slide 17.
Let's focus on 2021 and the new IFF with the N&B business.
Our teams executed well on the tremendous integration planning for the transformational combination despite working remotely due to COVID-19.
This integration planning effort, more than one year long, has provided an opportunity to create the right team and operating model needed to secure our global leadership position.
It has been driven by the lessons we have learned in past integrations across both organizations, rounding our plans and practical experience that will enable near-term execution.
We set out an aggressive time line in 2019 to close and complete integration planning in 2020.
The global pandemic only challenged us even further.
But I'm very pleased to say that our teams worked extraordinarily well together to complete every aspect of our integration planning.
I'm confident that the new IFF is ideally positioned to succeed.
With this planning complete, we can entirely focus on execution, delivering our commitments and realizing significant revenue cost synergies, resulting in significant value creation for shareholders for the years to come.
Let's move to Slide 18 and take a second and we focus on the value proposition of the new IFF.
Our new company is poised to realize significant value for all of our stakeholders.
And these two highly complementary companies form a true innovation partner for all customers.
The new IFF will be a force in shaping the future of our industry.
Our R&D investment will be 1.5 times greater than our nearest peer.
We will have #1 or #2 positions in core categories in nutrition, cultures, enzymes, probiotics, soy proteins, flavors and fragrances.
This is coupled with the broadest and most diverse customer base in our industry, more than 45,000 in total, and about 48% of our annual sales from small medium and private label customers.
We are well positioned to drive profitable growth for our shareholders.
This allows us to enhance the value we can deliver to our customers in a very powerful way.
We can deliver value to customers in every interaction, from leading product offerings to significant benefits of speed to market and supply chain simplification as we deliver market-leading integrated solutions.
I think it is important to remember that while the N&B transaction is a culminating and transformational move, it is completely consistent how we have been evolving the portfolio over the past five years.
Our strategy focused on positioning the company for where the industry is going, not where it has been.
That has required more naturals, more regional supply chains, reaching smaller customers and increasing technology and science-led innovation.
Actions like Frutarom, Lucas Meyer, Ottens Flavors and others were important foundational steps as we executed the strategy.
As we look ahead, we are pleased we have the most complete portfolio in the business.
While our portfolio may change around the edges, it is complete and gives us the right base to grow and the right assets to drive the financial results you see from our long-term targets.
Put simply, the new IFF will be the strongest partner to customers worldwide to corporate essential solutions for on-trend innovation.
Now to Slide 19.
I would like to emphasize the long-term value creation potential we have seen for IFF.
Our new company has substantial synergy opportunities that will drive growth and expand margins.
Through our integration planning, we confirmed the run rate revenue synergy expectation at approximately USD400 million by 2024, with a contribution of at least USD145 million of EBITDA by that time.
In addition, we expect to achieve meaningful cost savings, including a run rate cost synergy expectation of USD300 million by the end of 2023.
We expect that execution on our plan will unlock about $50 million in EBITDA contribution in 2021.
I think it's important to say that any combination is not just about synergies, but also to strong and leading-based businesses.
Our leaders across legacy IFF and legacy N&B businesses are committed to running every part of this business, both base business and combined, to yield superior results.
This requires a mindset of continuous improvement and operational excellence that we are embracing across the organization.
It is critical to underscore that we have a comprehensive structure in place to track more progress against the identified objectives.
At the center of our discussion will be synergy realization, where we will track diligently, including the onetime costs in both expense and capital.
Our hope is to highlight, on a continuous basis, all value creation levers to provide you with a critical how component of our value creation story.
And in the end, while we are focused on synergy realization, success will not be defined just as that.
It will be the cumulative results where synergies are additive to base business performance for a stronger total P&L.
On Slide 20, I want to highlight the actions that we are immediately taking to begin execution.
One of the most questions we get from investors is, not what will you deliver, but instead, how will you actually do it?
As you can imagine, synergy capture is all about the how.
And we -- and as we mentioned on January 11th, there are 85 separate initiatives behind the $300 million cost savings that are in our plan on the cost side and another several initiatives on the revenue side.
We try to give you a flavor for the type of actions that are part of these initiatives.
In terms of revenue synergies, we have engaged with our top global and regional customers to introduce joint portfolio and capabilities, accelerate co-development partnership with global customers, activate cross-divisional innovation and collaboration in R&D and launch combined commercial excellence and integrated solution teams.
At a high level, I would characterize the cost actions as follow.
First, where there's duplication, we eliminate the duplication.
You can imagine across two global companies, there's a lot of duplication in back-office and admin functions.
Second, we look to align our cost structure with best-in-class peers where it is comparable.
We have undertaken benchmarking across functions like G&A, which gives us a tangible target for improvement.
No two organizations are identical.
So we use this as a goal rather than a prescription.
Third, where there is efficiency, we spread the benefits of dollar spend across a larger base.
Let me give you an example.
Both organizations invest in R&D.
We can now leverage across double the categories and customers.
This powerful -- and this is powerful and shows you the benefit of global scale for supporting cutting-edge science investments.
Fourth, I will point out the power of centralized services.
We have empowered regional business leaders who drive their P&LS, but they have access to the best-in-class global-shared service centers in areas like HR, finance and procurement where there's a tangible benefit to scale and combine resources.
And finally, we have set all of our incentive compensation metrics to reflect and align with our base business and integration objectives.
I really hope this gives you some flavor for the how.
We now know the targets we want to deliver and we have told you our long-term goals.
So over the coming quarters, focus will be very much on these actions.
The new IFF is set to deliver a best-in-class financial profile and maximize value for our shareholders.
This slide summarizes our long-term outlook, which we introduced to investors at the beginning of this year.
From a revenue perspective, we expect currency-neutral organic sales growth of approximately 4% to 5% over the next few years, led by our unrivaled product and solutions portfolio, which is set to benefit from our industry-leading R&D programs.
We also expect to see meaningful operating margin improvements for IFF, including an estimated adjusted EBITDA margin of approximately 26% in 2023, up around 400 basis points from our 2020 pro forma.
The new IFF will continue to generate strong free cash flows, and we expect a significant increase to approximately $2 billion in 2023.
As we pursue further growth toward capital management and delevering, we remain -- we will remain at core priority.
We are targeting almost 3 times net debt-to-EBITDA ratio, 24 to 36 months post close and reaffirm our commitment to maintaining our investment-grade rating.
Finishing on Slide 22.
Across the world, our teams have worked tirelessly throughout a difficult year to ensure IFF continued to serve our customers and deliver strong business results.
Our full year financial results showcase the strength of our portfolio and, most importantly, our people.
Through this challenging environment, we made tremendous progress on our transformational journey.
The formation of the new IFF, together with N&B, has made us an even stronger company, better positioned to deliver value for our stakeholders.
With the pre-integration process completed, it's now time to execute.
We have the team and structures in place to ensure that our newly combined company will meet our financial and operating goals in order to shape the future of our industry and improve our world.
While global volatility is expected to persist, our foundational commitment to our people, customers, communities and planet will remain unchanged as we look to strengthen and redefine our role as the industry-leading ingredients and solutions partner.
I'm really thrilled for IFF's exciting new chapter, and hope that you will join us on our pursuit to revolutionize the industry and deliver for our customers, teams and shareholders.
So before opening to questions, please note that our plan for Q&A today is to focus on our results and outlook and not to address questions about market rumors. | qtrly adjusted earnings per share except amortization $1.47.
achieves strong double-digit sales growth in quarter; on-track to grow 8.5% for full year 2021. | 0 |
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I've had the pleasure of meeting many of you over the past couple of months as I've transitioned into the CEO role.
I'm excited to be hosting my first earnings call and sharing yet another year of consistent industry-leading financial performance.
Before I discuss our year-end results and our updated five-year capital investment plan, I want to take a moment to reiterate our simple but powerful investment thesis, was simple to put on paper it's not easy to replicate, and that is what sets us apart.
It starts with our industry-leading commitments to clean energy.
Our net zero methane and carbon goals require significant investment as we update our expansive electric and gas systems to achieve decarbonization.
These investment opportunities are supported by constructive energy legislation as well as alignment with our Commission and the MPSC staff.
This strong regulatory and legislative framework is why Michigan is consistently ranked a top tier regulatory jurisdiction.
But investment opportunities in a supportive regulatory environment are not enough.
Our focus on affordability is critical, so our customers can afford these investment.
Now, I've been with the company for 18 years, much of it in operations.
Over that time, we've demonstrated our ability to consistently manage costs as we've invested in the safety and reliability of our systems while improving customer service.
That ability to manage costs is not driven from the top down but from the bottom up.
It's our 8,500 coworkers who are committed to excellence, delivering the highest value to our customers at the lowest cost possible.
This is embedded in our culture and was built in partnership with our union over the last two decades.
These unique attributes to the CMS story or would allow us to deliver for our customers and you, our investors.
Our adjusted earnings per share growth of 6% to 8% combined with our dividend provides a premium total shareholder return of 9% to 11%.
Our ability to deliver this growth each and every year is something we are uniquely capable of doing.
Regardless of weather, a global pandemic, who is leading our state, our Commission or our company, we have delivered consistent industry-leading results year-in and year out 2020 proved this, 2021 will be no different.
In 2020, we delivered adjusted earnings per share of $2.67, up 7% from 2019 and achieved operating cash flow of almost $2 billion, excluding $700 million of voluntary pension contributions in 2020.
Today, we're raising our adjusted earnings per share guidance for 2021 by $0.01 to $2.83 to $2.87 with a focus on the midpoint.
This reflects annual growth of 6% to 8% from our 2020 results.
Last month, we announced our 15th dividend increase in as many years, $1.74 per share, up 7% from the prior year.
We continue to target long-term annual earnings and dividend per share growth of 6% to 8%, again with a focus on the midpoint.
Today, we're also increasing our five-year capital plan to $13.2 billion, up $1 billion from our prior plan.
18 consecutive years of industry-leading financial performance.
I'll let that sit with you for a moment.
I'm pleased with our financial performance, but equally important is our commitment to the triple bottom line.
We balanced everything we do for our coworkers, customers and the communities we serve, our planet and our investors as demonstrated on Slide 6.
2020; 2020 was a tough year for everyone, the global pandemic impacted all of us emotionally, physically and financially.
Through it all, I'm proud of the work done by our coworkers.
We were able to provide over $80 million of support to our customers and communities in 2020 through support programs, low-income assistance, donations to foundations and reinvestment to improve safety and reliability.
We focused our efforts on COVID relief for residential and small business customers, payment forgiveness as well as enhanced support in the area of diversity, equity and inclusion.
This quite change in our work practices as a result of the pandemic, we maintained first quartile, employee engagement, achieved first quartile customer experience and attracted 126 megawatts of new load to our state, which brings with it significant investment and over 4,000 new jobs.
From a planet perspective, we continue to lead the clean energy transition.
We added over 800 megawatts of new wind and are executing on 300 megawatts of new solar.
The first tranche of our integrated resource plan.
Furthering our commitment, over $700 million of investments were made to advance our clean energy transition, additionally, our demand response and energy efficiency programs continue to save our customers money, reduce carbon and earn an incentive.
And last but certainly not least we finished the year with more than $100 million in cost savings driven by the CE Way.
Many of you have asked about my commitment to the CE Way, light blue arrow at the bottom of this slide in my experience leading this operating system over the past five years should be a strong signal.
I'll tell you this, we are positioned well but there is still more opportunity.
Through the CE Way, we will continue to improve reliability, reduce waste and deliver better customer service.
And that is just the tip of the iceberg, there are opportunities in every corner of the company to achieve excellence through the CE Way.
My coworkers and I remain committed.
We will continue to lead the clean energy transition with support from our new five-year $13.2 billion capital investment plan, which translates to over 7% annual rate base growth and focuses on enhancing the safety and reliability of our systems, as we move toward net zero carbon and methane emissions.
In fact, 40% of our plan directly supports our clean energy transition and includes our renewable generation, electric distribution investment to support this generation, grid modernization as well as programs like our main invented service replacement programs which reduce methane emissions.
In addition to our traditional rate base returns, our wind investments, renewable PPAs and demand side resources are supported by regulatory incentives above and beyond our ROE.
These incremental earnings mechanisms enhance our earned returns and combined with our investments in clean energy, our growing percentage of our earnings mix.
Our customers' ability to afford the investments in our system is complemented by our continued focus on cost savings.
Over the last decade, we have reduced the utility bill as a percentage of the customer's wallet and we continue to see further opportunity to reduce costs in the future.
We have unique cost saving opportunities relative to peers and two above market PPAs, Palisades and MCV, which will generate nearly $140 million of power supply cost recovery savings.
This coupled with the future retirement of our remaining coal facilities provides over $200 million or 5% cost savings for our customers.
These structural cost savings combined with the productivity we will deliver through the CE Way will ensure we deliver on our capital plan and keep customer bills affordable.
Now the great thing about the CE Way is it delivers more than cost savings.
What makes us unique is our engaged coworkers, we value our best-in-sector employee engagement and our 8,500 coworkers who work every day to deliver the best value for our customers.
This engaged workforce has doubled productivity which has enabled us to consistently increase our capital plan without significantly increasing our workforce.
Furthermore, we have never served our customers better as we move from the bottom quartile to top quartile not just in the utility industry but across all industries.
Slide 9 serves as an excellent example of how our team leverages the CE Way to deliver on our triple-bottom line.
Our ability to deliver this level of excellence for our customers and investors supported is by Michigan's constructive regulatory environment.
We benefit from a legislative and regulatory construct that supports our rate case proceeding and a statute that allows for financial incentives above and beyond current authorized ROE.
Michigan's regulatory jurisdiction has been ranked in the top tier since 2013.
That's not by accident, it's a reflection of the hard work my coworkers do every day to earn the trust of our customers, policy makers, environmental groups, EMV and MPSC Staff.
Turning to Slide 11, you know, we have a light regulatory docket with no financially significant regulatory outcomes in 2021.
With the approval of our current securitization and electric rate case in December of last year, we'll file our next electric rate case in the first quarter and our gas rate case in December of this year.
Notably, we'll file our second iteration of our integrated resource plan in June.
I'm sure many of you would like a sneak peek, but it's too early, we're in the midst of the modeling phase.
You can be confident that this next iteration will continue to build on industry-leading clean energy commitments and we'll find ways to get cleaner, faster and a corporate storage in customer-driven solutions as they become more cost effective.
Beyond that we'll ask you to stay tuned until our second quarter earnings call, we will provide more information after we file.
We're pleased to report our 2020 adjusted net income of $764 million or $2.67 per share, up 7% year-over-year off our 2019 actuals.
To elaborate on the key drivers of our year-end results, we realized increases in rate relief net of investments due to constructive orders in our recent gas and electric rate cases, strong performance in our non-utility segments and most notably our historic companywide cost reduction efforts led by the CE Way which Garrick noted earlier.
These positive factors were partially offset by mild weather and reinvestments or flex up back into the business.
We've talked in the past about our practice of flexing up, which enables us to put financial upside to work in the second half of the year to pull ahead or connect to work to improve the safety and reliability of our gas and electric systems to fund customer support programs, which was particularly important in 2020 given the effects of the pandemic, invest in coworker training programs and derisk our financial plan in subsequent years.
This tried and true approach benefits all stakeholders, which is the absence of the triple bottom line of people, planet and profit.
On Slide 13, you will note that we met our key financial objectives for the year.
To avoid being repetitive with Garrick's earlier remarks, I'll just note that we invested $2.3 billion of capital in our electric and gas infrastructure to the benefit of customers, including investments in wind farms, which add approximately $500 million of RPS related rate base, which I'll remind you earns a premium return on equity of 10.7%.
I'll also note that our treasury team had a banner year successfully raising approximately $3.5 billion of cost effective capital which includes roughly $250 million of equity while navigating turbulent capital market conditions over the course of 2020.
These efforts further strengthened our balance sheet to the benefit of customers and investors.
Turning the page to 2021, as mentioned, we are raising our 2021 adjusted earnings guidance to $2.83 to $2.87 per share, which implies 6% to 8% annual growth off our 2020 actuals.
Unsurprisingly, the majority of our growth will be driven by the utility and I'll also note a modest level of anticipated upside at the parent and other segment in 2021, largely due to the absence of select non-operating flex items executed in 2020.
All in, we will continue to target the midpoint of our consolidated earnings per share growth range of 7% at year-end, which is in excess of the sector average.
To elaborate on the glide path to achieve our 2021 earnings per share guidance range, as you'll note in the waterfall chart on Slide 15, we'll plan for normal weather, which in this case amounts to $0.06 per share of positive year-over-year variance given the mild winter weather experienced in 2020.
Additionally, we anticipate $0.41 of earnings per share pickup in 2021 attributable to rate relief net of investment costs largely driven by the orders received in the second half of 2020.
It is also worth noting that the magnitude of earnings per share impact here is in part due to the absence of an electric rate increase in 2020 which was a condition of our 2019 settlement agreement.
While we do plan to file an electric case in Q1 of this year, as Garrick mentioned, the test year and economic impact for that case will commence in 2022.
As we look at our cost structure in 2021 you'll note approximately $0.27 per share of negative variance attributable to incremental O&M approved in our recent rate cases to support key initiatives around safety, reliability customer experience and decarbonization, needless to say we have underlying assumptions around productivity and waste elimination, driven by the CE Way and we'll always endeavor to overachieve on those targets while delivering substantial value for our customers.
Lastly, we apply our usual conservative assumptions around sales, financings and other items.
And I'll note that while the pandemic remains relatively uncontested, we are assuming a gradual return of weather normalized load to pre-pandemic levels around mid-year.
In the event, the mass teleworking trend persists and/or we see an accelerated reopening of the Michigan economy, we can potentially see some upside from incremental, residential and commercial margin.
As always we'll adapt to changing conditions and circumstances throughout the year to mitigate risks and increase the likelihood of meeting our operational and financial objectives.
We're often asked whether we can sustain our consistent industry-leading growth in the long-term given the widespread concerns about economic conditions or potential changes in fiscal, energy and/or environmental policy?
And our answer remains the same, irrespective of the circumstances, we view it as our job to do the worrying for you.
Our familiar earnings per share chart on Slide 16 illustrates one of our key strengths, which is to identify and eliminate financial risk and capitalize on opportunities as they emerge to deliver additional benefits to customers while sustaining our financial success over the long term for investors, each year provides a different fact pattern.
And we've always risen to the occasion.
2020 offered some unique challenges resulting from the pandemic and more familiar source of risk in the form of mild winter weather.
And as usual, we didn't make excuses instead we offer transparency, devise our course of action and counted on the perennial will of our 8,500 co-workers to deliver for our customers, the communities we serve, and for you, our investors.
To summarize our financial objectives in the near and long term, we expect 6% to 8% adjusted earnings per share and dividend growth and strong operating cash flow generation.
From a balance sheet perspective, we continue to target solid investment grade credit ratings and we'll manage the key credit metrics accordingly.
One item I'll note in this regard is that we have slightly modified our FFO to debt targets to align better with the various rating agency methodologies.
Given the increase in our five-year capital plan, we anticipate annual equity need of up to $250 million in 2021 and beyond, which we are confident that we can comfortably raise through our equity dribble program to minimize pricing risk.
And two additional items I'll mention with respect to our financial strength as we kick off 2021 that are not on the page but no less important are that we concluded 2020 with $1.6 billion of net liquidity, which positions our balance sheet well as we execute our updated capital plan going forward.
And we have fully funded benefit plans for the second year in a row due to proactive funding.
The latter of which benefits roughly 3,000 of our active co-workers and 8,000 of our retirees.
Our model has served and will continue to serve all stakeholders well.
Our customers receive safe, reliable and clean energy at affordable prices while our co-workers remain engaged well trained and cared for in our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance.
As you'll note with the reasonable planning assumptions, rate orders already in place in our track record of risk mitigation, the probability of large variances from our plan are minimized.
And with that, I'll hand it back to Garrick for some final comments before Q&A.
Our investment thesis remains simple but unique.
It enables us to deliver for all our stakeholders year in and year-out.
We remain committed to lead the clean energy transition, excellence through the CE Way and delivering our premium total shareholder return through continued capital investment that benefits the triple bottom line.
With that, Racho, please open the lines for Q&A. | sees fy adjusted non-gaap earnings per share $2.63 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q3 adjusted earnings per share $0.54 from continuing operations.
q3 earnings per share $0.54 from continuing operations.
sees fy 2021 adjusted earnings from continuing operations in the range of $2.63 per share to $2.65 per share.
raised its full-year 2021 adjusted earnings from continuing operations guidance to $2.63 to $2.65 per share.
reaffirmed 2022 adjusted earnings guidance of $2.85 - $2.87 per share. | 0 |
During the past year, Nick has helped advance our Investor Relations focus including adding Olga to the team.
I've enjoyed working with Nick and I look forward to continuing to enhance our external communications under Julie's leadership.
We reported very strong results for the first quarter of fiscal 2021 with continued momentum across our professional and residential businesses.
Double-digit growth in this dynamic environment is a testament to our focus on innovation, operational execution, and the perseverance of our team and channel partners.
To share highlights of the quarter, net sales were up 14% year-over-year and up 11% organically.
Professional segment net sales were up 9%, a continuation of the growth trend for this segment.
Higher shipments of landscape contractor zero-turn riding mowers led the growth along with incremental sales from Venture Products.
Residential segment net sales were up 31%, setting another record.
We saw broad-based demand across our segment with snow equipment driving significant growth due to favorable weather and enhanced mass retail placement.
Momentum also continued for our all-season Flex-Force 60-volt lithium ion products and demand remained strong for walk power mowers.
The introduction of our innovative new products coupled with effective marketing and expanded mass retail channels has further strengthened our brand during this recent period of heightened residential growth.
From a segment earnings perspective, Professional segment grew 14% and Residential increased 49%.
We generated strong free cash flow in the quarter, which allowed us to pay down $90 million in debt and resume share repurchases.
We also continued to make investments in key technology areas like alternative power, smart connected and autonomous to drive sustained long-term growth.
Notably, we recently acquired TURFLYNX and Left Hand Robotics, both of which are technology accelerators.
Finally, we believe the critical path forward and emerging from the pandemic involves worldwide vaccinations.
We have developed specific plans for each of our sites to take full advantage of vaccination opportunities.
In addition, we launched our new [Indecipherable] campaign to provide education and encourage employees to get vaccinated against COVID-19 as soon as they are able.
As we prepare for the broader distribution of vaccines, our team has remained diligent in navigating the continued pandemic environment.
They're keeping health and safety in the forefront while meeting surging demand from our retailers and end customers.
Three underlying elements stand out this quarter as we delivered favorable results in a dynamic environment.
The first is the strength of our Residential segment.
Coming off a record setting year, the team delivered another record quarter.
These results were driven by expanded distribution and new products complemented by stay-at-home trends and favorable weather.
The second element is the productivity story in our business.
We continue to drive productivity and synergy benefits enterprisewide.
This has helped to mitigate factors such as inflation and COVID-related manufacturing inefficiencies.
The third element is our unwavering commitment to innovation.
The success of new products across our businesses in the first quarter highlights the strong return on innovation investments.
For example, battery-powered products now represent a growing and important part of our business.
This commitment to innovation reflects our dedication to constantly provide new solutions for customers' ever evolving needs regardless of the market environments or macro economy.
Our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people productivity and operational excellence, and empowering people guided our strong execution in the quarter.
I'm optimistic about our momentum as we head further into 2021 given our continued investments in technology and new products, excellent relationships with our channel partners, strong financial position, and effective operational and capital deployment capabilities.
We reported a very strong first quarter as our professional businesses continue to recover in a meaningful way and we continued to capitalize on robust residential demand.
We grew net sales by 13.7% to $873 million.
Reported earnings per share was $1.02 and adjusted earnings per share was $0.85 per diluted share.
This compares with reported earnings per share of $0.65 and adjusted earnings per share of $0.64 for the comparable quarter last year.
Now to the segment results, Professional segment net sales for the quarter were up 9.3% to $650.2 million.
This increase was primarily due to higher shipments of landscape contractor zero-turn riding mowers and incremental sales from the Venture Products acquisition, partially offset by decreased sales of underground construction equipment to oil-and-gas markets and the timing of international shipments of golf and grounds equipment.
Professional segment earnings for the quarter were up 14% to $116.8 million.
When expressed as a percent of net sales, segment earnings increased 80 basis points to 18%.
This increase was primarily due to sales volume leverage, productivity, synergy initiatives and net price realization, partially offset by manufacturing cost pressures and product mix.
Residential segment net sales for the quarter were up 31.3% to $217.7 million.
The increase was primarily due to strong retail demand for snow products driven by favorable weather and expanded mass retail placement, Flex-Force battery-powered products and shipments of walk power mowers ahead of the key selling season.
Residential segment earnings for the quarter were up 48.9% to a record $32.1 million.
This reflects a 170 basis point year-over-year increase to 14.7% when expressed as a percent of net sales.
The same drivers that offsets that effective Professional segment earnings also affected Residential segment earnings.
Turning to our operating results.
We reported gross margin for the quarter of 36.1%, a decrease of 140 basis points from the prior year.
Adjusted gross margin was also 36.1%, down to 150 basis points.
The decreases in gross margin and adjusted gross margin were primarily due to manufacturing costs pressures and product mix partially offset by productivity, synergy initiatives and net price realization.
SG&A expense as a percent of net sales decreased 570 basis points to 19.9% for the quarter.
This decrease was primarily due to sales volume leverage, a favorable onetime legal settlement and lower indirect marketing expenses.
Operating earnings as a percent of net sales for the quarter increased 430 basis points to 16.2%.
Adjusted operating earnings as a percent of net sales increased 210 basis points to 14.2%.
Interest expense of $7.5 million was down approximately $600,000 compared with a year ago, driven by lower interest rates.
The reported effective tax rate was 18.1% for the first quarter and adjusted effective tax rate was 21.5%.
Turning to the balance sheet and cash flow, at the end of the quarter, our liquidity was just over $1 billion.
This included cash and cash equivalents of $433 million and full availability under our $600 million revolving credit facility.
We have no significant debt maturities until April of 2022.
Accounts receivable totaled $306.9 million, down 4.5% from a year ago due to channel mix and the timing of other and receivables.
Inventory was down 8.6% from a year ago to $675.3 million.
This decrease was due to lower inventory in certain Professional segment businesses, as well as the result of increased demand for our products.
Accounts payable increased 4.7% to $364.4 million from a year ago.
This was due to increased purchases of component inventories, as well as incremental payables from the Venture Products acquisition.
First quarter free cash flow was $84.5 million with a reported net earnings conversion ratio of 76%.
This positive performance was primarily the result of higher earnings, the favorable onetime legal settlement, and lower working capital mainly due to reduced inventories as compared with the first quarter of last year.
Our disciplined capital allocation strategy includes investing in organic and M&A growth opportunities, maintaining an effective capital structure, and returning cash to shareholders.
Our capital priorities remain the same and include reinvesting in our businesses to support sustainable long-term growth both organically and through acquisitions, returning cash to shareholders through dividends and share repurchases, and repaying debt to maintain our leverage goals.
During the first quarter we paid down $90 million in debt and returned $59.8 million to shareholders, $28.7 million in regular dividends and $31.4 million in share repurchases.
We are reaffirming our full year fiscal 2021 guidance.
Additionally, we are actively managing a dynamic supply chain and cost inflation environment.
I'll share the guidance highlights and Rick cover the macro trends and key factors we'll be watching throughout the remainder of the year.
For fiscal 2021 we continue to expect net sales growth in the range of 6% to 8%.
This includes four months of incremental sales from the Venture Products acquisition.
We expect continued recovery in Professional segment end markets.
The strongest growth in the Professional segment will be in the second quarter and third quarters as well as comparable periods last year were most impacted by the pandemic.
We expect full year Residential segment net sales growth to be in the low to mid-single-digits, following an exceptionally strong fiscal 2020 and first quarter 2021.
We anticipate strong retail demand to continue throughout the year.
Given the comparisons of record setting performance last year, and potential supply chain constraints, we expect year-over-year Residential segment net sales growth to moderate for the remainder of the year.
Looking at overall profitability, we expect moderate improvement in fiscal 2021, adjusted operating earnings as a percent of net sales compared with fiscal 2020.
This assumes continued productivity and synergy benefits, net price realization and lower COVID-related manufacturing inefficiencies, partially offset by potential supply chain constraints and an expected inflationary environment.
In the Professional segment, we expect earnings as a percent of net sales to improve versus fiscal 2020, due to better volume leverage.
In the Residential segment, we expect earnings as a percent of net sales to be similar to fiscal 2020.
We expect full year adjusted earnings per share in the range of $3.35 to $3.45 per diluted share.
This estimate includes the effects of recently announced acquisitions.
It excludes the benefit of the excess tax deduction for share-based compensation and the favorable onetime legal settlement.
Based on current visibility, we anticipate adjusted earnings per share to be higher in the first half of fiscal 2021 versus the prior-year period.
For the second half of fiscal 2021, we expect adjusted earnings per share to be comparable with the same period of fiscal 2020.
Looking to the rest of the year, we're excited about the robust near-term demand environment as we continue to execute on our long-term strategic priorities and invest in innovation to capitalize on future growth opportunities.
Looking ahead, we'll be watching several macro trends to provide us with additional insights into the remainder of the year.
These include the ongoing effects of COVID-19 including its impact on manufacturing efficiencies and potential global supply chain disruptions, weather patterns, including the timing of spring in northern climates, and global economic recovery factors driving general consumer and business confidence, as well as the related commodity and inflationary effects.
From an end market perspective, demand trends are positive and we're well-positioned for further growth.
Recent strong retail demand has reduced field inventory and many of our channel partners are seeking to replenish given the improved outlook.
We're watching a number of key market drivers for our residential and certain professional businesses continuing customer interest in home investments for landscape contractors, improved business confidence leading to the resumption of capital investments, along with catch-up purchases of prior deferrals.
For golf, a strong start to the season in northern markets, an increase in international course reopenings and the expected return of travel and resort golf all leading to another great year for leading to another great year for rounds played.
For grounds equipment, increased spending on outdoor space maintenance and improvement projects by municipal and other tax-supported entities.
For Underground, increased funding for 5G and broadband build-out and critical-need infrastructure rehab and replacement.
For rental and specialty construction, continued upgrades and replacement of fleets by independent rental companies and national accounts.
And for snow and ice management, channel response to lower end-of-season inventory levels as a result of recent snow events.
We continue to be excited about our innovative suite of products that are well-positioned to capitalize on these market opportunities, and these products directly address customer trends.
For the focus on home improvement, a complete line of residential products from walk and Z mowers to irrigation and lighting solutions including the zero-emission all-season Flex-Force 60-volt lithium-ion suite of products; additionally, our professional line of maintenance and renovation products.
For the growing interest in professional battery electric solutions, the Greensmaster eTriFlex and hybrid riding Greensmowers; the Toro e-Dingo compact utility loader and the expanding line of lithium-ion workman GTX utility vehicles.
For increased productivity solutions, the Toro Dingo TXL 2000 and Ditch Witch SK 3000 stand on skid steers; Toro Exmark and Ventrac high-capacity mowers, a new line of Ditch Witch horizontal directional drills, the BOSS DRAG PRO rear-mounted truck plow and BOSS and Ventrac sidewalk snow and ice management equipment.
It's because of our deep commitment to innovation, strong customer relationships, exceptional sales and service through our channel partners and stellar product lineup that we are seeing significant momentum across our businesses with world-class partners.
Two exciting examples in golf are our new partnerships with PGA Frisco and Pebble Beach Resorts.
We're honored that every 2021 major championship tournament will be played on a course serviced by Toro-branded turf equipment.
And we are the official Ryder Cup turf equipment and irrigation provider for the remainder of the decade.
In closing, we are optimistic as we head into our peak selling season.
While the environment remains dynamic as we manage through COVID-related manufacturing and supply chain challenges, we have a number of factors working in our favor, a diverse portfolio of businesses and strong customer relationships, productivity initiatives to drive increased profitability and operational excellence, continued investments in innovative products and emerging technologies, and as always our team is the key to the Toro Company's continued success. | compname reports q1 earnings per share $1.02.
q1 adjusted earnings per share $0.85.
q1 earnings per share $1.02.
q1 sales $873 million versus refinitiv ibes estimate of $848.9 million.
sees fy sales up 6 to 8 percent.
sees fy fiscal 2021 adjusted earnings per share in range of $3.35 to $3.45 per diluted share. | 1 |
Joining me on the call today are Gene Lee, Darden's Chairman and CEO; Rick Cardenas, President and COO; and Raj Vennam, CFO.
Any reference to pre-COVID when discussing first quarter performance is a comparison of the first quarter of fiscal 2020.
This is because last year's results are not meaningful due to the pandemic's impact on the business and the limited capacity environment that we operated in during the first quarter of fiscal '21.
We plan to release fiscal 2022 second quarter earnings on Friday, December 17 before the market opens, followed by a conference call.
Rick will give an update on our operating performance, and Raj will provide more detail on our financial results and an update of our fiscal '22 financial outlook.
Our teams continue to operate effectively in a challenging environment.
And I'm proud of their focus and ability to deliver another quarter of strong sales and profitability.
All of our segments delivered record first quarter profit.
Our ability to drive profitable sales growth is a testament to the strength of our business model and our continued to adherence this strategy we implemented six years ago.
Our brands remain laser focused on executing our back-to-basics operating philosophy anchored in food, service and atmosphere, while at the Darden level, we concentrate on strengthening and leveraging our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture.
Our first quarter sales trends started strong.
This momentum carried over from the fourth quarter, and they further strengthened and peaked in July.
However, in August, sales slowed due to the impact of the Delta variant, but remained positive relative to pre-COVID levels.
For the first quarter, sales per operating week were up 4.8% relative to pre-COVID.
And through the first three weeks in September, sales per operating week were up approximately 7% relative to pre-COVID.
Regardless of the operating environment, our unwavering commitment to our strategy ensures we will stay focused on what we do best, providing exceptional guest experiences.
Throughout this unique period, our operators have shown tremendous flexibility, while remaining locked in on the fundamentals of running great restaurants.
At the same time, our focus helps us continue to find ways to make our competitive advantages work even harder for us.
One of the ways we do this is by leveraging our ability to open value-creating new restaurants.
We opened seven new restaurants during the quarter, all of which are exceeding our expectations.
And we remain on track to open approximately 35 to 40 new restaurants this fiscal year.
A long-term framework calls for 2% to 3% sales growth from new restaurants.
Given our stronger unit economics, our development team is working hard to build out a pipeline of locations for fiscal '23 and beyond that would put us at or above the higher end of our framework.
As I visit our restaurants and talk with our teams, I'm constantly reminded why our people are our greatest competitive advantage.
Their passion for being of service to our guests and each other fuels our success.
Our success this quarter was driven by the work we have done to simplify our processes and our menus to drive execution at the highest level.
We also paused any new initiatives in order to further eliminate distractions for our restaurant teams and allow them to focus on what it takes to run 14 great shifts a week.
In addition, To-Go sales continue to benefit from the ongoing evolution of our digital platform.
This platform makes it simpler for our guests to visit, order, pay and pick up, all while making it easier for our teams to execute at the highest level, both in the dining room and off-premise.
This served our teams well, as To-Go sales remained high through the quarter.
For the quarter, off-premise sales accounted for 27% of total sales at Olive Garden and 15% of total sales at LongHorn Steakhouse.
Digital transactions accounted for 60% of all off-premise sales during the quarter, and guest satisfaction metrics for off-premise experiences remained strong.
As we navigate short-term external pressures, our focus is simple.
We must continue to win when it comes to our people and product.
From a people perspective, the employment environment is challenging.
That's why our top priority during the quarter was staffing our restaurants.
Our operators and HR teams have done a great job sourcing talent.
We recently launched a new talent acquisition system that helps increase our pool of candidates by allowing applicants to apply and schedule an interview in five minutes or less.
Additionally, our brands are successfully utilizing their digital platforms, including social media to promote our employment proposition and drive applications.
As a result, we are netting more than 1,000 new team members per week, and our team member count is approximately 90% of our pre-COVID levels.
The biggest operational challenge we've been dealing with is a temporary exclusion of team members identified through contact tracing.
Given our commitment to health and safety, we are diligent about exclusions, but they create sudden staffing disruptions for our operators.
Despite being appropriately staffed in the majority of our restaurants, these exclusions reduce the number of available team members with little notice for our operators to prepare.
This volatility can negatively impact sales in these restaurants for the duration of the exclusion period.
Getting and staying staffed also requires a strong focus on training.
As we continue to hire, it is critical that we have the right training in place to ensure we continue to execute at a high level.
That's why our operations leaders are validating the quality of our training during their restaurant visits, ensuring new team members receive the appropriate amount of training and successfully complete the required assessments.
Our team members are the heart and soul of our business, and we are constantly focused on our employment proposition.
The investments we have made and continue to make in our people are helping us retain and attract top talent, and I'm confident in our ability to address our staffing needs.
When it comes to product, our significant scale, including our dedicated distribution capabilities, enables us to manage through the challenges affecting the global supply chain and maintain continuity for our restaurants.
Our supply chain team continues to work hard to ensure we successfully manage through any spot outages we encounter, and our restaurants have the key products they need to serve our guests.
During the quarter, we had to secure more product than usual on the spot market, because our brands exceeded sales expectations and some of our suppliers experienced capacity challenges.
Raj will share more details in a moment, but these higher sales volumes, as well as freight costs have contributed to higher-than-expected inflation.
Our scale advantage provides the opportunity for us to price below our competition and inflation, which is a strategy we have executed successfully.
Our competitive advantage of extensive data and insights allows us to be surgical in our pricing approach, positioning us well to deal with these higher costs and maintain our value leadership.
The rich insights we gather from our analytics help us find the right opportunities to price in ways that minimize impact to traffic over time.
We still expect pricing to be well below the rate of inflation for the year, further strengthening our value proposition.
Ensuring our restaurants are appropriately staffed and our supply chain continues to avoid significant disruptions, will be the most important factors of our continued success in the short term.
To wrap up, I also want to recognize our outstanding team.
I'm inspired by the dedication and winning spirit that our leaders and team members, both in our restaurants and in our support center continue to demonstrate.
Total sales for the first quarter were $2.3 billion, 51% higher than last year, driven by 47.5% same restaurant sales growth and the addition of 34 net new restaurants.
Diluted net earnings per share from continuing operations were $1.76.
We returned approximately $330 million to our shareholders this quarter, paying $144 million in dividends and repurchasing $186 million in shares.
We had strong performance this quarter, despite increased inflationary pressures with EBITDA of $370 million and EBITDA margin of 16%, 250 basis points higher than pre-COVID.
Our sales results were better than expected requiring us to go out and purchase more product on the spot market, in particular, proteins, as our LongHorn and Fine Dining segments had the largest sales outperformance versus our expectations.
The market for proteins this quarter was very strong with spot premiums as high as 30% above our contracted rates.
This resulted in higher average cost per pound for our proteins contributing to total commodities' inflation for the quarter of approximately 5.5%.
Given the heightened attention on inflation, I want to clarify that we use a conventional approach to calculating the rate of inflation.
We're only measuring change in average price holding product mix and usage constant.
We follow the same approach for calculating wage inflation rate, in which we keep the hour and job mix constant and only look at change in wage.
While we expect higher rates of inflation to persist for the remainder of the year versus what we initially planned, we believe our scale and recent enhancements to our business model enable us to deliver significant margin expansion, while still adhering to our strategy of pricing below inflation.
Now looking at the P&L for the first quarter of 2022, we're providing a comparison against pre-COVID results in the first quarter of 2020, which we believe is a more comparable to normal business operations and with how we've been talking about our margin expansion.
For the first quarter, food and beverage expenses were 150 basis points higher, driven by investments in both food quality and pricing significantly below inflation.
Restaurant labor was 110 basis points lower, driven primarily by hourly labor improvement, due to efficiencies gained from operational simplifications and was partially offset by elevated wage pressures.
Restaurant expenses were also 110 basis points lower due to sales leverage.
Marketing spend was $45 million lower, resulting in 220 basis points of favorability.
As a result, restaurant-level EBITDA margin for Darden was 20.9%, 290 basis points better than pre-COVID levels.
G&A expense was 30 basis points higher, driven primarily by approximately $10 million of stock compensation expenses related to the immediate expensing of equity awards for retirement eligible employees.
Additionally, we had approximately $5 million of expense related to mark-to-market on our deferred compensation.
As a reminder, due to the way we hedge this expense, it's largely offset on the tax line.
Our effective tax rate for the quarter was 12.6%, which benefited from the deferred compensation hedge I just mentioned.
Excluding this benefit, our effective tax rate would have been closer to the top end of our guidance range for the year.
Turning to our segment performance.
First quarter sales at Olive Garden were flat to pre-COVID, while segment profit margin increased 220 basis points.
This was strong performance despite elevated inflation and two-year check growth of only 2.4%.
LongHorn had the best sales performance across our segments with sales increasing by 26% versus pre-COVID, while growing segment profit margin by 250 basis points.
Sales at our Fine Dining segment increased 24% versus pre-COVID in what's traditionally their slowest quarter from a seasonal perspective.
Segment profit margin grew by 490 basis points, driven by strong sales leverage and operational efficiencies, which more than offset double-digit commodity inflation.
Our Other segment grew sales by nearly 5% and segment profit margin by 360 basis points.
We continue to be excited about the long-term prospects of this segment, as it's driving the strongest underlying business model improvement of all our segments.
Finally, turning to our financial outlook for fiscal 2022.
Based on our performance this quarter and expected performance for the remainder of the year, we increased our outlook for the full year.
We now expect total sales of $9.4 billion to $9.6 billion, representing growth of 7% to 9% from pre-COVID levels; same restaurant sales growth of 27% to 30% and 35 to 40 new restaurants; capital spending of $375 million to $425 million; total inflation of approximately 4% with commodities inflation of 4.5% and total restaurant labor inflation of 5.5%, which includes hourly wage inflation of about 7%; EBITDA of $1.54 billion to $1.60 billion; and annual effective tax rate of 13% to 14% and approximately 131 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.25 and $7.60.
This outlook implies EBITDA margin growth versus pre-COVID, in line with our previous outlook as higher sales are helping offset elevated inflation.
This will be a net negative to second quarter from a sales perspective. | sees q2 earnings per share $0.65 to $0.75 from continuing operations.
q1 adjusted earnings per share $0.56 from continuing operations excluding items.
qtrly same-restaurant sales down 28.2% for olive garden.
darden restaurants -reiterated full year outlook for 35-40 net new restaurants and total capital spending of $250 to $300 million. | 0 |
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
Net income in the second quarter of $29.6 million produced core earnings per share of $0.31, a core pre-tax pre-provision ROA of 1.82% and a core efficiency ratio of 53.1%.
Importantly, pre-tax pre-provision net revenue of $42.9 million was slightly ahead of the consensus estimate, reflecting good underlying second quarter momentum in our key businesses.
Lending rebounded in the second quarter, increasing year-to-date loan growth to 5.3% annualized rate, and that excludes PPP loans.
The loan growth was broad-based and although indirect lending and corporate banking led the way, mortgage, branch-based consumer lending and small business all contributed meaningfully.
Our corporate bank had several big wins and is seeing deepening pipelines.
Bucking national trends, our branch team has originated $209 million in home equity loans year-to-date, which represents a 12% increase year-over-year.
Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remains strong.
Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth.
We have also lifted out some talented lenders from large competitors over the last past year.
Consumer and small business household growth helped fuel noninterest income, which remained strong at $26.1 million, even as mortgage gain on sale income tapered.
Card-related interchange income at $7.4 million was a quarterly company record by a wide margin.
At $2.7 million, trust revenue was a quarterly record as well.
Our SBA business contributed $1.6 million to gain on sale income and SBA pipelines have never been stronger.
This is four quarters in a row of strong contribution by the SBA business.
Importantly, in this discussion around growth, business conditions in the second quarter in our markets recovered faster than we anticipated, and our business customers are generally positive about the outlook ahead.
Expenses remain well controlled, and the core efficiency ratio was an impressive 53.21%.
Over the last six years, First Commonwealth's revenue base has broadened considerably with significant investment in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card and new digital platforms to include online loan and deposit account opening.
We have expanded -- also expanded our footprint through five strategic M&A opportunities.
Even as we've made these significant investments and transformed our company, at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage.
Jim will provide important detail in a few minutes.
But at a very high level, I believe our NIM is benefiting from our long-term approach to building a diversified loan portfolio that is balanced between commercial and consumer loans.
At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year, and our commercial loan growth picked up steam as the second quarter progressed.
We like the contribution margin a new consumer loan brings versus having money parked at the Federal Reserve or in investment security.
And we also have the potential of cross-selling a new consumer customer as an added bonus.
We're also enthused about the lift-out of an equipment finance team from a larger institution that we recently announced as well as the momentum in our SBA business.
Both of these businesses are scalable and will enable our margin to expand by generating high -- higher-yielding assets.
Importantly, we're very pleased with the adoption of our new digital platform.
The second quarter, our active mobile users increased an annualized 22%.
Additionally, we continue to bring new capability forward, and we'll be introducing a new mobile mortgage platform in August where our customers can easily apply for and track their mortgage status from anywhere at any time.
Lastly, regarding credit, we feel our asset quality is solid and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year.
As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income and expense control.
Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income and expenses.
Our net interest margin for the second quarter was 3.17%, down from 3.40% last quarter.
Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest-bearing liabilities by seven basis points.
But to understand our NIM, you have to look at the effects of PPP and changes in our asset mix, especially cash.
For example, we began the quarter with $479 million in PPP loans.
By June 30, that figure had shrunk to $292 million.
Similarly, excess cash dropped from $414 million to $189 million over the period.
These changes don't come through if you only look at our published average balances, which barely moved.
Essentially, what happened is this.
We started the quarter with a lot of excess cash because of government stimulus programs that took place in the first quarter.
In addition, PPP loans were forgiven over the course of the quarter, generating even more cash.
We invested some of that excess cash into securities early in the quarter and into strong loan growth toward the end of the quarter.
To be more precise, PPP and excess cash had two distinct effects on the margin.
First, the first quarter NIM had the benefit -- excuse me, the first quarter NIM had the benefit of $7.9 million of PPP income, while second quarter PPP income was only $5.5 million.
Second, we put excess cash to work by purchasing approximately $300 million of securities in the second quarter.
That's better than leaving it sit in cash.
Those investments will generate about $3.9 million of net interest income annually or about $0.03 per share, but they still yield us than what we were earning on the PPP loans, and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM.
Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things.
Our previous guidance was for our core NIM to fall between 3.20% and 3.30%, and our core NIM for the second quarter came in at 3.20%, which was within that range, albeit at the bottom of that range.
The reason for that is simple math.
The more excess cash we invest in securities, the less cash there is to adjust for in the core calculation.
The good news here is that our loan growth in the second quarter was very strong, especially toward the end of the quarter.
That should help the margin going forward.
We expect to maintain that trajectory for the remainder of the year, which would replace PPP runoff and further soak up excess cash to the benefit of the margin.
As a result, we are reiterating our core NIM guidance of 3.25% plus or minus five basis points.
Let me switch gears now to asset quality and offer a couple of thoughts that may be helpful to you.
First, we realized that deferrals were the number one topic a year ago, but our deferrals have all but disappeared from a peak of over $1 billion during the pandemic to $138 million last quarter to only $59.5 million this quarter or just 88 basis points of total loans.
Second, nonperforming loans are just 0.82% of total loans ex PPP, and the reserve coverage of nonperforming loans is 182.9%.
These are levels that we believe compare very favorably to peers.
Third, we just completed our regular semiannual loan review process in which we review every commercial credit in excess of $350,000.
This involved a review of about 1,000 relationships totaling $2.4 billion out of a $3.9 billion commercial loan portfolio.
At the conclusion of that exercise, there were 0 downgrades to special mention or substandard in the portfolio.
The thoroughness of that exercise gives us confidence as we took noted declines in both special mention and classified loans this quarter.
Classified loans, for example, dropped from $72.3 million to $56.3 million, a level very close to the pre-pandemic level of $52.5 million at the end of 2019.
Fourth, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they are at an all-time low for our bank at just 11 basis points of total loans ex PPP.
Fifth and finally, our reserves remain at 1.50% of total loans ex PPP protecting our capital and our earnings stream going forward.
As for fee income, even with mortgage income slowing down a bit in the second half, we anticipate being able to sustain the pace of $26 million to $27 million per quarter in noninterest income for the remainder of 2021 due to favorable trends we are seeing in SBA, swap and trust income.
NIE came in at $51.5 million in the second quarter, down slightly from $51.9 million last quarter.
Our previous NIE guidance was $52 million to $53 million per quarter, so we've been comfortably below that.
We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expense that we have been seeing, new hires in revenue-producing and credit positions and the new recently announced equipment finance effort, bringing our NIE guidance to $53 million to $54 million per quarter for the remainder of the year.
Finally, we repurchased 72,724 shares in the second quarter at an average price of $13.95.
And with that, we'll take any questions you may have. | first commonwealth declares quarterly dividend.
qtrly diluted earnings per share $0.31. | 1 |
I'm pleased to report that we delivered another strong quarter with excellent performance in both segments.
Our operations continue to do a great job for our customers with best-in-class delivery, quality and service.
I'm really proud of our employees and how they stayed focused on safety, productivity, cost savings in Lean Kaizen process improvements.
As a company, we delivered $235 million in revenue in the second quarter, growing revenues both year-over-year and sequentially and we achieved near record levels of profitability.
Gross margins of 43% and operating margins of 21%, our second highest quarterly margin performance.
We achieved GAAP earnings per share of $0.97 for adjusted earnings per share of $1.1 [Phonetic] and our best free cash flow quarter in the company's history, generating over $50 million in free cash flow in the second quarter.
We did face supply chain challenges in materials, cost inflation and logistics that our teams were able to manage through and successfully offset some of their impact on the bottom line and we'll keep an eye on these going forward.
We continue to pay down debt and have a healthy balance sheet, which enables investment in future growth.
As we've mentioned before, we're increasing our investment in research and technology across the company.
In general, we're encouraged by the economic recovery in key markets coming out of the pandemic slowdown.
We're cautiously watching how the delta variant might affect this recovery, particularly international air travel in the less-vaccinated regions of the world.
That said, long-term secular trends are favorable and Albany's market positions global footprint and product development take advantage of these trends.
In our Engineered Composites segment.
As domestic airline travel recovers, we expect to benefit from our position on narrow-body aircraft with LEAP engines in our partnership with Safran.
As we mentioned last quarter, we're working closely with Safran to coordinate ramping production as LEAP demand picks up on recovering narrow-body OEM production.
Our plans include hiring additional workers and preparing for increased production in our three LEAP facilities as we exit 2021 grow in the future.
We're very excited about Safran's recent announcement with GE to partner and development in the next generation RISE engine.
We view Safran as an important long-term customer and partner.
As we previously mentioned, we're investing more this year in R&D projects, particularly with new customers and new products, using advanced materials such as our 3D-woven composites, with the goal to diversify and grow our customer base, broaden our material science capabilities.
This ranges from our proprietary 3D-woven composites currently used on LEAP engine, fan blades and fan cases, to automated fiber placement composite wing skins for Lockheed Martin's F-35 Joint Strike Fighter to complex components on the Sikorsky CH-53K helicopter.
We continue to develop applications for the Wing of Tomorrow program with airbus industries and along these lines, we are pleased to announce earlier this month our technology collaboration with Spirit AeroSystems to develop advanced 3D-woven composite applications for hypersonic vehicles.
This collaboration capitalizes on the unique capabilities of both companies to achieve superior hypersonic design solutions and efficient manufacturability using Albany's proprietary 3D-woven composite technologies, and it builds on our demonstrative ability to manufacture 3D-woven composites at commercial scale.
This is an exciting example of the types of new business and advanced technology programs we're investing in today to help secure our future long-term growth.
In the Machine Clothing segment, we're optimistic about recovering global growth, expect to benefit from long-term secular trends, which should underpin the demand for paper products.
Our Machine Clothing business has benefited as a leading supplier in the industry since we're well-positioned globally, particularly in the growing end markets for packaging and tissue products.
Our product development strategies, operational improvements and technical service continue to target these higher growth end markets.
Our operating teams have been firing on all cylinders and we expect to continue our strong execution in the second half of the year.
Let me say a few words about Machine Clothing's end markets.
Packaging, tissue, corrugated products, pulp and building products, end markets have remained the strongest sub-segments with packaging benefiting from increasing online shopping as retail goes through a fundamental shift worldwide.
In tissue, we may be in a transition phase whereby at-home demand settles down and people return to school, restaurants, offices, vacations, et cetera.
We have yet to see a pickup however, in the away-from-home paper markets for our belts, which should eventually improve.
Not surprisingly, publication grades continue their decline and only represented 16% of MC revenues in the second quarter.
Markets in North America and China robust while emerging economies are still grappling with COVID and low vaccination rates likely requiring more time to rebound.
In summary, our Machine Clothing segment continues to perform well, our operations are strong, taking advantage of the higher growth sub-segments and serving customers well around the world as a recognized global leader in the industry.
This success is a result of disciplined execution of our long-term strategy.
As I mentioned, we have a strong balance sheet and good free cash flow generation, which allows us to continue investing in the technologies and customer programs that expand and broaden our competitive position in both segments.
Our first priority for capital allocation is to invest in organic growth programs across both business segments and then to seek acquisitions that fill our long-term strategy.
Our reputation for reliability, service and technical excellence is well-established in Machine Clothing and our brand is growing in aerospace as a reliable supplier and engineered materials partner.
We're optimistic about the long-term opportunities in both segments.
I'll talk first about the results for the quarter and then comment on the outlook for our business for the balance of the year.
For the second quarter, total company net sales were $234.5 million, an increase of 3.8% compared to $226 million delivered in the same quarter last year.
Adjusting for currency translation effects, net sales rose by 1% year-over-year in the quarter.
In Machine Clothing, also adjusting for currency translation effects, net sales were up 0.8% year-over-year, driven by increases in packaging grades and engineered fabrics, partially offset by declines in all other grades.
Publication revenue declined by over 7% in the quarter and as Bill mentioned, represented only 16% of MC's revenue this quarter.
Tissue grades also declined over year-over-year due to a more normal level of demand for grades to support customer production for at-home use, resulting in the decline from the highs for those grades that we saw last year without significant recovery to date in the away-from-home product grades.
Engineered Composites net sales, again after adjusting for currency translation effects, grew by 1.3%, primarily driven by growth on LEAP and CH-53K, partially offset by a decline on the 787 platform.
During the quarter, the ASC LEAP program generated little over $25 million in revenue.
Comparable to the first quarter of this year, but up over $10 million from the second quarter of last year.
At the same time, we reduced our inventory of LEAP-1B finished goods by over 20 engine shipsets in the quarter, leaving us with about 170 LEAP-1B engine shipsets on the balance sheet at the end of the second quarter.
As you will recall, we previously recognized revenue on these engine shipsets and their value was reported under contract assets on our balance sheet.
Also during the most recent quarter, we generated about $3 million in revenue on the 787 program, up from less than $1 million in the first quarter, but down from almost $14 million in the second quarter of last year.
Second quarter gross profit for the company was $101.7 million, a reduction of 1% from the comparable period last year.
The overall gross margin decreased by 220 basis points from 45.6% to 43.4% of net sales.
Within the MC segment, gross margin declined from 54.5% to 52.9% of net sales principally due to foreign currency effects, higher input costs and higher fixed costs, partially offset by improved absorption.
For the AEC segment, the gross margin declined from 26.7% to 23% of net sales, driven primarily by a smaller impact from changes in the estimated profitability of long-term contracts.
During this quarter, we recognize the net favorable change in the estimated profitability of long-term contracts of just over $4 million.
But this compares to a net favorable change of over $7 million in the same quarter last year.
The favorable adjustment this quarter was principally due to a reduction as a result of changes in volume expectations to previously established loss reserves on a couple of specific programs and is therefore not necessarily reflective of ongoing enhancements to profitability.
In fact, as we previously discussed, the expected revenue declines this year in some of our fixed price programs are leading to headwinds to long-term program profitability this year.
Second quarter selling, technical, general and research expenses increased from $47.4 million in the prior year quarter to $51.8 million in the current quarter and also increased as a percentage of net sales from 21% to 22.1%.
The increase in the amount of expense reflects higher incentive compensation expense, higher R&D spending, higher travel expenses and higher foreign currency revaluation losses.
Total operating income for the company was $50 million, down from $52.7 million in the prior year quarter.
Machine Clothing operating income fell by $600,000, caused by higher STG [Phonetic] in our expense, partially offset by higher gross profit and lower restructuring expense.
And AEC operating income fell by $1.1 million, caused by lower gross profit and higher STG in our expense, partially offset by lower restructuring expense.
The income tax rate for this quarter was 30%, compared to 32.1% in the same quarter last year.
The lower rate this year was caused by the generation of a lower share of our global profits in jurisdictions with higher tax rates, partially offset by a higher level of unfavorable discrete income tax adjustments.
Net income attributable to the company for the quarter was $31.4 million, reduction of $1 million from $32.4 million last year.
The reduction was caused primarily by the lower operating profit, partially offset by the lower tax rate.
Earnings per share was $0.97 in this quarter compared to $1 last year.
After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses and expenses associated with the CirComp acquisition and integration, adjusted earnings per share was $1.01 this quarter, compared to $1.09 last year.
Adjusted EBITDA declined by 5.8% to $69.4 million for the most recent quarter compared to the same period last year.
Machine Clothing adjusted EBITDA was $63 million, essentially flat compared to the prior year quarter and represented 39.4% of net sales.
AEC adjusted EBITDA was $19.3 million or 25.9% of net sales, down from last year's $22.8 million or 31.4% of net sales.
Turning to our debt position.
Total debt, which consists of amounts reported on our balance sheet as long-term debt or current maturities of long-term debt declined from $384 million at the end of Q1 2021 to $350 million at the end of Q2 and cash increased by just over $15 million during the quarter, resulting in the reduction in net debt of about $50 million.
Capital expenditures in the quarter were approximately $11 million compared to $9 million in the same quarter last year.
The increase was caused primarily by higher capital expenditures in Machine Clothing.
As we look forward to the balance of 2021, the outlook for the Machine Clothing segment remains strong.
Compared to the same period last year, MC orders were up 10% in the second quarter and up over 3% year-to-date.
We are also seeing some foreign currency tailwinds to our MC revenue, primarily driven by the strong Euro, although the recent strength in the dollar versus the euro means that we are unlikely to see the same foreign currency tailwinds in the back half of the year.
Overall, we are raising our previously issued guidance of revenue for the segment to between $585 million and $600 million, up from the prior range of $570 million $590 million.
From a margin perspective in Machine Clothing, we delivered another strong quarter with adjusted EBITDA margins of almost 40%.
We saw some increase in the level of travel during the quarter, but we are still not back to a normal level of travel and the segment's travel expense in the quarter was still almost $2 million, below the level in the same quarter in 2019.
So, we may see some additional pressure from that in the balance of the year as we continue with the return to normal.
We have also seen some pressure from increased input expenses both raw materials and logistics and expect these pressures to continue through the balance of the year.
We continue to work to offset the impact of these cost increases to the greatest extent possible by driving down our production cost through continuous improvement initiatives.
However, we do expect to see overall margin pressures in the back half of the year, driven by both increasing travel expenses and rising input costs.
At the start of the year, we had anticipated seeing foreign currency exchange rate pressures on MC profitability, particularly caused by the recovery in the Mexican peso and Brazilian real as the devaluation of both of those currencies in the middle of 2020 has provided us a bottom line benefit since we've more expenses than revenues in those currencies.
Year-to-date, we have not seen as much headwind from those currencies as we had expected and we have also benefited from the strong euro, a currency where we have more revenues than expenses.
As a result, overall year-to-date, foreign exchange rates have actually provided us with a modest adjusted EBITDA benefit compared to the same period last year.
However, based on current exchange rates, we will not see the same comparable foreign currency benefit in the back half of the year.
We are also cautious about the effects of a potential resurgence in COVID cases on segment results in the back half of the year.
As a result of all of these factors and the increase in revenue guidance, we are increasing our adjusted EBITDA guidance for the MC segment to a range of $210 million to $220 million, up from the prior range of $195 million to $205 million.
Turning to Engineered Composites.
We delivered a strong quarter aided by the net favorable adjustment to long-term contract profitability.
Absent that pickup, our Q2 results were consistent with what we had indicated last quarter, down from Q1, representing of what we had expected to be the trough for the year.
However, given the impact of the net favorable adjustment on the second quarter results, we now expect that Q2 will be the quarter with the highest segment profitability this year as we expect Q3 and Q4 profitability to be more in-line with what we delivered in Q1.
For the full year, we still expect 787 program revenue to be down over $40 million from the roughly $50 million generated on that program last year.
With Boeing's recent announcement of a reduction in 787 build rate, all but eliminating the possibility for any upside on that program later in the year.
We also still expect LEAP revenue to be in-line with prior expectations and roughly flat to last year.
However, on a more positive note, while F-35 revenue was down slightly in the second quarter compared to the same period last year, recent order volume has given us confidence that we will not see the full-year decline in F-35 revenue that we had previously expected.
Overall, due to the increased confidence in F-35 revenue, the adjustments to long-term contract profitability this quarter and improvements in several other areas, we are raising our guidance for segment revenues to be between $290 million and $310 million, up from the previous range of $275 million to $295 million.
From a profitability perspective driven by the same factors, we are raising our AEC adjusted EBITDA guidance to be between $65 million and $75 million, up from the prior range of $55 million to $65 million.
We are also updating our previously issued guidance ranges for company-level performance including revenue of between $880 million and $910 million, increased from prior guidance of $850 million to $890 million; effective income tax rate of 28% to 30%, unchanged from prior guidance; depreciation and amortization of approximately $75 million, the top end of prior guidance; capital expenditures in the range of $40 million to $50 million, down from prior guidance of $50 million to $60 million; GAAP earnings per share of between $2.84 and $3.14 increased from prior guidance of $2.38 to $2.78; adjusted earnings per share of between $2.90 and $3.20, increased from prior guidance of $2.40 to $2.80; and adjusted EBITDA of between $225 million and $240 million, increased from prior guidance of $195 million to $220 million.
Overall, we continue to be very pleased with the performance of both segments.
Both face challenges -- primarily rising input cost for Machine Clothing and recovering commercial aerospace market for the Engineered Composites segments, but both segments are overcoming the challenges and delivering strong results, which is a testament for the hard work by all of our employees across the globe. | compname reports q1 earnings per share of $0.85.
q1 sales fell 6 percent to $222.4 million.
q1 adjusted earnings per share $0.87.
q1 earnings per share $0.85.
reiterating our guidance for 2021.
updated 2021 gaap earnings per share guidance.
sees 2021 gaap earnings per share $2.38 - $2.78 and adjusted earnings per share of between $2.40 -$2.80. | 0 |
With me on the call today is Mimi Vaughn, our board chair, president, and chief executive officer.
These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
We hope you're all staying safe and healthy.
As we announced earlier this week, we are pleased to report that Tom George has been appointed interim chief financial officer of Genesco, replacing Mel Tucker, who stepped down last month.
Tom has almost 30 years of CFO experience and deep roots in brands and retail, most recently in footwear at Deckers brands.
We look forward to adding Tom's valuable expertise to support the continued growth of our business and very much look forward to Tom joining our leadership team.
Tom's appointment is effective December 14, and in the interim, I have assumed the responsibilities of chief financial officer, working closely with Dave, Brent Baxter, our chief accounting officer; and Matt Johnson, our treasurer, who together have formed the office of the CFO.
These leaders and the rest of our talented finance team are ensuring that the transition will be seamless.
Dave will return later in the call to review the financials.
I'm incredibly pleased with how well our organization performed during the third quarter as we navigated through a back-to-school season like none other.
It's a privilege to lead a team that is facing the challenges brought by COVID-19 head on, serving our consumers extremely well through digital and omnichannel, making progress on our strategic initiatives and quickly returning the company to profitability.
Through all this, we continue to operate with protocols to ensure our highest priority, the health and safety of our people and customers.
As you'll hear today, Journeys and Schuh are businesses serving teens and young adults that represent the large majority of our revenue, have both performed well under recent pressure.
This speaks to the strong strategic market positions, both concepts have built over time and their ability to capitalize on the accelerated shift to online spending.
In todays channel less world, where there are no barriers to shopping anywhere the consumer wants, Journeys' and Schuh's recent performance underscores the tremendous loyalty they've developed with their customers and the compelling proposition they offer to new customers.
Johnston & Murphy enjoys a strong strategic position with great heritage as well.
However, the pandemic has hit J&M's dressier competitive space harder, extending the time frame for turning this business around.
All in all, our teams executed with excellence, managing their businesses well as they reacted to rapidly changing dynamics during the quarter.
In the U.S., there was nothing normal about the cadence of back to school.
The selling season that's usually marked by a sharp acceleration in weekly sales starting in late July and running through Labor Day did not pack the punch that it usually does as school districts across the country delayed or suspended the return to in-person learning.
As we expected, we did see an extension of the selling season through September and into October.
However, in total, back to school was down year over year and more heavily tilted to online.
Meanwhile, back-to-school timing in the U.K. was consistent with historical patterns but far more consumers shopped online for their school needs than ever before.
Stores were open for about 95% of the possible days in the quarter compared to about 70% during the second quarter.
While we continue to face traffic levels that are down well into the double digits, our store teams are driving record levels of consumer conversion that helps to materially offset this headwind.
Our businesses online, on the other hand, experienced strong gains in both traffic and conversion.
We've said before, our e-commerce sales were nicely profitable prior to the pandemic and as we reap the benefits of the many investments we've made, e-comm is driving even greater profitability.
New customers continued to deliver increased volumes as new website visitors were up almost 40%, driving an almost 60% in new customer purchases.
The combination of these drivers led to a total revenue decrease of 11% year over year.
This result was better than we expected due mainly to stronger sales at Journeys and represents a meaningful improvement from last quarter's 20% decline.
The drop in-store volume was partially offset by another strong quarter of digital growth with comps up over 60%.
While gross margins were down compared to last year, due primarily to lower margins at J&M and a mix shift among our businesses, the drop improved sequentially from the second quarter as less promotional activity as Schuh was necessary and Journeys' gross margins increased.
With sales and gross margin improving over last quarter combined with increased profitability in our e-comm channel, our bottom line swung solidly back into positive territory.
The return to profitability yielded positive operating cash generation in the quarter.
Equally encouraging was the health of our inventories which were down more than 20%, allowing for fresh receipts of holiday merchandise.
In addition, the significant effort we invested with our landlord partners seeking rent abatements during the time our stores were closed, paid dividends and will bring even greater benefit next quarter.
We appreciate our landlord partners' willingness to find mutually beneficial solutions and hope to expeditiously reach conclusion with those discussions we have not yet concluded.
So turning now to discuss each business in more detail.
Journeys' third-quarter results are influenced heavily by back to school with more than two-thirds of elementary, middle and high school students attending school only virtually to begin the year, the quarter got off to a difficult start.
Same-store sales were down double digits in August, although e-commerce remains strong.
The business had an inflection point in early September as comparisons began to ease, accelerated significantly over the remainder of the month and remain strong in October as we captured our fair share of late back-to-school demand.
While we were not able to fully make up for the lost volume in August, we were encouraged that store comps were nicely positive in both September and October, and e-commerce growth was even stronger than earlier in the quarter.
Comfort continued to be the fashion choice of the pandemic and Journeys' offering of casual product resonated strongly with consumers.
While teens always have a big complement of fashion athletic footwear in their closets, when fashion swings toward nonathletic or what we call casual footwear, Journeys is especially well-positioned among its competition to deliver this assortment.
This spring a range of comfortable sandals and other casual products sold through well.
This fall, our consumers' appetite for boots began early and more robustly in the season than we have seen in many years.
While the casual part of Journeys' assortment has been gaining ground over fashion athletic all year, Q3 delivered the largest quarterly growth so far.
These gains have been especially pronounced in women's and kids' as we've seen throughout the year.
On the other side of the Atlantic, back to school at Schuh unfolded similarly to previous years with schools starting on time and most students returning to in-person learning.
With its best-in-class digital capabilities, Schuh was ideally positioned to capitalize on this digital shift and capture the vast majority of lost store volume through digital sales.
E-commerce generated almost 45% of Schuh's sales in the quarter, even with most stores being opened.
While store traffic was still down considerably, back to school gave consumers a reason to shop and helped drive traffic increases -- decreases to less negative levels.
The blend of better store and much better online sales allowed Schuh to gain market share during the quarter.
With positive comps in total and only a slight decline in year-over-year revenue from closed stores, coupled with cost savings, Schuh delivered a solid year-over-year operating profit increase.
A noteworthy achievement under difficult conditions.
With less competitive discounting pressure and more scarcity in supply of the brands itself, Schuh pull back significantly on promotional activity versus the second quarter which helped performance as well.
Like Journeys, Schuh's casual assortment gain ground over its fashion athletic assortment with boot sales driving a good portion of the pickup.
While performance improved from the second to the third quarter with the introduction of its fall assortment, Johnston & Murphy continues to find itself in a tough environment.
Its customer has fewer reasons to shop with many continuing to work from home and most large social gatherings and events postponed or canceled.
In addition to store traffic being down over 50% for the quarter, some of J&M's airport and street locations have yet to reopen which further impacted retail sales.
A bright spot was boot sales which began selling earlier in the season this year.
While J&M historically has been known for its dressier product, the team initiated work years ago to evolve Johnston & Murphy into a full lifestyle brand with a range of footwear and apparel offerings from dressier to more casual.
Highlighting the traction we've already made, casual and casual athletic represented about 60% of footwear during our last fiscal year and apparel and accessories drove 40% of total sales.
Looking forward to the coming year, J&M has focused 90% of new product development on the expansion of its casual offering to include casual athletic, leisure, rugged outdoor and performance which follows upon its highly successful reentry into Gulf this spring.
Leading these efforts is a new Head of Product Development, who joined J&M earlier this year and brings a successful track record developing casual brands.
As the J&M customer returns to work and socializing which we hope with the recent medical advances will be sooner than later, J&M's assortment will be ready for the post pandemic lifestyle.
So turning now to the current quarter.
We believe we have the right assortments and are ready for this holiday season.
That said, consumer demand has been very different this year due to the pandemic and its impact on consumer behavior and the economy which has caused us to take a conservative approach to our outlook.
In November, we faced headwinds from the reclosure of stores in North America and the U.K. as we carefully monitor and adhere to each country's and region's health requirements.
And as a result, we're closed for more than 10% of the possible operating days in the month.
The biggest impact was in England and Ireland, where we had the best potential to make up some of these sales online and most stores have reopened at this time.
Following strong gains in September and October, sales moderated and November got off to a slower start against robust comparisons a year ago.
We were encouraged to see trends improve quite a bit around mid-month, providing the business with good momentum heading into Black Friday.
For the Black Friday weekend itself, as expected, traffic was more subdued than usual.
In spite of the choppiness, November sales were in line with our expectations with an even heavier mix of digital versus store sales.
The lion's share of the holiday season remains ahead of us.
Outside of Cyber Week, digital sales were normally strongest during the earlier part of December.
With recent investments across mobile, our platforms, our websites and our distribution centers, we're prepared to handle what we anticipate will be record holiday digital volumes.
We've helped the customer adjust to the pandemic online by introducing services like Klarna at Journeys this summer which is a pay in four installment option that is driving much larger transaction size and offering technology on our website that helps customers determine what size is best to order.
With the ability to fulfill online orders via our distribution centers or from any of our almost 1,500 store locations, we're well-positioned to meet the surge in demand.
Earlier this year, we upgraded our inventory locating an order brokering system to provide greater inventory accuracy which is critical during this peak sales period.
This system also allows functionality such as tiering stores to protect inventory in our highest volume stores, enabling us to better optimize sales across our network.
Even with the acceleration in online demand, the majority of holiday sales will still take place in our physical locations.
Our stores become even greater strategic assets as we get closer to Christmas and customers don't want to risk online orders not arriving in time.
This is the first year we'll have holiday comparison data in our workforce management system since we implemented it last year.
This technology proved invaluable in managing the unusual traffic patterns during back to school and will enable us to rapidly add or remove labor to optimize store staffing levels during this unusual holiday season.
This holiday will be about execution, something we do well that will differentiate us among others.
We've also developed some terrific marketing campaigns, adjusted for what we learned during the pandemic to drive traffic and sales in this important holiday selling season.
We've increased digital marketing spend substantially and are leveraging our CRM systems to inform our digital, social and other advertising efforts.
As conditions normalize and we make further progress on our strategic initiatives, I am confident we'll emerge strong and be well-positioned with more than enough liquidity to take advantage of the many opportunities the pandemic has presented.
We appreciate your efforts all year round, but really especially in this busy holiday season in the midst of the pandemic.
When I'm certain you'll go the extra mile to delight our customers.
I'm also so proud of the work our teams are doing in the communities we serve including donating shoes and masks and supporting our diversity and inclusion initiatives.
Finally, we wish you and your family's happiness and good health this holiday season.
And with that, I'll pass the call back over to Dave.
We were very pleased under the circumstances with our performance in Q3 and the return to profitability against the backdrop of the pandemic.
In Q3 sequential improvement compared to the prior two quarters in both revenue and gross margin, along with a lower tax rate and a small pickup in SG&A drove results back to nicely positive levels with adjusted earnings per share of $0.85 compared to $1.33 last year.
For the third quarter, ending cash was $115 million, with borrowings of $33 million for a net cash position of $82 million.
Just a little below second-quarter's levels.
We entered the quarter with $299 million of cash.
And during the quarter, operations generated $5 million while we spent $8 million on capital projects and paid down $178 million in borrowings using $184 million in total.
In addition, we continue to have outstanding rent payables as we remain in active negotiations with a number of our landlords.
While the business environment continues to be fluid, we are confident we have adequate liquidity to navigate these challenging times and decided to pay down the majority of our revolver balances in both North America and U.K. during the quarter.
As a reminder, early this year, we increased our North American ABL borrowing capacity to $350 million.
facility replacing an expiring one.
Turning to the specifics of the quarter.
Consolidated revenue was $479 million, down 11% compared to last year driven by a lower back-to-school revenue, continued pressure at J&M and the impact from store closures during the quarter.
Robust e-commerce comp of 62% was offset by a decline in-store revenue of 22% driven by a comp decline of 18%, while our stores were closed for 5% of the possible operating days during the quarter.
Digital sales increased to 21% of retail business from 11% last year.
Our comp policy removes any stores that are closed for seven consecutive days.
And therefore, we are providing both overall and comp sales by business to give better insight into performance.
Overall, sales were down 10% for Journeys with comp sales down 6% while store traffic was down well into double digits, much higher conversion and transaction size lifted Journeys' comps.
At Schuh, overall sales were down 3%, while sales were up 1%.
At J&M, overall sales were down 45%, and comp sales were down 43%.
Our licensed brands, overall sales were up 91% due to Togast acquisition.
Consolidated gross margin was 47.1%, down 210 basis points from last year, 100 basis points of which was related to J&M.
Consistent with last quarter, increased shipping to fulfill direct sales pressured the gross margin rate in all of our businesses, totaling 50 basis points of the total overall decline.
Journeys' gross margin increased 110 basis points driven by lower markdowns.
Schuh's gross margin decreased 320 basis points, more than half of which was due to increased e-comm shipping expense with the balance due to higher penetration of sale products.
J&M's gross margin decrease of 1,370 basis points was due to more close outs at wholesale, incremental inventory reserves and higher markdowns at retail.
Finally, the combination of lower revenue at J&M, typically our highest gross margin rate of our businesses and the revenue growth of licensed brands, typically our lowest gross margin rate negatively impacted the overall rate mix.
Adjusted SG&A expenses were down 11%.
And as a percentage of sales, leveraged 10 basis points to 44.1% as we realized the collective benefits of our organization's disciplined actions to manage expenses and relief from government programs.
government programs which provides property tax relief.
The next largest areas of savings came from bonus expense and the reduction in store selling salaries.
Compensation expense benefited from reduced operating hours and government salary relief provided in Canada and the U.K. Given the added cost of driving customer traffic to our stores and websites, our organization is intently focused on the strategic initiative of reshaping the cost structure.
One of the most impactful areas has been a multiyear effort centered around occupancy costs, and we have achieved even greater traction this year with the pandemic.
In addition to the rent abatement savings, we have negotiated 58 renewals year-to-date and achieved a 28% reduction in cash rent or 27% on a straight-line basis in the U.S., this was on top of an 11% cash rent reduction or 8% on a straight-line basis or 160 renewals last year.
These renewals are for an even shorter-term, averaging approximately one and a half years compared to the three year average we saw last year, with almost a third of our fleet coming up for renewal in the next 24 months, we should make substantial progress here.
In summary, the third-quarter's adjusted operating income was $13.9 million versus last year's adjusted operating income of $26.7 million.
Both Schuh and licensed brands generated operating income increases over last year, while Journeys was lower and J&M saw the largest year-over-year decline.
Our adjusted non-GAAP tax rate for the third quarter was 4% reflecting the impact of foreign jurisdictions for which no income taxes were recorded.
Turning now to the balance sheet.
Q3 total inventory was down 22% on sales that were down 11%.
Journeys' inventory was down 28% on sales that were down 10%.
Schuh's inventory was down 22% with sales that were down 8% on a constant currency basis.
Both Journeys and Schuh will continue to chase inventory during Q4, adding fresh merchandise to increase these levels.
J&M's inventory was down 3% on sales that were down 45% reflecting the pack-and-hold inventory and the level of reserves we believe will be adequate to better rightsize the current inventory levels.
Capital expenditures were $8 million as we -- as our spend remains focused on digital and omnichannel and depreciation and amortization was $11 million.
We closed seven stores and opened seven during the quarter.
Given the continued uncertainty due to the pandemic, we are not providing guidance this quarter, but we'll share some current thoughts on the business going forward.
Q4 revenue usually is dependent upon performing well during what are traditionally, the peak volume times of the holiday season.
This year, we are more conservative about those consumer peaks materializing.
Therefore, thinking about revenue, the year-over-year percentage decline in overall sales in the fourth quarter could be just a little bit more than the decline in the third quarter as a result of this.
That said, if consumer demand is stronger during the peaks, we believe we are well-positioned to capture our fair share which would result in us exceeding these levels.
This does not contemplate any additional store closures or restrictions beyond what we know today which could be a bigger headwind.
For the month of November, stores were open for about 88% of the possible operating days and currently, 97% of our stores are open.
Stores have also been operating on more limited hours.
Gross margin rates versus last year for Q4 should be in the range of the decrease we saw in Q3.
The Q3 headwinds of higher e-commerce penetration, J&M gross margin pressure and the negative impact from the mix of businesses we expect will persist into Q4.
We expect SG&A in Q4 to leverage quite a bit from last year's levels, as we continue to benefit from ongoing cost reduction efforts and get some substantial help from rent abatements.
While the annual tax rate is expected to be approximately 18%.
I'd like to highlight that in the fourth quarter, we expect it to be approximately 40%.
In conclusion, I would like to echo Mimi's comments on our amazing teams, who have executed so admirably throughout this entire year.
From store closings and reopenings through an unprecedented back-to-school season and now in the middle of the most important holiday season, the talent and perseverance shown during this challenging year leaves me with much to be admired and appreciated. | q2 sales $555 million versus refinitiv ibes estimate of $522.4 million.
qtrly e-commerce sales increased 97% from q2 two years ago. | 0 |
In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA.
I'm very pleased to report that we continued our strong start to the year, achieving record investment volume of more than $750 million during the first six months of 2021.
Robust and high quality investment activity further increased our investment grade, concentration and raised our ground lease exposure to a record of nearly 13%.
Our investment activities during the quarter were supported by more than $1 billion of strategic capital markets transactions that fortified our best-in-class balance sheet and positioned our company for continued growth in the quarters ahead.
During the second quarter, we invested approximately $366 million in 59 high-quality retail net lease properties across our three external growth platforms.
54 of these properties were originated through our acquisition platform representing acquisition volume of more than $345 million.
The 54 properties acquired during the second quarter are leased to 32 tenants operating in 18 distinct retail sectors including best-in-class operators in the off-price, home improvement, auto parts, general merchandise, dollar store, convenience store, craft and novelties, grocery and tire and auto service sectors.
The acquired properties had a weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years.
Through the first six months of this year, we've invested a record $756 million into 146 retail net lease properties spanning 35 states in 24 retail sectors.
Approximately $732 million of our investment activity originated from our acquisition platform.
Roughly 75% of the annualized base rents acquired in the first half of the year comes from leading investment grade retailers, while almost one-third of annualized base rent is derived from ground leased assets.
These metrics demonstrate our continued focus on best in class opportunities with leading omnichannel retailers, while still achieving record results.
Given our record acquisition activity date and visibility into our pipeline, we are increasing our full-year 2021 acquisition guidance to $1.2 billion to $1.4 billion.
During this past quarter, we executed on several unique and notable transactions, including a new small format target on the University of Georgia's campus in Athens.
We are extremely pleased to expand our relationship with target, as well as add another unique street retail asset to our growing portfolio.
We continue to invest in market dominant grocers during the quarter.
Most significant with a five-store sale leaseback transaction with Kroger for approximately $68 million.
The stores are located in Texas, Michigan, Ohio, and Mississippi and each location is subject to a new 15 year net lease.
With this transaction Kroger moved into our top 10 tenants at 3.2% of annualized base rents.
Kroger's of course is a leader in the grocery space.
Their fortified balance sheet, strategic omnichannel initiatives, and significant investment in e-commerce fulfillment are emblematic of our investment strategy.
Additionally, we closed on the purchase of a ShopRite, which is owned and operated by Wakefern in New Rochelle, New York.
ShopRite is a tremendous operator in the real estate located at a strategic interchange of I-95 is yet another example of the diligent bottoms for analysis that we conduct on every asset that we acquired.
Finally, as you may recall we acquired our first Wegmans Ground Lease in Chapel Hill, North Carolina during the fourth quarter of 2020.
We've built upon that momentum in this quarter with the acquisition of our second property ground leased to Wegmans.
The store located in Parsippany, New Jersey is over 100,000 square feet and was constructed at Wegmans expense.
Through the first six months of the year we've acquired 45 ground leases for a total investment of over $240 million.
The second quarter contribution to this total was 14 ground leases representing an investment volume of more than $113 million.
Additional notable ground lease acquisitions during the quarter included our first capital grow in Whippany, New Jersey.
A Walmart Supercenter and Lowe's and Hooks at New Hampshire, our first Cabela's in Albuquerque, New Mexico, as well as three additional Wawa assets increasing our Wawa portfolio to 25 properties including their flagship store in Downtown Philadelphia.
As mentioned at quarter end, our overall ground lease exposure stood at a company record of 12.7% of annualized base rents and includes a very unique assets leased to the best retailers in the country.
Inclusive of our second quarter acquisition activity, the ground lease portfolio now derives nearly 90% of rents from investment grade tenants and has a weighted average lease term of 12.5 years.
The majority of the portfolio includes rent escalators that result in average annual growth of close to 1% while the average per square foot rent is only $9 and $0.65.
This growing portfolio continues to be a source of tremendous risk adjusted returns when reviewing the lease term, credit, underlying real estate attributes and of course the free building and improvements of a tenant wherever to vacate.
We look forward to continue to leverage our industry relationships and strong track record of execution to identify potential additions to this expanding and diversified sub portfolio.
As of June 30, our portfolio's total investment grade exposure was nearly 68%, representing a significant year-over-year increase of approximately 670 basis points.
On a two-year stacked basis, our investment grade exposure has improved by more than 1,300 basis points.
The continued growth of our ground lease portfolio and the investment grade exposure demonstrates our disciplined focus on building the highest quality retail portfolio in the country.
Moving on to our Development and Partner Capital Solutions platforms, we continue to uncover compelling opportunities with our retail partners.
We had six development in PCS projects either completed or under construction during the first half of the year that represent total capital committed of more than $36 million.
Three projects were completed during the second quarter, including a grocery outlet in Port Angeles, Washington, a Gerber Collision in Buford, Georgia, and a Floor & Decor in Naples, Florida.
I'm pleased to announce we also commenced construction during the quarter of our second development with Gerber Collision in Pooler, Georgia.
Gerber will be subjected to a new 15 year net lease upon completion and we anticipate rent will commence in the first quarter of 2022.
We continue to work with Gerber Collision on additional opportunities that we anticipate announcing later this year and into next year.
Construction continued during the quarter on our first development with 7-Eleven in Saginaw, Michigan.
We anticipate delivery will take place in the first quarter of next year at which time 7-Eleven will be subject to a new 15 year net lease.
We remain focused on leveraging our full capabilities to grow our relationships with these leading omnichannel retailers.
I look forward to providing an update on our continued progress in the coming quarters.
While we continue to strengthen our best-in-class retail portfolio through record investment activity we're also quite active on the disposition front during the quarter.
We continue to reducing Walgreens exposure and as well as franchise restaurants as we sold seven properties for gross proceeds of approximately $28 million with a weighted average cap rate of 6.7%.
In total, we disposed of 10 properties through the first six months of the year for gross proceeds of more than $36 million with a weighted average cap rate of approximately 6.7%.
Given our disposition activities during the first half of the year, we are raising the bottom end of our disposition guidance to $50 million for the year, while the high-end remains at approximately $75 million.
Our asset management team has also been proactively and diligently addressing upcoming lease maturities.
Their efforts to reduce the remaining 2021 maturity to just three leases representing 20 basis points of annualized base rents.
During the second quarter, we executed new leases, extensions or options on approximately 209,000 square feet of gross leasable area.
Most notably, we are extremely pleased to have executed a new 15 year net lease with Gardner White to backfill our only former Loves Furniture store in Canton, Michigan.
As you may recall, this was the Art Van flagship we developed prior to the company's acquisition by TH Lee.
We delivered the space to Gardner White in June and rent commenced in July, allowing us to recover close to 100% of prior rents with just over one month of downtime.
I would note this is the second time we have released this asset on effectively full recovery since the Art Van bankruptcy.
Gardner White is Michigan-based family owned and operated, has been one of the preeminent furniture retailers in the state for more than a century.
The Company is led by Rachel Tronstein, one of the brightest minds in the retail furniture industry and a former high school classmate of mine.
We are extremely pleased to have Rachel and her team as partners in this flagship asset.
I'm also pleased to announce the addition of Burlington to Central Michigan Commons in Mount Pleasant, Michigan, one of the only two remaining legacy shopping centers that we chose to retain during the transformation of our portfolio.
To date we have redeveloped the former Kmart Space for Hobby Lobby and Alta and added Texas Roadhouse on an outline via ground lease.
These transactions are emblematic of our ability to unlock embedded value within the portfolio and support our decision to hold on to this very well located legacy shopping center across from Central Michigan University's main campus.
During the first six months of the year we executed new leases, extensions or options and approximately 275,000 square feet of gross leasable area and as of June 30, our expanding retail portfolio consisted of 1,262 properties across 46 states, including 134 ground leases and remains nearly 100% occupied at 99.5%.
With that, I'll hand the call over to Simon and then we can open it up for any questions.
Starting with earnings core funds from operations for the second quarter was $0.89 per share, representing a record 17.3% year-over-year increase.
Adjusted funds from operations per share for the quarter was $0.88, an increase of 15.9% year-over-year.
As a reminder, treasury stock is included within our diluted share count prior to settlement if and when ADCs stock trades above the deal price of our outstanding forward equity offerings.
The aggregate dilutive impact related to these offerings was less than half a penny in the second quarter.
Per FactSet, current analyst estimates for full year AFFO per share range from $3.40 per share to $3.53 per share, which implies year-over-year growth of 6% to 10%.
As mentioned on last quarter's call, we continue to view this level of growth as achievable and expect to end the year toward the higher end of this range given current visibility into our investment pipeline and the broader operating environment.
Building upon our 6% of AFFO per share growth in 2020-this implies two year stack growth in the mid-teens.
General and administrative expenses totaled $6.2 million in the second quarter.
G&A expense was 7.6% of total revenue or 7.1% excluding the noncash amortization of above and below-market lease intangibles.
Even as we continue to invest in people and systems to facilitate our growing business, we anticipate the G&A as a percentage of total revenue will be in the lower 7% area for full year 2021 excluding the impact of lease intangible amortization on total revenues.
As mentioned last quarter, G&A expense for our acquisitions team fluctuates based on acquisition volume for the year and our current anticipation for G&A expense reflects acquisition volume within our new guidance range of $1.2 billion to $1.4 billion.
Total income tax expense for the second quarter was approximately $485,000 for 2021.
We continue to anticipate total income tax expense to be approximately $2.5 million.
Moving onto our capital markets activities for the quarter, in May we completed a $650 million dual tranche public bond offering, comprised of $350 million of 2% senior unsecured notes due in 2028 and $300 million of 2.6% senior unsecured notes due in 2033.
In connection with the offering, we terminated related swap agreements of $300 million that hedged for 2033 Notes receiving approximately $17 million upon termination.
Considering the effect of the terminated swap agreements, the blended all-in rates for the 2028 Notes and 2033 Notes are 2.11% and 2.13% respectively.
We used the portion of the net proceeds from the offering to repay all $240 million of our unsecured term loans, the termination costs related to early pay down of our unsecured term loans total approximately $15 million.
Given the one-time nature of the termination costs, these amounts have been added back to our core FFO and AFFO measures.
The offering in combination with the prepayment of all of our unsecured term loans extended our weighted average debt maturity to approximately nine years and reduced our effective weighted average interest rate to approximately 3.2%.
In June, we also completed a follow-on public offering of 4.6 million shares of common stock.
Upon closing, we received net proceeds of approximately $327 million.
During the second quarter, we entered into forward sale agreements in connection with our ATM program to sell an aggregate of roughly 1.2 million shares of common stock for anticipated net proceeds of approximately $81 million.
In May, we settled roughly 164,000 shares and received net proceeds of approximately $10 million.
At quarter-end we had approximately 3.9 million shares remaining to be settled under existing forward sale agreements which are anticipated to raise net proceeds of approximately $259 million upon settlement.
Inclusive of the anticipated net proceeds from our outstanding forward offerings cash on hand and availability under our credit facility, we had nearly $950 million in available liquidity at quarter-end.
The balance sheet continues to be a huge strength for us.
As of June 30, our pro forma net debt to recurring EBITDA was approximately 3.6 times, including our outstanding forward equity offerings.
Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5 times.
Total debt to enterprise value of quarter-end was approximately 25% while fixed charge coverage remained at a record five times.
During the second quarter, we declared monthly cash dividends of $0.217 per share for April, May and June.
The monthly dividend reflected an annualized dividend amount of $2.60 per share representing an 8.5% increase over the annualized dividend amount of $2.40 cents per share for the second quarter of last year.
Our payout ratios for the second quarter were a conservative 73% of Core FFO per share and 74% of AFFO per share respectively.
Subsequent to quarter-end, we declared a monthly cash dividend of $0.217 per share for July.
The monthly dividend reflects an annualized dividend amount of $2.60 per share or an 8.5% increase over the annualized dividend amount of $2.40 per share from the third quarter of 2020. | q1 earnings per share $2.78.
q1 revenue rose 27 percent to $15 billion. | 0 |
Our call today will be led by our CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer.
To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
First, I would like to extend my sincere hope that all of you have been able to safely navigate the horrendous weather that we've had over the last week, along with the associated power outages and impacted water supplies.
Our prayers are extended to you for a speedy return to normalcy.
December 31st marked the end of the year that will go down into the record books for the oil and gas industry.
Energy companies face the dawning challenges of excess supply, a demand crisis triggered by COVID, an OPEC supply management problem, and investor apathy toward the sector.
Already six years into an extended downturn, the industry took a notable turn for the worst in 2020 with the onset of the COVID-19 pandemic, leading to epic levels of demand destruction for crude oil and associated products.
With commodity prices in dangerous territory, coupled with deteriorating activity and financial results, energy companies had to respond quickly.
Rig counts and customer CAPEX spending collapsed in the second and third quarters of 2020.
In response to these events, we took immediate action to shore up liquidity and stabilize cash flows.
We will update you on these matters, give you our thoughts on near-term market conditions, and summarize our continued efforts to mitigate costs, both capital and operating as we navigate the early stages of a U.S.-led market recovery.
shale-driven activity, while at historic low levels, was improving as we entered the fourth quarter with stronger crude oil prices.
Activity in the U.S. shale basins has historically been the first market to decline in a downturn, but it is also the first to recover.
completion activity steadily improved during the fourth quarter, albeit off a low base, ending the quarter up 67% sequentially in terms of the average frac spread count as reported by primary vision.
Our fourth-quarter results reflected 2% sequential growth in revenues and a significant 55% improvement in gross profits before DD&A, reflecting the cost mitigation measures implemented earlier in the year.
Partially offsetting these benefits was $2.7 million of severance and restructuring charges.
During the fourth quarter, our well site services revenues were up 3% sequentially, and adjusted segment EBITDA margins improved.
Our completion services incremental adjusted EBITDA margins came in at 89%.
In our downhole technologies segment, revenues continued their recovery and were up 24% sequentially, with adjusted segment EBITDA margins also up nicely.
In contrast, revenues in our offshore/manufactured products segment, which is a later-stage business, decreased 4% sequentially due primarily to weaker connector product sales.
Segment backlog at December 31, 2020, totaled $219 million, a decrease of 4% sequentially.
Our segment bookings totaled $65 million for the quarter, yielding what appears to be an industry-leading book-to-bill ratio of 0.9 times for the fourth quarter and 0.8 times for the year.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs.
To that end, we had an exceptional year in 2020, generating $133 million of cash flow from operations.
With our significant free cash flow, we materially delevered during the year, reducing our total net debt by $128 million.
In addition, despite capital being extremely tight in the U.S. for banks lending to the industry, we successfully syndicated a new four-year asset-based credit facility with our key banking relationships last week.
Lloyd will review additional details with you shortly.
We believe that we have managed the company effectively during a very difficult period, and we'll continue to closely manage our debt, working capital, and cash flow generation in the quarters to come.
Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
During the fourth quarter, we generated revenues of $137 million, while reporting a net loss of $19 million, or $0.31 per share.
Our revenues increased 2% sequentially, and our adjusted consolidated EBITDA improved significantly due to better cost absorption in our U.S. businesses.
After generating significant free cash flow in prior quarters, we were essentially cash flow-neutral after CAPEX during the fourth quarter.
For the fourth quarter of 2020, our net interest expense totaled $2.6 million, of which the majority are $1.8 million was noncash amortization of debt discount and debt issue costs.
At December 31, our net debt-to-book capitalization ratio was 12.8%, and our total net debt declined $128 million during 2020 through opportunistic open-market purchases of our convertible senior notes and repayments of borrowings outstanding under our revolving credit facility.
As Cindy mentioned, on February 10, we announced that we had entered into a new $125 million asset-based revolving credit agreement with a group of our key commercial relationship banks.
Our existing revolving credit facility was terminated upon entering into the new asset-based revolving credit facility.
Borrowing availability under the new facility is based on a monthly borrowing base on eligible U.S. customer accounts receivable and inventory.
The maturity date of the revolving credit facility is February 10, 2025, as Cindy mentioned, a four-year credit facility.
With a springing maturity 91 days prior to the maturity of any outstanding debt with a principal amount in excess of $17.5 million.
Excluding the seller promissory note associated with our acquisition of GEODynamics.
Borrowings outstanding under the new revolving credit facility will bear interest at LIBOR plus a margin of 2.75% to 3.25% based on our calculated availability under the facility with a LIBOR floor of 50 basis points.
We must also pay a quarterly commitment fee of 0.375% to 0.5% on the unused commitments.
At the closing of the new facility, we had approximately $29 million available, which was net of $12 million in outstanding borrowings and $29 million of standby letters of credit.
Together with $72 million of cash on hand at the end of December, pro forma liquidity would have been approximately $101 million.
At December 31, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $215 million.
In terms of our first-quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $23 million; net interest expense to total $2.1 million, of which approximately $1 million is noncash; and our corporate expenses are projected to total $8.4 million.
In this environment, we expect to invest approximately $15 million in total CAPEX during 2021, which is essentially flat when compared to 2020 spending levels.
In our offshore/manufactured products segment, we generated revenues of $76 million and adjusted segment EBITDA of $7.5 million during the fourth quarter.
Revenues decreased 4% sequentially due primarily to continued slow connector product sales.
Adjusted segment EBITDA margin of 10% compared to 12% margins achieved in the third quarter, reflecting lower revenues and reduced cost absorption.
As I mentioned earlier, orders booked in the fourth quarter totaled $65 million with a quarterly book-to-bill ratio of 0.9 times.
At December 31, our backlog totaled $219 million.
For over 75 years, our offshore/manufactured products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical, deepwater, and offshore environments.
Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients, while experiencing an increase in bidding to support multiple new clients actively involved in subsea mining, offshore wind developments, and other alternative energy systems globally.
While our 2020 bookings were lower than the levels achieved in 2019, our book-to-bill ratio for the year averaged 0.8 times, providing visibility as we progress into 2021.
In our downhole technologies segment, our revenues accelerated for the second quarter in a row, increasing 24%, while generating incremental adjusted segment EBITDA margins of 68% sequentially due primarily to cost savings measures implemented at the segment level.
Sales trends for our STRATX integrated gun systems and addressable switches continue to gain improved customer acceptance, and we experienced a 49% sequential improvement in international sales of our traditional perforating products.
We also continue to focus on the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.
Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality, and increased performance, while ensuring the highest level of safety and reliability.
In our well site services segment, we generated $39 million of revenue with sequentially increasing adjusted segment EBITDA.
land completion activity in the quarter but was partially offset by seasonal fourth-quarter declines in operator spending in the Northeastern United States.
Excluding the Northeast region, revenues increased 20% sequentially.
International and U.S. Gulf of Mexico market activity comprised 26% of our fourth-quarter completion service business revenues.
We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
We will continue to focus on core areas of expertise in this segment and are actively developing and conducting field trials of selected new proprietary service offerings to differentiate Oil States' completions business.
Moving on to outlook.
COVID-19 disruptions continue to hamper activity in domestic and international markets.
The fourth-quarter 2020 U.S. rig count average was 311 rigs, which was up 22% sequentially.
As we are now a month and a half into the first quarter of 2021, the average frac spread count has increased by about 26 spreads or roughly 20% since the fourth quarter.
This increase gives us optimism that the first quarter is setting up more favorably for our U.S. shale-driven product and service offerings.
Given improvements in the frac spread count over the last several months, we expect our well site services and downhole technologies segments to grow sequentially in 2021, with increasing EBITDA contributions.
Revenues in our offshore/manufactured products segment will continue to lag into the first half of 2021 until our book-to-bill ratio exceeds one-time and our short-cycle product demand improves.
Our outlook for 2021 suggests that our consolidated revenue will be flat or declined modestly, given this very strong first quarter of 2020, which, of course, was pre-pandemic, with EBITDA growth resulting from cost mitigation efforts.
We expect 2021 full-year consolidated EBITDA of $35 million to $40 million, with roughly 60% of the total generated in the second half of 2021.
The first quarter will undoubtedly be the weakest quarter of 2021, given the impact of severe weather that has gripped the nation this week.
Record-breaking temperatures and dangerous conditions have limited our field operations and manufacturing locations for several days.
Now I would like to offer some concluding comments.
We believe that we made substantial progress in 2020 in terms of shoring up our liquidity with exceptionally strong free cash flow generation coupled with associated debt reduction initiative.
As I mentioned earlier, we stabilized the company during a very difficult period and have managed our debt, working capital, and cash flow generation throughout the period.
Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product lines with value-added products and services to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic, which dramatically reduced travel and business activity, thereby depressing global oil demand and correspondingly, demand for our products and services.
That completes our prepared comments. | compname reports q4 loss per share $0.31.
q4 loss per share $0.31. | 1 |
Joining today's call are Bob Blue, chair, president, and chief executive officer; Jim Chapman, executive vice president, chief financial officer, and treasurer; and other members of the executive management team.
Before I report on our strong quarterly financial results, I'm going to start with a recap of our compelling investment proposition and highlight our focus on the consistent execution of our repositioned strategy.
We expect to grow earnings per share 6.5% per year through at least 2025 supported by a $32 billion five-year growth capital plan.
As outlined on our fourth-quarter call in February, over 80% of that capital investment is emissions reduction enabling and over 70% is rider recovery eligible.
We offer a nearly 3.5% yield and expect dividends per share to grow 6% per year based on a target payout ratio of 65%.
Taken together, Dominion Energy offers an approximately 10% total return premised on a pure-play, state-regulated utility profile, operating in premier regions of the country.
More on that lasting in a minute.
Turning now to earnings.
Our second-quarter 2021 operating earnings, as shown on Slide 4, were $0.76 per share, which included $0.01 hurt from worse than normal weather in our utility service territories.
Both actual results and weather-normalized results of $0.77 were above the midpoint of our quarterly guidance range.
So this is our 22nd consecutive quarter, so 5.5 years now, of delivering weather-normal quarterly results that meet or exceed the midpoint of our quarterly guidance range.
Note that our second quarter and year-to-date GAAP and operating earnings, together with comparative periods, are adjusted to account for discontinued operations, including those associated with our gas transmission and storage assets.
Second-quarter GAAP earnings were $0.33 per share and reflect the mark-to-market impact of economic hedging activities, unrealized changes in the value of our nuclear decommissioning trust funds, the contribution from Questar pipeline, which will continue to be accounted for as discontinued operations until divested and other adjustments.
A summary of all adjustments between operating and reported results is, as usual, included in Schedule 2 of our earnings-release kit.
Turning now to guidance on Slide 5.
As usual, we're providing a quarterly guidance range which is designed primarily to account for variations from normal weather.
For the third quarter of 2021, we expect operating earnings to be between $0.95 and $1.10 per share.
We are affirming our existing full-year and long-term operating earnings and dividend-growth guidance as well.
No changes here from prior communications.
For the first half of the year, weather-normal operating earnings per share of $1.86 represents approximately half of our full-year guidance midpoint.
So we are tracking nicely in line with our expectations.
We'll provide our formal fourth-quarter earnings guidance, as is typical, on our next earnings call, but let me provide some commentary on the implied cadence of our earnings over the second half of the year.
While Q3 guidance is roughly in line with weather-normal results from a year ago, we will see a multitude of small year over year helps in Q4, such as normal course regulated rider growth, the impact of the South Carolina electric rate settlement, strengthening sales, modest margin help, including -- from Millstone, continued expense management and tax timing that combined will help us to deliver solid second-half results.
We continue to be very focused on extending our track record of achieving weather-normal results, at least equal to the midpoint of our guidance on both a quarterly and annual basis.
Turning now to our couple of macro items.
First, overall electric sales trends.
In Virginia, weather-normalized sales increased 1.2% year over year in the second quarter and 3.2% in South Carolina.
In both states, increased usage from commercial and industrial segments overcame declines among residential users, as the stay-at-home impact of COVID waned, some context on that.
You'll recall that demand in DOM zone last year was despite the pandemic pretty resilient due to robust residential and data center demand.
So it's not surprising to see South Carolina's relatively higher growth in Q2, given the larger toll COVID had on sales there last year.
We're encouraged by the strong return of commercial and industrial volumes in South Carolina in the second quarter.
And looking ahead, we expect electric sales growth in our Virginia and South Carolina service territories to continue to a run rate of 1% to 1.5% per year, so similar to what we were observing pre pandemic.
Next, let me discuss what we're seeing around input prices.
As discussed on last quarter's call, we're continuing to monitor raw material costs.
And it seems to be the case across a number of industries right now, we're observing higher prices, although we have seen a moderation in the upward pressure over the last few months, especially in steel.
Despite these cost pressures, as it relates to offshore wind, in particular, we remain confident in our ability to deliver that project in line with our previously guided levelized cost of energy range of $80 to $90 per megawatt hour.
On the solar side, we're seeing, again, what others seem to be seeing, supply is tight, and prices for steel, poly and glass are up, but our 2021 projects remain on track with most material now already on site.
We're beginning to see moderation in pricing and relief from modest shipping constraints, which bodes well, we expect, for our post-2021 projects.
So again, we're watching but no material financial impacts at this time.
Let me address a few additional topics on Slide 6.
Last month, Dominion Energy and Berkshire Hathaway Energy mutually agreed to terminate our planned sale of Questar pipeline as a result of ongoing uncertainty associated with the timing and the likelihood of ultimately achieving Hart-Scott-Rodino clearance.
A few thoughts here.
First, though we obviously felt that a timely clearance of closing was the logical outcome given the facts and circumstances surrounding that transaction, we did build into the original Berkshire sale contract, the flexibility to easily accommodate a termination if needed.
Second, we are already at a reasonably advanced stage of an alternate competitive sale process for Questar Pipeline with expected closing by the end of this year.
Third, its termination has no impact on the sale of the gas transmission storage assets to Berkshire, which we successfully completed back in November of last year and which represented approximately 80% of the originally announced transaction value.
And finally, this termination nor the outcome of the ongoing sale process impacts Dominion Energy's existing financial guidance.
As mentioned, Questar pipeline will continue to be accounted for as discontinued operations excluded from the company's calculation of operating earnings.
Briefly, on credit, we've continued to deliberately enhance our qualitative and quantitative credit measures.
Last month, we were pleased to see Fitch upgrade Dominion Energy South Carolina's credit rating from BBB+ to A-.
Fitch cited both improved regulatory relationships, including the unanimous approval of the General Electric rate settlement, which Bob will discuss in some more detail, as well as good balance sheet management.
So let me turn now to a couple of ESG-related topics.
In June, we announced the successful syndication of sustainability-linked credit facilities totaling $6.9 billion, and we very much appreciate the efforts and support of all the banks who work with us on what we view as a very interesting new type of financing.
The $6 billion master credit facility links pricing to achievement of annual renewable electric generation and diversity and inclusion milestones.
And the $900 million supplemental facility presents a first-of-its-kind structure where pricing benefits accrue for draws related to qualified environmental and social spending programs.
So in other words, going forward, if we meet or exceed our quantifiable goals in these areas, our borrowing costs decline.
And of course, the opposite is also true.
If we fail to meet our goals, we pay more.
But through this financing, we're very much putting our money where our mouth is when it comes to ESG performance.
And we're looking for more ways to deploy green capital raises as we execute on our fixed income financing plan during the balance of the year.
In July, we issued an updated and comprehensive climate report, which reflects the task force on climate-related financial disclosures, or TCFD, methodology.
We are just one of six U.S. electric utilities that have pledged formal support for TCFD.
As described in the report, which is available on our website, we have modeled several potential pathways to achieve net zero emissions across our electric and gas business that reflect 1.5-degree scenario and are consistent with the Paris Agreement on climate change.
The climate report shows we are a leader in both greenhouse gas emission reductions over the last 15 years and in our commitment to transparent progress toward our goal of net zero emissions.
As shown on Slide 7, I'm very pleased that our results over the first two quarters of this year surpassed even our record-setting results from last year.
Our safety performance matters immensely to our more than 17,000 employees, to their families and to the communities we serve, which is why it matters so much to us and why it's our first core value.
Turning to Slide 8.
I often describe our pure-play state-regulated strategy as centering around five premier states, all of which share the philosophy that a common sense approach to energy policy and regulation puts a priority on safety, reliability, affordability and, increasingly, sustainability.
We were pleased that CNBC's list of America's Top States for Business ranked Virginia, North Carolina and Utah as 1, 2 and 3, respectively, a podium sweep for three of our five primary jurisdictions with a fourth major service territory, Ohio, also ranking in the top 10.
This is the second consecutive No.
1 ranking for Virginia.
Obviously, an assessment of this variety is just one of several possible ways to evaluate state-specific business environments, but we're pleased with the independent confirmation of what we observe every day working on the ground in all of our regions.
We've strategically repositioned our business around the state-regulated utility model in order to offer investors increased stability, which is further enhanced by our concentration in these fast-growing, constructive and business-friendly states.
Next, I'd like to highlight the outstanding work done across our operating segments by the women and men of Dominion Energy, who exemplify our core values of safety, ethics, excellence, embracing change and One Dominion Energy.
At Gas Distribution, our colleagues have collaborated across our national footprint to share best practices, resulting in a nearly 20% reduction of third-party excavation damage to our underground infrastructure as compared to 2019.
Each instance of damage prevention enhances the safety and reliability of our system while also reducing the emissions profile of our operations.
At Dominion Energy South Carolina, our ability to work in close partnership with state and local officials, combined with our commitment to meet an aggressive time line for electric and gas service delivery, were key to attracting a new $400 million brewery to the state last year.
The facility is expected to create 300 local jobs and is one of the largest breweries built in the United States in the last 25 years.
Being on time, however, wasn't good enough for our South Carolina colleagues, who safely completed the infrastructure upgrades and installation ahead of an already ambitious schedule.
We take pride in examples like this that demonstrate how DESC plays a key role in supporting South Carolina's economic and job growth.
And in Virginia, despite several days of near-record peak demand in June, our generation colleagues delivered exceptional performance as evidenced by the absence during those periods of any forced outages across our fleet.
Our transmission and distribution team members kept the grid operating flawlessly under demanding load conditions while also keeping pace with robust residential connects and remarkable data center demand growth, which continues the trend of robust growth over the last several years with no end in sight.
I'll now turn to updates around the execution of our growth plan.
The 2.6 gigawatt Coastal Virginia offshore wind project received its notice of intent, or NOI, from the Bureau of Ocean Energy Management in early July, consistent with the time line we had previously communicated.
The issuance of an NOI formally commenced the federal permitting review, which, based on our previously disclosed time line, is expected to take about two years.
Key schedule milestones are shown on Slide 10.
Later this year, we'll file our CPCN and rider applications with the Virginia State Corporation Commission.
In June, we announced an agreement with Orsted and Eversource, under which they will charter our Jones Act-compliant wind turbine installation vessel for the construction of two offshore wind farms in the Northeast.
Turning to Slide 11.
The Virginia triennial review is currently in discovery phase, and the company is providing timely responses to requests for information, all of which generally conform with what we would reasonably expect during a rate proceeding of this size and complexity.
As a reminder, the earnings review applies only to the Virginia base portion of our rate base, which becomes smaller as a percentage of DEV and Dominion Energy during our forecast period.
Virginia rider investments like offshore wind, solar, battery storage, nuclear life extension and electric transmission, which are outside the scope of the proceeding, represent the vast majority of the growth at DEV.
We've provided a summary of our filing position, as well as key milestones in the procedural schedule.
A few items to reiterate here.
First, our filing highlights the compelling value we've provided to customers during the review period of 2017 through 2020.
We've delivered safe and reliable service at affordable rates that are well below regional, RGGI and national averages, all while taking aggressive steps to accelerate decarbonization by pursuing early retirement of fossil fuel and power generation units.
Second, at the direction of the general assembly, we've provided over $200 million of customer arrears forgiveness to assist families and businesses in overcoming financial difficulties caused by the pandemic.
Third, we've invested over $300 million in CCRO-eligible projects, including our offshore wind test project, which is the first operational wind turbines built in federal waters in the United States.
Finally, our filing reports a regulatory return that aligns closely to our authorized ROE plus the 70-basis-point collar.
Inclusive of arrears forgiveness, this financial result warrants neither refund nor a change to revenues.
While offshore wind and the triennial review are understandably areas of focus, we'd be remiss if we didn't also highlight the blocking and tackling we're doing to advance other very material growth investments and their associated regulatory processes for the benefit of our customers, communities and the environment.
Since our last update, we received our fourth consecutive regulatory approval for investments in utility-owned rider recoverable solar projects.
We've now surpassed 1,000 megawatts of Dominion Energy-owned solar generation in service in Virginia, and there is a lot more to come.
In fact, our pipeline of company-owned solar projects in Virginia under various stages of development currently totals nearly 4,000 megawatts, which gives us great confidence in our ability to achieve the solar capacity targets set forth in Virginia law and which support our long-term growth capital plans.
In the very near term, about 25 days to be specific, we'll make our next and largest to date clean energy submission.
We expect the filing to include as many as 1,100 megawatts of utility-owned and PPA solar, roughly consistent with the 65-35 split identified in the Virginia Clean Economy Act.
It will also include around 100 megawatts of battery storage, including 70 megawatts of utility-owned projects.
Taken together, the filing will represent as much as $1.5 billion of utility-owned and rider-eligible investment, further derisking our growth capital guidance provided on our fourth-quarter 2020 earnings call.
Next, the State Corporation Commission approved our inaugural renewable portfolio standard development plan and rider filings.
This annual accounting is mandated under the VCEA and provide a status update on the company's progress toward meeting both near- and long-term requirements under the state's RPS targets.
We received commission approval for our Regional Greenhouse Gas Initiative, or RGGI, rider filing.
Under state law, Virginia has joined with other RGGI states to promote a marketplace for emissions credits with the goal of significantly reducing greenhouse gases over time, and this approval allows for timely recovery of our cost of compliance.
Next, we received authorization from the Nuclear Regulatory Commission to extend the life of our two nuclear units at the Surry power station for an additional 20 years.
These units currently provide around 45% of the state's zero carbon generation and under this authorization will be upgraded to continue providing significant environmental and economic benefits for many years to come.
We expect to file for rider cost recovery associated with license renewal capital investment later this year.
And last but not least, progress on our grid's transformation plans.
Our first phase covering 2019 through 2021 is well underway, and we recently filed our phase 2 plan with Virginia regulators covering the years 2022 and '23.
The second phase includes approximately $669 million in capital investment, which is needed to facilitate and optimize the integration of distributed energy resources while continuing to address the reality that reliability and security are vital to our company and its customers.
We expect the final CPCN order around the end of the year.
Our customers and our policymakers have made it abundantly clear.
They want cleaner energy, and they want it delivered safely, reliably and affordably.
We're therefore very pleased to be executing on that vision on multiple fronts while extending the track record of constructive regulatory outcomes to the benefit of all stakeholders.
Turning now to our gas distribution business.
We're leading the industry in initiatives to reduce the carbon footprint of our essential natural gas distribution services.
Our efforts include modifications to our operating and maintenance procedures, systemic pipeline and other aging infrastructure replacement, third-party damage prevention, piloting applications for hydrogen blending, producing and promoting the use of carbon-beneficial renewable natural gas and offering innovative customer programs.
For example, in Utah, we're seeking approval for a program that would enable customers to purchase voluntary carbon offsets.
For around $5 per month on a typical residential bill, customers that opt into the program will offset the carbon impact of their gas distribution use.
This program, which like our existing GreenTherm program, allows customers to make choices about how to manage and lower their individual carbon profiles is just one way we're reimagining how gas distribution service intersects with an increasingly sustainable energy future.
Along those lines, our hydrogen blending pilot in Utah is performing in line with expectations, and we're in the planning stages of expanding the pilot to test communities.
We filed for a similar blending pilot in North Carolina and are evaluating appropriate next steps for blending in our Ohio system.
And as it relates to our already industry-leading renewable natural gas platform, we're pleased to announce an expansion of our strategic alliance with Vanguard Renewables.
As a result, we expect to grow our dairy RNG portfolio from six projects in five states to 22 projects in seven states through the second half of the decade and enhance our development pipeline with specific projects toward our aspirational goal of investing up to $2 billion by 2035.
Our current pipeline of projects will result in an estimated annual reduction of 5.5 million metric tons of CO2e, which is the equivalent to removing 1.2 million cars from the road.
Turning now to South Carolina.
On July 21, the South Carolina Public Service Commission with the support of all parties unanimously approved the proposed comprehensive settlement in the pending General Electric rate case.
We appreciate the collaborative approach among the parties over the last six months, which allowed us to produce this agreement that provides significant customer benefits, as shown on Slide 14; supports our ability to continue providing safe, reliable, affordable and increasingly sustainable energy; and aligns with our existing consolidated financial earnings guidance.
Further, the approval allows all parties to turn the page and focus on South Carolina's bright energy future.
It's also worth noting that the commission also recently approved our modified IRP, which favors a plan that would result in the retirement of all coal-fired generation in our South Carolina system by the end of the decade.
While the IRP is an informational filing and does not provide approval or disapproval for any specific capital project, we look forward to continuing to work with stakeholders, including the commission, to drive toward an increasingly low carbon future.
First, Senior Vice President, Craig Wagstaff, who's provided over 10 years of exemplary leadership for our gas utility operations in Utah, Idaho and Wyoming, will be retiring early next year.
And I can say definitively on behalf of all of our colleagues, he will be sorely missed.
Craig joined Questar Corp.
in 1984, and we have benefited greatly from his contributions since the Dominion Energy-Questar merger in 2016.
Best wishes to Craig and his family on his retirement.
We ask Steven Ridge, our current vice president of investor relations, to relocate to Salt Lake City and, effective October 1, assume the role of vice president and general manager for our Western natural gas distribution operations.
Steven has been a valuable member of our IR efforts over the last nearly four years.
And I think he's got to know most of you pretty well.
We have every confidence in his ability to follow Craig's long-standing example of serving our Utah, Wyoming and Idaho customers and communities well.
And finally, David McFarland, who's been working on our investor relations team since October of last year, will assume responsibility for our IR efforts as Steven transitions into his new role later this year.
We congratulate David on this new opportunity.
Our investors should expect no change to our aim to provide consistently a high level of responsiveness and accuracy they've grown to expect from our current IR team.
With that, let me summarize our remarks on Slide 15.
Our safety performance year to date is on track to improve upon last year's record-setting achievement.
We reported our 22nd consecutive quarterly result, normalized for weather, meets or exceeds the midpoint of our guidance range.
We affirmed our existing annual and long-term earnings guidance and our dividend-growth guidance.
We're focused on executing across project construction and achieving regulatory outcomes that serve our customers well, and we're aggressively pursuing our vision to become the most sustainable regulated energy company in America. | compname announces q1 earnings per share of $1.23.
sees q2 operating earnings per share $0.70 to $0.80.
q1 operating earnings per share $1.09.
q1 gaap earnings per share $1.23.
also affirms its long-term earnings and dividend growth guidance. | 0 |
Joining me on the call today are Gene Lee, Darden's Chairman and CEO; Rick Cardenas, President and COO; and Raj Vennam, CFO.
Any reference to pre-COVID when discussing first quarter performance is a comparison of the first quarter of fiscal 2020.
This is because last year's results are not meaningful due to the pandemic's impact on the business and the limited capacity environment that we operated in during the first quarter of fiscal '21.
We plan to release fiscal 2022 second quarter earnings on Friday, December 17 before the market opens, followed by a conference call.
Rick will give an update on our operating performance, and Raj will provide more detail on our financial results and an update of our fiscal '22 financial outlook.
Our teams continue to operate effectively in a challenging environment.
And I'm proud of their focus and ability to deliver another quarter of strong sales and profitability.
All of our segments delivered record first quarter profit.
Our ability to drive profitable sales growth is a testament to the strength of our business model and our continued to adherence this strategy we implemented six years ago.
Our brands remain laser focused on executing our back-to-basics operating philosophy anchored in food, service and atmosphere, while at the Darden level, we concentrate on strengthening and leveraging our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture.
Our first quarter sales trends started strong.
This momentum carried over from the fourth quarter, and they further strengthened and peaked in July.
However, in August, sales slowed due to the impact of the Delta variant, but remained positive relative to pre-COVID levels.
For the first quarter, sales per operating week were up 4.8% relative to pre-COVID.
And through the first three weeks in September, sales per operating week were up approximately 7% relative to pre-COVID.
Regardless of the operating environment, our unwavering commitment to our strategy ensures we will stay focused on what we do best, providing exceptional guest experiences.
Throughout this unique period, our operators have shown tremendous flexibility, while remaining locked in on the fundamentals of running great restaurants.
At the same time, our focus helps us continue to find ways to make our competitive advantages work even harder for us.
One of the ways we do this is by leveraging our ability to open value-creating new restaurants.
We opened seven new restaurants during the quarter, all of which are exceeding our expectations.
And we remain on track to open approximately 35 to 40 new restaurants this fiscal year.
A long-term framework calls for 2% to 3% sales growth from new restaurants.
Given our stronger unit economics, our development team is working hard to build out a pipeline of locations for fiscal '23 and beyond that would put us at or above the higher end of our framework.
As I visit our restaurants and talk with our teams, I'm constantly reminded why our people are our greatest competitive advantage.
Their passion for being of service to our guests and each other fuels our success.
Our success this quarter was driven by the work we have done to simplify our processes and our menus to drive execution at the highest level.
We also paused any new initiatives in order to further eliminate distractions for our restaurant teams and allow them to focus on what it takes to run 14 great shifts a week.
In addition, To-Go sales continue to benefit from the ongoing evolution of our digital platform.
This platform makes it simpler for our guests to visit, order, pay and pick up, all while making it easier for our teams to execute at the highest level, both in the dining room and off-premise.
This served our teams well, as To-Go sales remained high through the quarter.
For the quarter, off-premise sales accounted for 27% of total sales at Olive Garden and 15% of total sales at LongHorn Steakhouse.
Digital transactions accounted for 60% of all off-premise sales during the quarter, and guest satisfaction metrics for off-premise experiences remained strong.
As we navigate short-term external pressures, our focus is simple.
We must continue to win when it comes to our people and product.
From a people perspective, the employment environment is challenging.
That's why our top priority during the quarter was staffing our restaurants.
Our operators and HR teams have done a great job sourcing talent.
We recently launched a new talent acquisition system that helps increase our pool of candidates by allowing applicants to apply and schedule an interview in five minutes or less.
Additionally, our brands are successfully utilizing their digital platforms, including social media to promote our employment proposition and drive applications.
As a result, we are netting more than 1,000 new team members per week, and our team member count is approximately 90% of our pre-COVID levels.
The biggest operational challenge we've been dealing with is a temporary exclusion of team members identified through contact tracing.
Given our commitment to health and safety, we are diligent about exclusions, but they create sudden staffing disruptions for our operators.
Despite being appropriately staffed in the majority of our restaurants, these exclusions reduce the number of available team members with little notice for our operators to prepare.
This volatility can negatively impact sales in these restaurants for the duration of the exclusion period.
Getting and staying staffed also requires a strong focus on training.
As we continue to hire, it is critical that we have the right training in place to ensure we continue to execute at a high level.
That's why our operations leaders are validating the quality of our training during their restaurant visits, ensuring new team members receive the appropriate amount of training and successfully complete the required assessments.
Our team members are the heart and soul of our business, and we are constantly focused on our employment proposition.
The investments we have made and continue to make in our people are helping us retain and attract top talent, and I'm confident in our ability to address our staffing needs.
When it comes to product, our significant scale, including our dedicated distribution capabilities, enables us to manage through the challenges affecting the global supply chain and maintain continuity for our restaurants.
Our supply chain team continues to work hard to ensure we successfully manage through any spot outages we encounter, and our restaurants have the key products they need to serve our guests.
During the quarter, we had to secure more product than usual on the spot market, because our brands exceeded sales expectations and some of our suppliers experienced capacity challenges.
Raj will share more details in a moment, but these higher sales volumes, as well as freight costs have contributed to higher-than-expected inflation.
Our scale advantage provides the opportunity for us to price below our competition and inflation, which is a strategy we have executed successfully.
Our competitive advantage of extensive data and insights allows us to be surgical in our pricing approach, positioning us well to deal with these higher costs and maintain our value leadership.
The rich insights we gather from our analytics help us find the right opportunities to price in ways that minimize impact to traffic over time.
We still expect pricing to be well below the rate of inflation for the year, further strengthening our value proposition.
Ensuring our restaurants are appropriately staffed and our supply chain continues to avoid significant disruptions, will be the most important factors of our continued success in the short term.
To wrap up, I also want to recognize our outstanding team.
I'm inspired by the dedication and winning spirit that our leaders and team members, both in our restaurants and in our support center continue to demonstrate.
Total sales for the first quarter were $2.3 billion, 51% higher than last year, driven by 47.5% same restaurant sales growth and the addition of 34 net new restaurants.
Diluted net earnings per share from continuing operations were $1.76.
We returned approximately $330 million to our shareholders this quarter, paying $144 million in dividends and repurchasing $186 million in shares.
We had strong performance this quarter, despite increased inflationary pressures with EBITDA of $370 million and EBITDA margin of 16%, 250 basis points higher than pre-COVID.
Our sales results were better than expected requiring us to go out and purchase more product on the spot market, in particular, proteins, as our LongHorn and Fine Dining segments had the largest sales outperformance versus our expectations.
The market for proteins this quarter was very strong with spot premiums as high as 30% above our contracted rates.
This resulted in higher average cost per pound for our proteins contributing to total commodities' inflation for the quarter of approximately 5.5%.
Given the heightened attention on inflation, I want to clarify that we use a conventional approach to calculating the rate of inflation.
We're only measuring change in average price holding product mix and usage constant.
We follow the same approach for calculating wage inflation rate, in which we keep the hour and job mix constant and only look at change in wage.
While we expect higher rates of inflation to persist for the remainder of the year versus what we initially planned, we believe our scale and recent enhancements to our business model enable us to deliver significant margin expansion, while still adhering to our strategy of pricing below inflation.
Now looking at the P&L for the first quarter of 2022, we're providing a comparison against pre-COVID results in the first quarter of 2020, which we believe is a more comparable to normal business operations and with how we've been talking about our margin expansion.
For the first quarter, food and beverage expenses were 150 basis points higher, driven by investments in both food quality and pricing significantly below inflation.
Restaurant labor was 110 basis points lower, driven primarily by hourly labor improvement, due to efficiencies gained from operational simplifications and was partially offset by elevated wage pressures.
Restaurant expenses were also 110 basis points lower due to sales leverage.
Marketing spend was $45 million lower, resulting in 220 basis points of favorability.
As a result, restaurant-level EBITDA margin for Darden was 20.9%, 290 basis points better than pre-COVID levels.
G&A expense was 30 basis points higher, driven primarily by approximately $10 million of stock compensation expenses related to the immediate expensing of equity awards for retirement eligible employees.
Additionally, we had approximately $5 million of expense related to mark-to-market on our deferred compensation.
As a reminder, due to the way we hedge this expense, it's largely offset on the tax line.
Our effective tax rate for the quarter was 12.6%, which benefited from the deferred compensation hedge I just mentioned.
Excluding this benefit, our effective tax rate would have been closer to the top end of our guidance range for the year.
Turning to our segment performance.
First quarter sales at Olive Garden were flat to pre-COVID, while segment profit margin increased 220 basis points.
This was strong performance despite elevated inflation and two-year check growth of only 2.4%.
LongHorn had the best sales performance across our segments with sales increasing by 26% versus pre-COVID, while growing segment profit margin by 250 basis points.
Sales at our Fine Dining segment increased 24% versus pre-COVID in what's traditionally their slowest quarter from a seasonal perspective.
Segment profit margin grew by 490 basis points, driven by strong sales leverage and operational efficiencies, which more than offset double-digit commodity inflation.
Our Other segment grew sales by nearly 5% and segment profit margin by 360 basis points.
We continue to be excited about the long-term prospects of this segment, as it's driving the strongest underlying business model improvement of all our segments.
Finally, turning to our financial outlook for fiscal 2022.
Based on our performance this quarter and expected performance for the remainder of the year, we increased our outlook for the full year.
We now expect total sales of $9.4 billion to $9.6 billion, representing growth of 7% to 9% from pre-COVID levels; same restaurant sales growth of 27% to 30% and 35 to 40 new restaurants; capital spending of $375 million to $425 million; total inflation of approximately 4% with commodities inflation of 4.5% and total restaurant labor inflation of 5.5%, which includes hourly wage inflation of about 7%; EBITDA of $1.54 billion to $1.60 billion; and annual effective tax rate of 13% to 14% and approximately 131 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.25 and $7.60.
This outlook implies EBITDA margin growth versus pre-COVID, in line with our previous outlook as higher sales are helping offset elevated inflation.
This will be a net negative to second quarter from a sales perspective. | darden restaurants q1 earnings per share $1.76 from continuing operations.
q1 earnings per share $1.76 from continuing operations.
sees fiscal 2022 same-restaurant sales versus.
fiscal 2021 of 27% to 30%.
sees 2022 total sales of approximately $9.4 to $9.6 billion.
sees 2022 diluted net earnings per share from continuing operations of $7.25 to $7.60. | 1 |
We apologize for the technical difficulties just now.
Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
I'll start by giving a brief overview of our significant accomplishments in 2020 and current market trends.
Phillippe will cover our strategy and quarterly performance.
Hilla will provide a financial overview of the quarter and 2021 guidance.
Despite the gravity and impact of the pandemic that affected so many individuals across the globe, 2020 ended up being a great year for the homebuilding industry and for Meritage in particular.
We set the bar for new operational and financial records every quarter during the year, culminating in our all-time highest annual sales orders and home closings, and in turn our best average absorption pace of 5.2 per month since 2005.
We also delivered our greatest annual home closing revenue and homebuilding gross profit and the second strongest annual homebuilding gross margin in our company's history.
Even beyond the balance sheet and income statement, 2020 was quite a year.
We closed our 135,000th home.
And as the industry leader in energy efficiency, we were the first homebuilder to introduce MERV-13 nationwide, the most advanced air filtration system offered today for residential construction, which controls and improves air exchange within the home.
In keeping with our commitment to innovation and enhancing the customer experience, we rolled out 100% contactless selling to our customers.
Our homebuyers can begin their search online, qualify for mortgage through our models virtually, electronically remit their earnest money and earnest deposit, sign a sales agreement, and even close on home online and safety allow it.
We are driving digital enhancements to continuously improve the way customers, employees and trade partners interact with Meritage.
We'll have more to share with you on this initiative throughout 2021.
We pride ourselves on our reputation as a premium homebuilder focused on customer satisfaction.
2020 marked the eighth straight year of award-winning recognition for Meritage as we received various Avid Diamond, Gold and Benchmark awards across nine separate divisions.
In line with our dedication to fostering healthy communities in which we live and work, we donated over $0.5 million to our Meritage Care Foundation to nonprofits like Feeding America and Americares that are focused on helping those affected by COVID-19, fighting hunger and combating homelessness.
And to promote racial equity nationwide, we donated $200,000 to INROADS and the United Negro College Fund and began our multiyear partnership with these organizations.
Our Board of Directors and management are committed to drive DEI, diversity, equity and inclusion, throughout our organization and our industry.
We'll have more to share on DEI in 2021 as well.
And we were also one of the only three public homebuilders who Forbes recognized as one of America's Best Mid-size Companies.
Our employees accomplished all these milestones in 2020 while keeping the health and safety of our fellow team members, customers and trades front of mind during this difficult year.
As we turn to 2021 and beyond, we look to the favorable macroeconomic factors to provide some visibility into future demand.
The housing market remains robust with low mortgage interest rates, and undersupply of new and existing homes for sale and advantageous demographic trends in new home ownership for the millennial and baby boom generations.
The homebuilding industry has already experienced an uptick in demand prior to COVID-19.
And after a brief pause in late March and early April, 2020's unprecedented strength in the housing market was particularly focused on increased demand for healthier and safer homes at affordable price points.
We anticipate these fundamentals to continue into the foreseeable future, which aligned well with our strategic focus on entry-level and first move-up homes.
Since 2016, our strategy has centered around the entry-level and first move-up markets, offering customers affordable yet high-quality homes.
The strength in the housing market this past year enabled us to capture pricing power, which combined with our streamlined, more efficient operating model, produced growing sales volume, higher margins, improved SG&A leverage and our strong Q4 results.
The fourth quarter of 2020 was another record quarter for Meritage, which reflected the continued momentum of the first nine months of the year.
We sold 3,174 homes this quarter, which was 52% higher than the same quarter of 2019.
This represented the hot third highest quarterly orders only to be surpassed by Q2 and Q3 earlier this year.
Home closing revenue of $1.4 billion in the current quarter increased 28% year-over-year.
In the fourth quarter of 2020, we delivered our best quarterly home closing gross margins in 2006 by improving 420 bps to 24% from 19.8% in the prior year.
2020 lacks the normal cadence of seasonality.
The housing market remained robust during the traditionally quiet time of the year.
Capitalizing on the overall industry demand as well as the expansion of our community mix toward entry-level homes, which sell at a higher pace than our first move homes, our absorption of 5.3 per month for the quarter was up 87% year-over-year, even as we increased pricing in all of our geographies in line with strong local market demand.
The per store absorption accelerated faster than total order growth, demonstrating our capacity to generate significant sales volumes once we achieve our 300-community target.
five out of the nine states had absorptions increase over 100% year-over-year this quarter, despite a 19% decline in average active communities.
We continue to focus on growing our spec inventory for our entry-level communities as well as refining our offerings for the first move-up market, which has also experienced solid demand over the last two quarters.
Entry-level comprised almost 70% of total orders for the quarter, up from 55% in the fourth quarter last year.
Entry-level represents 67% of our average active communities during the current quarter compared to 45% a year ago.
As we have hit our relative product mix goal, we expect these ratios to sustain for the next -- for the near to midterm, although mix in individual geography is always adjusting with communities opening and closing.
Our first move communities also experienced improved demand year-over-year, with absorption 91% higher than a year ago.
All our regions reflected solid year-over-year performance in Q4.
The strength in the market was driven by low interest rates, limited supply and shifting buyer preferences for single-family, less densely populated homes.
Our East region led in terms of order growth, with a 76% improvement over the fourth quarter of 2019.
Absorption in the East region increased 118% year-over-year for the quarter, offset by a 20% decline in average community count.
64% of our average active communities in each region sold entry-level product during the quarter.
The East region performance and product mix are now in line with the rest of the company.
The shift to entry-level is nearly there had average absorptions exceeded five per month.
Our Central region, comprising our Texas market, increased orders by 46% over the fourth quarter of 2019, despite a 20% reduction in average community count.
Entry-level communities represented 71% of the Central region's average active community during the fourth quarter of 2020.
This region continues to see solid demand with shifting migration into the state, particularly in the tech sector, with Austin and Dallas Fort Worth seeing outsized demand even by today's standards.
Our fourth quarter 2020 orders in the West region were up 34% over the same quarter in the prior year, driven by a 65% increase in absorptions and partially offset by 18% fewer average communities.
Entry-level communities represented 67% of the West region's average active communities during the quarter.
Colorado had our highest first order absorption in the company this quarter, with an average of 6.4 homes per month in the fourth quarter of 2020 compared to 2.5 in the prior year.
This produced a 48% year-over-year growth in orders, reflecting the hard shift down to ASP price band over the last four to six quarters.
Turning to slide seven.
We closed 32% more homes in the fourth quarter of 2020 than prior year.
And our backlog was 4,672 units at the end of the fourth quarter, reflecting the high absorption pace we achieved this quarter.
Of the 3,744 home closings this quarter, 71% came from previously started spec inventory compared to 61% a year ago.
At December 31, 2020, less than 10% of total specs were completed versus 1/3, which is our typical run rate.
We are selling more specs in early stages of production to meet the surge in demand and are focusing our production efforts on completing our backlog inventory.
Our backlog conversion rates decreased to 71% in the fourth quarter this year compared to 80% last year, reflecting the early stages of construction in our sold homes.
We expect similar trends over the next couple of quarters as demand in the market absorbs our spec inventory at an accelerated pace.
Spec building is the core tenet of our entry-level market-focused strategy, which results in a higher spec inventory in these communities compared to first move-up communities.
We try to keep a four to six month supply of specs on the ground of our entry-level product.
We ended the fourth quarter of 2020 with a little over 2,500 spec homes in inventory or an average of 12.9 per community compared to approximately 3,000 or an average of 12.4 last year, reflecting the significant sales order growth during the fourth quarter.
While specs for community grew, our total staff count did not quite achieve our goal of 3,000 as these homes converted to backlog as quickly as we started them.
However, we are still focused on increasing our specs in January as we move into the spring selling season.
As Philippe noted, the 28% year-over-year closing revenue growth in the fourth quarter was the net impact of 32% increase in home closings and 4% decline in ASP.
While this ASP decline reflects the shift in product mix toward affordable entry-level homes, it also includes price increases throughout 2020 in all of our geographies from strong market demand.
We had our highest quarterly home closing gross revenue since 2006 this quarter, reaching 24%, a 420 bps improvement from the prior year.
The margin reflects our ASP increases achieved throughout the year, the additional leveraging of fixed costs from higher closing volumes as well as operational efficiencies.
We have our entry-level and first move-up construction processes really dialed in today.
We know all of the components of our home intimately and continue to focus on reducing our cost of materials.
Due to the consistent purchasing volumes on a limited number of SKUs, we're able to negotiate lower pricing in bulk purchasing discounts from our vendors.
This consistency and transparency also provide scheduling visibility to our trades and suppliers, allowing all of us to be more efficient and enabling us to attract local labor as we look to be the builder of choice for our contractors.
With this clarity, we have maintained a tight control over our production and gain confidence to start our spec homes on a structured cadence.
To date, we've not experienced elongated cycle times from shortages in the labor pool, but we continue to monitor the space for any changes.
Although lumber inflation has retreated a bit its highest earlier in the year, these costs still remain elevated.
We've been able to mitigate the cost inflation with price increases during 2020, although this is also an area that we are watching closely.
SG&A as a percentage of home closings revenue was 9.3% for the current quarter, which was our lowest quarterly percentage since 2007.
The 80 bps improvement over prior year reflects greater leverage of fixed expenses from efficiencies and higher closing revenue and ongoing permanent cost benefits from technology enhancements, particularly leading to our sales and marketing efforts.
We believe we can sustain strong margins in 2021 despite higher commodity costs, but we will incur a minimal negative impact to our SG&A leverage over the next several quarters.
As expected, we will have some additional costs relating to achieving our 300-community goal prior to the incremental closings and revenue from that new business.
However, we expect to improve our SG&A leverage beyond 2021 once our higher community count starts materially contributing to closing.
Included in our Q4 results are $20.3 million of impairment charges on land sales.
The impairment consists of two projects: one in California that is no longer in strategy for us as it is not an entry-level or first move-up product.
And another in our active adult market that we are looking to wind down.
We anticipate those sales will close in the first half of 2021.
The fourth quarter's effective income tax rate was 21.9% in 2020 compared to 6.3% in the prior year.
In 2019, the extension of the eligible energy tax credit on qualifying homes occurred in December, resulting in the beneficial impact for full year 2018 and '19 reflected in Q4 2019 generating the low tax rate.
With the extension of the 45L provisions into 2021, we expect to continue receiving energy tax credit in a significant percentage of our closings into this year.
Our fourth quarter diluted earnings per share was $3.97, increasing 50% year-over-year compared to 2.65% in the same quarter of 2019.
To highlight just a few items for the full year 2020 results: On a year-over-year basis, we generated a 70% increase in net earnings.
Orders were up 43%, and closings were up 28%.
We delivered $4.5 billion in full year home closing revenue, a 310 bps increase in home closing gross margin to 22%, and a 90 bps improvement in SG&A as a percentage of home closing revenue, ending the year at 10%.
The trends I just covered for Q4 were primarily in place for most of 2020, translating to these record results.
Moving on to slide nine.
We continue to focus on strengthening our balance sheet even as we push toward our 300-community goal.
We achieved several objectives this quarter.
Late in the quarter, we amended our revolving credit facility to extend the maturity date to 2025, changing our revolver to a five year maturity.
We opportunistically repurchased 100,000 shares for a total of $8.8 million in advance of the routine first quarter employee share issuance in 2021.
On November 13, 2020, our Board of Directors authorized an additional $100 million for share repurchases under the existing stock repurchase program.
And we also received two credit rating upgrades.
At December 31, 2020, our cash balance was $746 million, reflecting positive cash flow from operations of $530 million despite increased land acquisition and development spend.
Our net debt to cap reached an all-time low of 10.5%.
We previously noted that we've adjusted our maximum net debt-to-cap target to high 20s to low 30s range from our prior low to mid-40s range as our assets turn quicker with entry-level and first move-up offering.
We intend to use our excess cash on hand to aggressively pursue our community growth target, while also ensuring we do not overextend our balance sheet or liquidity.
On to slide 10.
We already control all the land we need to achieve our 300-community goal.
Our focus now is on developing the land to prepare the communities to open.
We also plan to increase our spend on additional land and development in order to sustain this growth level beyond 2022.
We spent $506 million on land and development this quarter, our highest spend in a single quarter in the company's history and over a 100% increase year-over-year.
For full year 2020, we invested nearly $1.3 billion in land and development.
We anticipate spending more than $1.5 billion annually in 2021 and beyond to sustain and replenish our 300 communities.
In the fourth quarter of 2020, we secured a quarterly record of approximately 11,200 new lots, which translates to 69 new communities.
We put nearly 29,500 gross new lots under control in 2020, a 62% increase as compared to about 18,000 lots in 2019.
Adjusting for land sales and termination, we secured approximately 27,200 net new lots in 2020, representing 192 new communities, of which approximately 81% are entry level.
At year-end with over 55,500 total lots under control, we had 4.7 years' supply of lots based on trailing 12-month closings, in line with our target of four to five years' supply of lots on hand.
We increased our land book by 34% from December 31, 2019.
We are using options or staggered purchasing terms where financially feasible, allowing us to preserve our liquidity.
About 59% of our total inventory at December 31, 2020, was owned and 41% was optioned, an improvement compared to the prior year of 63% owned and 37% optioned.
We've been putting larger land positions under contract several hundred lots at a time to address our accelerated sales pace.
Larger, higher-volume, entry-level communities reduce community level costs per lot and allow us to minimize the community count churn and inefficiencies associated with opening and closing out of communities.
For full year 2020, our new lots under control have an average community size of about 140 lots.
Finally, I'll direct you to slide 11.
We're encouraged by the continued strength in the housing market.
For full year 2021, we are projecting total closings to be between 11,500 and 12,500 units, total home closing revenue of $4.2 billion to $4.6 billion, home closing gross margin of 22% to 23%, and effective tax rate of about 23%, and diluted earnings per share in the range of $10.50 to $11.50.
We ended 2020 with 195 active communities, down from 244 in the prior year.
During the year, we opened up 105 communites, up 40% from 75% in 2019.
Since we anticipate continued strong sales demand in 2021, community count will remain plus-minus 200 for Q1 and Q2 as new community openings will be offset by community closings.
And our projected volume of closings between 11,500 and 12,500 for the full year, we expect to end 2021 with approximately 235 to 245 communities.
The community count growth will continue into Q1 and Q2 of '22 when we anticipate achieving our goal of operating 300 communities by June 2022.
As for Q1 2021, we are projecting total closings to be between 2,600 and 2,900 units, home closing revenue of $950 million to $1.05 billion, home closing gross margin of approximately 22.5%, and diluted earnings per share in the range of $2.25 to $2.50.
Moving on to slide 12.
Our results in 2020 validate that we have a solid strategy and are executing at a high level.
We are achieving strong closing revenue growth due to market strength combined with an increase in both pace and price.
While we are increasing prices in all of our geographies and in line with local market conditions, we are also optimizing sales volume.
Spec building has allowed us to sell at a greater pace and capture market share while not sacrificing profit.
Our efficiencies allowed us to accelerate 2020 closings into 2020, which in turn will let us redeploy the capital to fuel future growth.
Our balance sheet strength reflects increases in operating cash flow at our lowest levels of net debt to capital.
This in turn provides a long runway for growth as well as a safety net in the event of a market downturn.
Since the start of 2019, we have accelerated investments in land acquisition and development to support and sustain future growth levels.
In the fourth quarter, we spent a record $506 million on land and secured approximately 11,200 new lots.
We already control all the land necessary to achieve our 300 active community goal by mid-2022.
Our strong land position enables us to focus on developing lots to get those communities open and to continue to replenish the land pipeline beyond 2022.
To summarize on slide 13, we are entering 2021 with a heavy backlog of almost 4,700 sold homes and more than 2,500 specs completed or under construction, giving us some additional visibility in 2021.
With a solid strategy, strong balance sheet, a healthy land position and a great team that is executing at a high level, we are well positioned for growth. | compname reports q3 earnings per share of $2.84.
compname reports record third quarter 2020 orders 71% higher than prior year; 56% increase in net earnings with 21% revenue growth and 21.5% gross margin.
q3 earnings per share $2.84.
qtrly home orders 3,851 units versus 2,258 units.
projecting about $4.2 billion-$4.4 billion total home closing revenue and home closing gross margin of 21.0-21.5% for full year 2020. | 0 |
Today's presenters are Chris Martin, Chairman and CEO; Tony Labozzetta, President and Chief Operating Officer; 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 our third quarter.
Our third quarter earnings improved as the economy recovered in a measured way, with protocols in place allowing businesses to reopen safely and for consumers to return to a semblance of normalcy.
At the end of July, we were able to close on the SB One acquisition, which substantially increased both our balance sheet and earnings potential.
Earnings per share were $0.37, including merger-related expenses of $2 million recorded during the quarter compared with $0.22 in Q2.
Total assets at quarter end rose to $12.9 billion.
The impact of COVID declined substantially during the quarter and related loan deferral levels to 3.2% of loans as of October 16, as we have seen a significant reduction in the number of consumers and businesses requesting part persistence.
The allowance and the related provision reflects the ongoing impact of the COVID-19 pandemic on economic activity, including the hospitality, retail-related CRE and restaurant sectors.
It remains uncertain when and if additional economic stimulus will be provided or when a vaccine will be approved, which may impact the ultimate collectability of certain commercial loans where borrowers have requested multiple deferrals or forbearance.
And we have proactively downgraded our most vulnerable loans, and we continuously review credit quality loan by loan.
We still do not know if and when losses will materialize, but we believe the first half of 2021 will be telling absent government assistance to trouble businesses and consumers.
Now Tom will go over the loan payment deferrals in more detail, but suffice it to say, we have performed a deep dive analysis of full borrower requests for relief and are pleased that so many have recovered and resumed normal payments with approximately 2/3 of those remaining in deferral currently paying interest.
Our credit quality is performing in line with our expectations at this point.
And the key to credit risk management has always been staying consistent with our policies, underwriting discipline and conservative loan structures.
We have been and continue to be proactive at identifying potential credit issues and working problem lines to minimize losses.
And in the end, we believe we're going to continue to have a strong credit quality performance through this cycle.
As a result of our combination with SB One, the loan portfolio increased by $1.77 billion, further augmented by net organic growth for the quarter of $218 million on loan originations of $587 million.
The pipeline improved during the quarter and the volume of loan opportunities has increased.
Regarding the $475 million of PPP loans we held at September 30, like many banks, we anticipated that forgiveness might have started by now.
However, we see a lack of urgency from the SBA, and the program is still being politicized by Congress.
As a result, PPP loans will remain on our balance sheet longer than expected, which will modestly impact our margin.
The yield on PPP loans is approximately 2.75%, and we have about $8 million remaining in related deferred fees.
Deposits increased $2.46 billion, including $1.76 billion added from the SP One transaction.
Included with the SB One deposits were $577 million in CDs, which were adjusted to market rates on acquisition, adding four basis points to our margin this quarter.
Core deposits represent 88% of total deposits, and our total cost of deposits was 33 basis points, among the best in our market.
Overall, our favorable cost of deposits reflects our strong long-standing client relationships.
Borrowings increased with $201 million coming from SB One, while the cost of borrowings declined during the quarter.
Capital levels remain strong and exceed all regulatory requirements.
And with PFS currently trading at 87% of book value, we see the repurchase of our stock as an effective use of capital and a great return for long-term stockholders.
The net interest margin held up well this quarter, and our expected earning asset growth will support total net interest income.
But the effect of historically low long-term rates will continue to challenge our net interest margin.
Funding costs will move marginally lower as borrowings and CDs reprice at maturity, but this may not be sufficient to fully offset declines in asset yields.
And while we have negotiated interest rate floors on the sizable portion of our portfolio and the rates on loans in our portfolio have improved, loan yields on new originations remain lower than portfolio yields.
Additionally, our loan portfolio is approximately 57% adjustable rate and has repriced downward, putting further pressure on the margin.
But our continued disciplined management of deposit pricing has mitigated this impact.
With the SB One merger completed, noninterest income increased as SB One Insurance Agency income was incorporated into the P&L, and we are excited about the prospects for this business line, given our substantial customer base.
Fees on retail banking services rebounded during the quarter, and wealth management fees improved with the market rebound from COVID shutdowns.
Loan level swap income was also up for the quarter.
Reflecting the addition of two months' worth of SB One expenses, the increase was primarily in compensation expense, legal and consulting expenses and severance costs related to the transaction.
Operating expenses to average assets and efficiency ratios remain strong, and we look forward to a decrease in expenses upon converting SB One to our data systems in November.
With that, I'll ask Tom to give some more detail.
As Chris noted, our net income was $27.1 million or $0.37 per diluted share compared with $14.3 million or $0.22 per diluted share for the trailing quarter.
Earnings for the current quarter reflect the $15.5 million acquisition date provision for credit losses on nonpurchased credit deteriorated loans acquired from SB One, partially offset by the favorable impact of an improved economic forecast.
In addition, costs specific to our COVID response fell to $200,000 from $1 million in the trailing quarter.
These improvements were partially offset by merger-related costs that increased to $2 million in the current quarter from $683,000 in the trailing quarter.
Core pre-tax preprovision earnings, excluding provisions for credit losses on loans and commitments to extend credit, merger-related charges and COVID response costs were $44.4 million.
This compares favorably with $35.9 million in the trailing quarter.
Our net interest margin expanded four basis points versus the trailing quarter as we reduced funding costs and grew noninterest-bearing deposits, while earning asset yields stabilized and we deployed average excess liquidity.
To combat margin compression, we continue to reprice deposit accounts downward and emphasize noninterest-bearing deposit growth.
Including noninterest-bearing deposits, our total cost of deposits fell to 33 basis points this quarter from 41 basis points in the trailing quarter.
Noninterest-bearing deposits averaged $2.21 billion or 25% of total average deposits for the quarter, an increase from $1.85 billion in the trailing quarter, reflecting the SB One acquisition and organic growth.
Noninterest-bearing deposits totaled $2.38 billion at September 30, and average borrowing levels increased $43 million and the average cost of borrowed funds decreased 12 basis points versus the trailing quarter to 1.19%.
This rate reduction was partially offset by subordinated debentures acquired from SB One that had an average balance of $16.4 million at an average cost of 4.99% for the quarter.
Quarter end loan totals increased $2 billion versus the trailing quarter, reflecting $1.8 billion from the SB One acquisition and organic growth in CRE, construction, multifamily and C&I loans, partially offset by net reductions in consumer and residential mortgage loans.
Loan originations, excluding line of credit advances totaled $587 million for the quarter.
The pipeline at September 30 increased $71 million from the trailing quarter to $1.4 billion.
The pipeline rate increased 12 basis points since last quarter to 3.55% at September 30.
The increases in pipeline volume and rate reflect the acquisition of the SB One loan pipeline and are requiring higher spreads and floors.
Our provision for credit losses on loans was $6.4 million for the current quarter compared with $10.9 million in the trailing quarter.
This reflects a day one provision of $15.5 million for the acquired non-PCD loans partially offset by the impact of improvements in the economic forecast.
We had annualized net recoveries as a percentage of average loans of less than one basis point this quarter compared with annualized net recoveries of one basis point for the trailing quarter.
Nonperforming assets increased slightly to 42 basis points of total assets from 37 basis points at June 30.
Excluding PPP loans, the allowance represented 1.16% of loans compared with 1.17% in the trailing quarter.
The allowance for credit losses on loans included $13.6 million recorded as part of the amortized cost of PCD loans acquired from SB One.
Loans that have been or expected to be granted COVID-19-related payment deferrals or modifications declined from their peak of $1.31 billion or 16.8% of loans to $311 million or 3.2% of loans.
This $311 million of loans includes $48 million added through the SB One acquisition and consists of $27 million that are still in their initial deferral period, $85 million in the second 90-day deferral period and $199 million that have completed their initial deferral periods, but are expected to require ongoing assistance.
Included in this total are $92 million of loans secured by hotels with a pre-COVID weighted average LTV of 56%; $44 million of loans secured by retail properties with a pre-COVID weighted average LTV of 56%; $31 million of loans secured by restaurants with a pre-COVID weighted average LTV of 49%; $15 million secured by suburban office space with a pre-COVID weighted average LTV of 66%; and $43 million secured by residential mortgages, with the balance comprised of diverse commercial loans.
Noninterest income increased $6.3 million versus the trailing quarter to $21 million, as swap fee income increased $3.2 million.
The addition of SB One Insurance Agency contributed $1.7 million for the quarter.
And wealth management income increased $870,000 versus the trailing quarter.
In addition, deposit ATM and debit card income increased $750,000 for the quarter with the addition of SB One's customer base and the easing of pandemic-related consumer restrictions, partially offset by a decrease in bank loan life insurance benefits.
Excluding provisions for credit losses on commitments to extend credit, merger-related charges and COVID-related costs, noninterest expenses were an annualized 1.92% of average assets for the quarter compared with 1.86% in the trailing quarter.
These core expenses increased $9.7 million versus the trailing quarter, primarily due to the addition of SB One personnel, operations and facilities.
Our effective tax rate increased to 25.5% from 20.6% for the trailing quarter as a result of an improved forecasted taxable income in the current quarter.
We are currently projecting an effective tax rate of approximately 24% for the balance of 2020.
We'd be happy to respond to questions. | provident financial services q1 earnings per share $0.63.
q1 earnings per share $0.63. | 0 |
I'm Hallie Miller, Evercore's Head of Investor Relations.
Joining me on the call today are Ralph Schlosstein, and John Weinberg, our Co-Chairman and Co-CEOs; and Bob Walsh, our CFO.
At this time, it is uncertain how long our business will be negatively affected by COVID-19 and the associated economic and market downturn.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it is important to evaluate Evercore's performance on an annual basis.
As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
Let me start by saying that it is a pleasure to be doing my first call with John as Co-Chairman and Co-CEOs of Evercore.
Our new titles formalize what we have been doing for several years already, and along with Roger, whose role has not changed at all, contrary to some reports in the press, we greatly look forward to a very successful future for Evercore.
I am sure you will agree that the challenges of the past quarter have been myriad and significant.
First, the rapid spread of COVID-19 pandemic drove lockdowns around the world and has inspired a race to develop diagnostics, treatments and vaccines.
The pandemic and lockdown then gave rise to an unprecedented global economic downturn, record levels of unemployment and in response, fiscal and monetary stimulus that has been applied with unprecedented size and rapidity.
Financial markets became predictably volatile, first down and then up, but they currently are reasonably healthy, in stark contrast to the health of the real economy.
And in the midst of all this, a much needed call for a higher level of equality and social justice in our society, and a significantly greater commitment to diversity and inclusion in the workplace.
My partnership with John and Roger, and more broadly the culture within our Firm, has helped us navigate this challenging environment and to stay focused on both our clients and our people.
Before I comment on our results, I want to provide an update on how, we as a Firm, have responded to these events in the first half from both an operational and a business standpoint.
The vast majority of our team continues to work remotely that we are beginning to return to working in some of our offices.
This transition back to the office, in contrast to our move to working remotely, is happening at a measured pace consistent with local government directives designed to protect the communities in which we work, and our own policies to protect our people and their families.
We have embraced new technologies that allow us to communicate with our clients and our colleagues, despite our physical distance and we remain focused on the needs of our clients, helping them by leveraging our broad and diverse capabilities.
This focus has resulted in a number of things.
First, M&A assignments that made strategic sense before the downturn have continued to be announced, or if announced, have been completed.
Capital raising and assignments, both in the equity and debt markets have been occurring at levels dramatically higher than that at any time in our history.
And we have seen an unprecedented surge of restructuring and refinancing transactions often on a highly expedited basis.
And finally, on our invest -- on our research and in our Wealth Management business, a greater engagement with investing clients than at any time in our history.
John will cover our performance in greater detail in his remarks.
Following the tragic events in Minnesota, we also saw a much needed call for a higher level of social justice and more extensive commitment to diversity and inclusion in the workplace, in the US and elsewhere, a call that we strongly embrace.
We have taken the time to reflect on calls for social justice and have thought hard about racism and prejudice that's still persist in our society today.
We have come away with the awareness and commitment that we need to strengthen our own diversity and inclusion efforts here at Evercore.
We are a market leader for our business accomplishments and we will expand the same energy and focus on our diversity and inclusion initiatives, not just to make ourselves better, but to try and have a more positive impact on our communities and the world in which we live.
As we look to the second half of the year, we are following a set of operating principles that are very similar to those that we discussed with you three months ago.
First, we remain committed to ensuring the health, wellness and safety of our team and their families, and to achieving our diversity and inclusion goals.
Second, our teams are focused on addressing the immediate needs of our corporate, institutional investor and wealth management clients, while helping them be better positioned for the eventual economic recovery.
Third, we are sustaining our operating infrastructure to support flexible and efficient working arrangements as we plan and implement our return to office on a thoughtful and disciplined basis.
And finally, we remain committed to maintaining our strong and liquid balance sheet.
Our results for the second quarter and the first half reflect both the momentum that we had in M&A before the onset of the pandemic, and our ability to pivot to meet our clients' changing needs in currently challenging economic and financial markets.
As a general matter, previously announced M&A transactions continued toward completion and the broader advisory capabilities that we have built and strengthened over the last several years have allowed us to continue to serve our clients on their most pressing financial and strategic issues.
Let me turn specifically to the numbers.
Second quarter adjusted net revenues of $513.9 million, decreased 4% versus the second quarter of 2019.
For the first six months of 2020, adjusted net revenues of $948.9 million, decreased 1% versus the prior year.
Although our revenues from Investment Banking, that is advisory fees, underwriting fees and commissions, increased by 2% versus the prior period.
Second quarter advisory fees of $336.5 million declined 24%, compared to the second quarter of 2019, which was an unusually strong quarter.
In fact, our third best quarter for advisory fees in our history.
Advisory fees for the six months of 2020 were $695.6 million, a decline of 10%, compared to the prior year period.
We expect our market advisory share -- our market share in advisory fees, among all publicly reported firms, on a trailing 12-month basis to be 8.2%, compared to 8.3% at year-end 2019.
Second quarter underwriting fees of $93.6 million, increased more than 450%, compared to the second quarter of 2019.
Underwriting fees in the second quarter were higher than our underwriting fees for all of 2019, which was a record year in underwriting fees for us.
For the first six months of the year, underwriting fees were $114.7 million, an increase of more than 160% versus the prior year period.
Third quarter underwriting fees are already off to a strong start and we are working hard to sustain this momentum.
Commissions and related fees of $54.1 million, increased 11% versus the second quarter of 2019.
For the first six months of 2020, commissions and related fees of $109.5 million, increased 21% versus the prior year period.
Asset management and administration fees from our consolidated businesses were $15.2 million, an increase of 4%, compared to the second quarter of 2019.
For the first six months of 2020, asset management and administration fees from our consolidated businesses were $30.5 million, an increase of 5% from the prior year period.
Turning to expenses, our compensation ratio for the second quarter is 65%, and our compensation ratio for the first six months of 2020 is 63.6%.
A word of explanation about the compensation ratio, the 63.6% accrual in the first half reflects, as it has in past years, an estimate for the full-year compensation ratio, which includes an estimate for 2020 incentive compensation.
Given the uncertainty about revenues for the remainder of the year and the uncertainty about the level of market compensation for our younger employees in 2020, we have significantly more uncertainty about the full-year compensation ratio than at this time in prior years.
Our intention is to pay our younger employees at market rates as we always have, and to pay our more senior employees in a way that fairly balances the short-term and longer-term interests of our shareholders.
The short-term interest being higher earnings this year and the longer-term interest being keeping the team together that has produced more than $2 billion of revenue in 2018 and 2019 and investing in new talent for our future growth.
So, we are doing our best to have our six-month compensation ratio be within the range of possible outcomes for the full-year, although the uncertainty about both revenues and market compensation for our employees is considerably higher than in prior years.
Non-compensation costs of $77.1 million in the second quarter declined 11% from the second quarter of 2019.
For the first six months, non-compensation costs of $159.9 million, declined 4%.
Bob will comment on this further in his remarks.
Adjusted operating income and adjusted net income of $102.7 million and $71.8 million, declined 26% and 29%, respectively, and adjusted earnings per share of $1.53, declined 26%, all versus the second quarter of 2019.
For the first six months of 2020, adjusted operating income, and adjusted net income of $185.3 million and $129.6 million, declined 21% and 29%, respectively, and adjusted earnings per share of $2.74, declined 27% versus the prior six-month period.
We remain focused on our capital return and management strategy.
Year-to-date, we returned $206 million to shareholders through dividends and repurchase of 1.9 million shares at an average price of $76.22.
We have offset the dilution associated with equity grants for the year.
So any additional share repurchases in 2020 will be dependent on our second half revenues and earnings, balanced by our intention to maintain our strong liquidity position.
Our Board declared a dividend of $0.58, consistent with prior quarters, and reflective of our results for the quarter.
Our Board and management will continue to evaluate the dividend on a quarterly basis, as the effect of the pandemic on revenues becomes more clear.
Although the current expectation, absent any extraordinary steep decline in revenues and a significant reduction in our cash position, is that our current dividend will be maintained.
The volatile market environment has created opportunities across products, geographic regions, and industry sectors.
As the quarter began, merger activity was muted as clients managed through the dislocation of the sudden impact of the COVID-19 pandemic.
We were fortunate to have the opportunity to assist our clients with broad-based debt advisory assignments, equity issuance, as well as advising them on restructuring challenges.
Our restructuring group has been especially busy.
We believe opportunities to assist our clients will continue as accommodative credit markets are giving companies time to address their liquidity needs and recover.
We believe there is significant opportunity in several sectors, including energy, consumer, retail and industrials.
In the capital markets, there has been extensive opportunity to assist clients in raising capital in both the debt and equity markets, in both the private and public arenas.
We had our strongest period ever in equity underwritings, and while we do not participate materially in public debt capital raises, we had the opportunity to assist clients on a number of innovative liability management assignments.
The momentum in our debt advisory and equity capital markets businesses has continued into the third quarter.
Private capital transactions for sponsors slowed considerably in the beginning of the quarter, but it's picked up more recently as issuers have become comfortable conducting diligence virtually.
Activism assignments similarly slowed early in the quarter, but the pace of business has started to recover more recently.
Investor clients remains focused on financial markets throughout the quarter, both institutional and wealth management, and trading activity remained high.
Significantly, during the quarter, the level of announced M&A activity slowed dramatically, as clients appropriately turned inward driving many of the activities I just summarized.
Announced M&A volumes were down 41% in the first six months of 2020, and the number of announced transactions is down 15%.
The second quarter was particularly weak, announced global M&A volumes were down more than 50%, compared to last year's second quarter and the number of announced transactions declined 29%.
Several of the key conditions necessary for a healthy M&A market were absent in the most -- in most sectors of the economy during the quarter and remain generally absent today.
However, the basis of recovery may be forming.
The equity markets are currently strong for many sectors.
Access to financing and readily available capital and credit began to improve throughout the quarter.
And CEO confidence began to slightly improve as the quarter closed, but granted from a low pace.
Dialogues and discussions with clients around strategic opportunities have begun to slowly pick up during the last few weeks and processes involving financial sponsors are beginning anew.
I am, for the moment, guardedly optimistic about the merger market overall.
When the markets began to show sustained stability, CEO confidence will grow, which will drive an increase in strategic activity.
Until then, we will continue to actively communicate and engage with our clients to help them navigate the current challenges and to be there with them during the eventual recovery.
Let me now turn to our performance in Investment Banking.
Our revenues during the second quarter and first six months of 2020 held up well despite increasingly challenging conditions.
We sustained our number one ranking for volume of announced M&A transactions over the last 12 months, both globally and in the US among independent firms.
Among all firms, we are once again number four in the US in announced volume over the last 12 months, and we ranked number three among all firms in the US based on number of transactions for the first six months of 2020.
We continue to work hard to increase our share of the market.
We were pleased to continue to advise on some of the most important M&A assignments of the first half, including three of the 10 largest global M&A transactions, and four of the five largest M&A transactions in the United States.
Our restructuring and debt advisory teams are extremely busy.
Our US restructuring team has worked on the same number of assignments in this first half as it did for the entire year of 2019.
We are pleased that we ranked number one among all firms in number of announced restructuring deals and number of completed restructuring deals in the US in the league tables for the first half of the year, and we've been involved in seven of the 10 largest bankruptcies by total actual liabilities year-to-date.
These accomplishments stem from our model of integrating our restructuring and debt experts, and our industry-focused bankers.
Our deep expertise in restructuring and debt matters was central to our ability to work with a number of large new client.
Two recent examples include we were an advisor to Boeing on a $25 billion offering of senior notes, and an advisor to Ford on its $8 billion debt financing.
Deep expertise was also a catalyst for our work in specialized markets, for example, PIPEs, where we advised on four of five announced PIPE deals before the financing markets reopened.
Our underwriting business has performed extremely well in the market.
We served as an active bookrunner or co-manager on six of the 10 largest IPOs in the first half of 2020.
We completed our largest ever active bookrun transaction when we advised PNC on the secondary offering of its 22% stake in BlackRock.
At the time of the announcement, this deal was the largest deal year-to-date.
We advised Danaher on its upsized $3.1 billion offering which was split between common stock, and convertible preferred stock.
And we were an active bookrunner on select quote [Phonetic], the first non-healthcare IPO in the COVID environment.
While these large assignments contributed meaningfully to our quarterly results, we also participated in many more transactions across a broad range of sectors, demonstrating our ability to work in diverse areas and markets.
And while issuance is up across the board, we also more than doubled our overall share in the first six months, compared to the same period last year.
Our shareholder advisory and activism defense and our private capital advisory businesses and assignments are already in progress and we move toward completion in many.
We are proud to advise on the first-ever proxy contest, to have decided in a virtual annual meeting.
It was a successful outcome for our client, and our Private Funds Group completed the first fully virtual fund-raise, which was oversubscribed and attracted both current and new investors.
In our equities business, our connectivity with investor and advisory assignment remains elevated as they have become to rely on us for valuable insights during a period of significant market dislocation and our traders continue to help our clients execute in volatile markets.
Our people have responded to the challenges of the current environment and have served our clients with distinction.
The results I just summarized are testament to their teamwork and their commitment to our clients and to one another.
We will remain open to opportunistically adding other high-quality individuals who can bring value to our clients.
Finally, as we look toward the second half of the year, we are aware of the many headwinds and uncertainties ahead.
Despite the challenges of working apart, our results so far in 2020 demonstrate the power of a team working extremely well together with a consistent focus on clients.
It is this kind of collaboration that defines us.
And it's a key ingredient to our ongoing success.
I very much and looking forward to continuing to lead Evercore through this downturn and eventual recovery in partnership with Ralph, and of course, Roger.
I truly believe that our best opportunities are ahead of us, and I'm excited by the prospects and direction of our Firm.
Starting with our GAAP results.
For the second quarter of 2020, net revenues, net income and earnings per share on a GAAP basis were $507.1 million, $56.4 million, and $1.35, respectively.
For the first half of 2020, net revenues, net income and earnings per share on a GAAP basis were $934 million, $87.6 million, and $2.08, respectively.
Consistent with prior periods, our adjusted results exclude certain items that principally relate to our acquisitions and dispositions and also include the full share count associated with those acquisitions.
Specifically, we adjusted for costs associated with the vesting of Class J LP Units, granted in conjunction with the ISI acquisition.
For the first half, we expensed $1.1 million related to the Class J LP units.
The Class J LP units have been fully expensed.
Our adjusted results for the quarter also exclude certain items related to the realignment strategy that began in the fourth quarter of 2019.
As we noted last quarter, we expect to incur separation and transition benefits and related costs of approximately $38 million, $8.2 million of which was recorded as special charges in the second quarter of 2020.
These charges are excluded from our adjusted results.
Year-to-date, we have recorded $30.3 million as special charges related to the realignment initiative.
As we mentioned on our last call, we have entered into an agreement with the leaders of our business in Mexico to purchase our broker-dealer there, which principally provides investment management services.
Completion of this sale is subject to regulatory approval.
We have requested that approval in June and closing is expected to occur shortly after approval is granted.
We continue to review additional opportunities in smaller markets.
These opportunities could result in further charges in 2020 if pursued to completion.
And separately, we completed the sale of a Trust business, which was part of the ECB during the second quarter.
Our adjusted results for the quarter and first six months also excluded special charges of $0.4 million and $1.9 million, respectively, related to accelerated depreciation expenses.
Turning to other revenues.
Second quarter other revenue increased compared to the prior-year period, primarily as a result of gains of $15.5 million in the investment funds portfolio, which is used as an economic hedge against a portion of our deferred cash compensation program.
Other revenues for the first six months of 2020 decreased versus the prior year, primarily reflecting a net loss of $6.8 million on this investment fund portfolio.
This amount will, of course, fluctuate and a significant market rebound during the quarter drove the quarterly gains.
While the quarter gain -- though the quarter gains were not enough to more than offset the first quarter market decline.
With regard to non-compensation costs.
Firmwide non-compensation costs per employee were approximately $43,000 for the second quarter, down 13% on a year-over-year basis.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related expenses and professional fees.
As we mentioned on our last call, we began a thorough review of our non-compensation costs before the COVID-19 pandemic.
We continue to adapt our operations in response to the current downturn and remain focused on reducing our non-compensation costs, including cutting non-essential costs related to travel, research and subscriptions, and deferring certain capital projects, so we are well positioned throughout the downturn, as well as into the inevitable recovery.
Our GAAP tax rate for the second quarter was 24.5%, compared to 24.8% in the prior-year period.
On a GAAP basis, the share count was 41.9 million for the second quarter.
Our share count for our adjusted earnings per share was 47 million shares, down versus the prior-year period, driven by share repurchases and a lower average share price.
Finally, with regard to our financial position, we hold $1 billion of cash and cash equivalents, and approximately $100 million in investment securities as of the end of the quarter, as we had transitioned nearly all liquid assets to cash and cash equivalents in the first half.
Our current assets exceed current liabilities by approximately $950 million.
As Ralph noted, we continue to monitor our cash levels, liquidity, regulatory capital requirements, debt covenants and all of our other contractual obligations regularly and carefully.
We'd now be pleased to answer any questions. | compname reports quarterly dividend of $0.58 per share.
compname reports second quarter 2020 results; quarterly dividend of $0.58 per share.
qtrly net revenues of $507.1 million decreased 5%.
qtrly diluted earnings per share $1.35.
qtrly adjusted earnings per share $1.53.
evercore - m&a activity remains limited, uncertainty and market volatility have led to delays or, in some cases, terminations of transactions in quarter.
in conjunction with employment reductions, expects to incur separation & transition benefits and related costs of about $38 million.
$30.3 million of separation and transition costs has been recorded as special charges in first six months of 2020.
observed initial decline in equity underwriting activity during early stages of covid-19 pandemic.
restructuring, debt advisory and capital markets advisory businesses remain very active. | 1 |
Actual results may differ materially from those made or implied in such statements, which speak only of the date they are made and which we undertake no obligation to publicly update or revise.
Our Chairman and CEO, Clarence Smith, will now give you an update on our results.
And then, our President, Steve Burdette, will provide additional commentary about our business.
We're very pleased with another record quarter with sales of $260.4 million and net income of $24.2 million.
Our team has done an outstanding job in producing this performance through the ongoing COVID concerns, significant product pricing increases, major hiring challenges, especially in warehouse and distribution, rising operating costs in unprecedented supply chain disruptions.
I believe that we've outperformed the competition in being able to deliver to our customers.
We're very pleased with the efforts of our merchandising team and the pricing discipline at the store level.
Even with the unusual and significant demurrage and LIFO charges, we increased our gross margins and reached record operating profits.
Our available inventory is in the best shape we've had in over a year.
We're finally restarting new product development that was on hold due to COVID and the massive backlog of sold orders.
Clearly, our priority focus is bringing in sold merchandise to bring down our backlogs and to better serve our customers.
However, we are a home furnishings retailer, and fashion and style are important drivers of sales.
We're always excited to see the latest design and styles hit our floors, which is an important differentiator for Haverty.
In the past several months, we've added over 500 online exclusive products, including outdoor products and specialty occasional items which have had good response.
We greatly appreciate our manufacturing partners in China and Vietnam who struggled with COVID shutdowns over the past several months, but are opening back up and increasing their production levels.
Because of the COVID-related shutdowns, we will have gaps in imported products, creating some out of stocks, especially in case goods.
Our merchandising and supply chain teams have a strategy to soften this gap related to the Vietnam factory shutdowns.
We expect to end 2021 with 121 stores, one store over last year.
In 2022, we have plans to open five stores, netting three.
We're evaluating numerous opportunities for locations, which we can serve in our distribution footprint.
We've been pleased with our strategy of converting existing retail space to Haverty stores.
Recently, we've had very good results with stores in the 30,000 to 35,000 square foot size, a building size with more availability.
With the importance of our website and special order tools, we can present a large selection set of merchandise without requiring a much larger store.
We're in the process of planning 2022 capex.
We expect we will be in the same range as we had last -- this year, approximately $35 million net.
Investments in stores and renovations are the largest block.
Our single largest investment will be expansion of our Virginia Distribution Center, which we bought back earlier this year.
We're converting the facility from a regional home delivery center to a full distribution center to better serve our Atlantic Coast growth.
The expansion will allow us to receive direct shipments from the north port, reducing shipment cost and allow for quicker deliveries.
Our IT and marketing teams made major investments in remaking and upgrading our website to be the best in class industry leader.
We're focused on ease of use and inspiring our customers throughout the process, utilizing the Adobe platform.
It will align with an upgraded 3D floor plan, significantly improved graphics, design and search.
We're expecting the rollout of the new site early in the second quarter next year.
As we just released, our fourth quarter written sales were down approximately 3.5% from the same period last year with delivered sales up 17.5% over last year.
For perspective, this year's Q4 written sales to date are up 20.9% and delivered are up 41.5% over 2019.
We're having record delivery weeks as we receive more incoming sold product and are having much better inventory compared to last year.
As all of retail is struggling with the late shipments for Christmas, we also have real challenges in supply chain, and I would like to ask Steve Burdette, President, to give us an update on our supply chain status.
I am thrilled with our results for the third quarter.
Our performance could not have happened without the dedication of our entire team in the stores, distribution centers, home delivery service and home office, whom I want to congratulate personally for their efforts.
Our supply chain network has been able to increase the flow of products into our warehouses over the third quarter.
Our warehouse inventory levels rose over 8% for the third quarter, and we are seeing our inventories continue to rise so far in October.
We will expect to see a slowdown in imports arriving in the November-December timeframe.
The headwinds during the quarter continued with the Vietnam shut down beginning in late July, rising container rates, container congestion at the ports along with container capacity, staffing issues with the continued spread of the Delta variant and trucking pressures moving products within our network.
There was a bright spot during the quarter with the foam supply as our vendors do not see this as an issue moving into the fourth quarter.
Vietnam began its shut down in late July and things accelerated in August where majority of our factories were closed for the months of August and September.
We are getting positive news from our vendors that they began opening at the beginning of October.
However, it will be a slow process to get back to 100% production.
Majority of the vendors feel like they will be able to get back to 50% to 75% of production by Chinese New Year with a return to 100% not happening until late first quarter next year.
A few vendors did give a more upbeat outlook that they will be back to 100% production by the end of November because of the safety and medical protocols that they had in place.
Also, we continue to see shipments coming from Vietnam now.
Container capacity, container rates and port congestion continue to be areas of concern.
We expect these issues to continue well into 2022.
Our container prices on the spot market continued to increase during the quarter.
However, we are seeing a downward trend in October.
We continue to balance our shipping mix so that no more than 20% to 30% is on the water at one time at these spot market rates.
Due to our focus on ensuring that we could provide our customers with a more consistent flow of product, we incurred higher freight costs during the quarter and a substantial amount of demurrage and detention expense that we expect will be reduced significantly during the fourth quarter.
Staffing continues to be a concern as it is not only impacting our distribution, delivery and service areas, but it's impacting our manufacturers and trucking partners.
We continue to evaluate each of our areas of the business to ensure that we are competitive so that we are attracting the best talent.
We did start seeing some traction in the latter part of the quarter, but still have opportunities.
We consider our people our most valued asset as we know our service is what sets us apart from our competitors.
We have seen our average age of the undelivered pool continuing to increase to nine weeks from eight weeks over the quarter.
Our special order lead times have stabilized due to the improvement in foam supplies, and we have started seeing higher production quantities from our domestic suppliers over the last four weeks.
Our special order business is still suffering from these delays, but we feel confident that we will be able to see a bounce back due to a more confident sales team seeing the improvement in our lead times.
We remain optimistic for the fourth quarter.
Our teams are doing a wonderful job communicating with our customers regarding any delays with their products.
While there will be a slowdown in import receipts from Vietnam, we are expecting improved shipping times from our domestic suppliers and improvements in shipments from our bedding suppliers to help offset some of these delays.
In the third quarter of 2021, delivered sales were $260.4 million, a 19.7% increase over the prior year quarter.
Total written sales for the third quarter of 2021 were up 2% over the prior year period.
Comparable store sales were up 17.7% over the prior year period.
Our gross profit margin increased 60 basis points from 56.2% to 56.8% due to better merchandise pricing and mix and less promotional activity during the quarter.
These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product cost.
Selling, general and administrative expenses increased $16.1 million or 16% to $116.2 million, primarily due to increased sales activity.
However, as a percentage of sales, these costs declined 1,400 basis points to 44.6% from 46%.
As Steve mentioned earlier, during the third quarter of 2021, we did experience increased port congestion and we incurred significant demurrage costs of approximately $2.3 million, which negatively impacted our selling, general and administrative costs.
However, as demonstrated in the past four quarters, our financial model has substantial operating leverage at these sales levels.
Other income in the third quarter of 2020 was $2.4 million, which includes the gain on surplus property that was adjacent to our distribution center in Dallas, Texas.
Income before income taxes increased $7.4 million to $31.9 million.
Our tax expense was $7.7 million during the third quarter of 2021, which resulted in an effective tax rate of 24%.
The primary difference in the effective rate and statutory rate is due to state income taxes and the tax benefit from vested stock awards.
Net income for the third quarter of 2021 was $24.2 million or $1.31 per diluted share on our common stock compared to net income of $18.3 million or $0.97 per share in the comparable quarter of last year.
Now looking at our balance sheet, at the end of the third quarter, our inventories were $119 million, which was actually up $29.1 million from the December 31, 2020 balance and up $28 million versus the Q3 2020 balance.
At the end of the third quarter, our customer deposits were $120.1 million, which was up $34 million from the December 31, 2020 balance and up $31.7 million versus the Q3 2020 balance.
We ended the quarter with $232.3 million of cash and cash equivalents.
We have no funded debt on our balance sheet at the end of Q3 2021.
Looking at some of the uses of cash flow.
Capital expenditures were $28.1 million for the first nine months of 2021 and we paid $13 million of regular dividends during the first nine months of 2021.
During the third quarter, we purchased $19.5 million of common stock as 537,196 shares.
As previously reported, our board of directors authorized an additional $25 million of share repurchases.
At the end of the third quarter of 2021, we had $22.3 million remaining under current authorization in our buyback program.
We continue to expect our gross profit margins for 2021 to be between 56.5% to 56.8%.
We anticipate gross profit margins will be impacted by our current estimate of product and freight costs and changes in our LIFO reserve.
Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the $278 million to $281 million range, an increase over our previous estimate, primarily due to rising warehouse and demurrage costs.
The variable-type costs within SG&A for 2021 are expected to be in the range of 17% to 17.3%.
Our planned capex for 2021 remains at $37 million, anticipated new replacement stores, remodels and expansions account for $18.7 million, investments in our distribution network are expected to be $15.2 million and investments in our information technology are expected to be approximately $3.1 million in 2021.
Our anticipated effective tax rate for this year is expected to be 24%.
This projection excludes the impact from vesting of stock awards and any potential new tax legislation.
This completes my commentary on the third quarter financial results.
We are very pleased with the record performance here underway.
We're comparing well with the second half records of 2021 and against 2019.
We believe that the pneumatic return to home that COVID precipitated has changed the importance of home for years to come.
We agree with the recent editorial from Jerry Epperson, an industry veteran and analyst in furniture today this week.
Following the boomers, the millennials and Gen Xers have moved to desiring homes because of life changes related to having children.
We're having another housing boom where people want to move to the suburbs.
We're getting back to the 67% of our households being homeowners.
The home will continue to grow in importance.
You can now shop, bank, see the doctor and go to church from home.
This is going to transform our nation in terms of level of productivity, innovation and new ideas.
Haverty's 136-year history and strength is in serving the home furnishing needs in the 16 Southern Atlantic and Central states.
These areas are gaining the most transplants from the rest of the country.
We think that our locations, premium product merchandising, H Design services and dedicated distribution positions us to continue to grow from the all time record set in the past years.
We believe we have the experience, the deep resources and strong commitment to growing our sales and maintain strong double-digit operating profits in the years ahead. | compname reports q2 earnings per share $1.21.
q2 earnings per share $1.21.
q2 same store sales rose 46.9 percent.
q2 sales $250 million.
qtrly diluted earnings per common share of $1.21. | 0 |
Subsets and Splits