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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I want to remind everyone that today's call is being recorded, and an archived version of the call will be available on our website.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. | scottsmiracle-gro increases full-year sales outlook for u.s. consumer segment.
q1 sales fell 24 percent to $566 million.
q1 non-gaap loss per share $0.88 excluding items.
q1 gaap loss per share $0.90 from continuing operations.
to consolidate u.s. lighting manufacturing for hawthorne into single location and to close another recently acquired assembly facility.
compname says restructuring charge of up to $5 million expected to be recorded in q2, will be excluded from co's fy adjusted results. | 1 |
In a moment, Mark Smucker, president, and CEO will give an overview of the quarter's results and an update on our strategic initiatives.
Tucker Marshall, our CFO, will then provide a detailed analysis of the financial results and our fiscal 2022 outlook.
These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties.
We also posted a slide deck summarizing the quarterly results, including additional information regarding net sales by segment and cost of products sold for fiscal 2021.
Included in the slide deck are schedules summarizing net sales excluding divestitures for fiscal years 2019 through 2021.
If you have additional questions after today's call, please contact me.
Fiscal 2021 was a year like no other.
In the face of unprecedented challenges, we delivered outstanding results.
Moreover, we believe the business is at an inflection point, and we are delivering against our strategic and executional plans.
We are emerging from the pandemic along with recent strategic actions a much stronger company.
From the outset of the pandemic, we prioritize the well-being of our employees, funded relief activities for our communities, and produced a record amount of products for consumers and their pets.
Our people are resilient and moved with speed and agility to adapt our business, all while executing our consumer-centric growth strategy and making progress toward our four execution priorities.
These are driving commercial excellence, streamlining our costs infrastructure, reshaping our portfolio, and unleashing our organization to win.
These priorities are essential to position our company for sustainable long-term growth.
I'll first share some examples of the progress we are making toward our priorities before turning to a few highlights from the fourth quarter and our fiscal year 2022 outlook.
Our first execution priority is driving commercial excellence.
Throughout the past year, significant changes in our industry demanded a rethink of CPG commercial models.
We adapted our approach to deliver what customers and consumers need and want more efficiently These changes included standing up a new sales model with two distinct teams, one focused on pets and the other on our consumer foods and coffee businesses.
The benefits from improved in-store execution and leveraging insights, combined with additional advertising and improved reach through new digital media models have been a driving factor for our market share gains.
These investments in our commercial capabilities provide a competitive advantage as we partner with retailers.
They also enable seamless and highly targeted consumer experiences from awareness to purchase and strong repeat purchasing.
Consumers remained loyal to our brands as we maintained the 1 million net new households gained in the prior year, while dollars per buyer increased 10%.
Over the past year, we increased our marketing investment by nearly $40 million or 8%.
Most importantly, we significantly improved our market share performance, where today, 55% of the brands in our portfolio are growing market share versus 26% 18 months ago.
This is the sixth quarter of sequential share performance improvement for our portfolio.
We also made significant progress on our second priority to increase focus on profitability and cost discipline.
We restructured our corporate support functions leading to a more lean and agile organization while continuing to optimize our supply chain and maximize network production efficiencies.
Full implementation of these initiatives will deliver $50 million of incremental cost savings in each of the next three fiscal years.
One example where we are driving efficiency in our supply chain is with our high-growth Dunkin' coffee.
The pandemic-driven surge in demand required us to increase agility and decrease production downtime and change over.
This led to operational efficiencies and incremental capacity for our coffee production, which supported 21% sales growth for the brand this year.
Our third execution priority to reshape our portfolio supports our strategy of leading in the best categories.
baking mix and condensed milk businesses.
In the pet business, we divested the special teaching and all exclusive Natural Balance brand.
These decisions show our commitment to divesting brands and businesses that are no longer consistent with our long-term strategic focus.
In turn, this allows us to optimize assortment to maximize productivity, reduce complexity, and shift resources to our fastest-growing opportunities.
We continue to evaluate opportunities to increase our portfolios' focus in the pet food, coffee, and snacking categories.
Further, acquisitions will remain a part of our strategic growth and we will be prudent when considering them, ensuring we focus on appropriate multiples paid and financial returns in their evaluation.
Our fourth execution priority, unleashing our organization to win, powers the first three priorities.
The strength of the Smucker culture has always been a unique differentiator in achieving growth and is a critical component of our future.
With the impact of my new leadership team and through the additional organization changes implemented this past year, we are more lean, agile, and focused on delivering with excellence and winning in the marketplace.
We're also increasing our focus on becoming a more inclusive and diverse company at every level of the organization.
These four priorities are critical to ensuring we maintain our momentum and we're critical to our record fiscal 2021 results with full-year net sales increasing 3%.
Net sales grew 5% when excluding the prior-year sales for divested businesses and foreign currency exchange.
Fiscal '21 adjusted earnings per share was $9.12, an increase of 4%, exceeding our most recent guidance range of $8.70 to $8.90.
Free cash flow was $1.26 billion, above our most recent expectations of $1.1 billion.
Our strong financial performance accelerated elements of our capital deployment strategy to support increased shareholder value.
We returned $1.1 billion of capital to shareholders this year in the form of dividends and share repurchases.
We increased our dividend for the 19th consecutive year and through share repurchases, reduced our shares outstanding by approximately 5% on a full-year basis.
And we repaid over $860 million of debt during the fiscal year, strengthening our balance sheet to provide flexibility for a balanced approach to reinvesting in the business and returning cash to shareholders.
Turning to the fourth quarter, we delivered results ahead of our expectations while accelerating investments for future growth.
Net sales declined 8% versus the prior year.
Excluding the non-comparable net sales from divestitures and foreign exchange, net sales decreased 3% due to lapping the initial stock upsurge related to the COVID-19 pandemic.
As we are lapping the COVID-19-related demand in the prior year, we believe evaluating results over the prior two-year period is more meaningful.
Adjusting for divestitures, net sales grew at a two-year CAGR of 4%, demonstrating growth across all three of our U.S. retail segments.
Fourth-quarter adjusted earnings per share declined 26%, primarily driven by the decreased sales, $40 million of incremental marketing investments, and higher costs, partially offset by higher pricing.
Turning to our segment results.
In pet food, we anticipated sales to be down due to lapping stock up purchasing in the prior year.
Net sales, excluding sales for the divested Natural Balance business, decreased 6% and demonstrated growth on a two-year basis.
While pet food consumption was not materially impacted by at-home versus away-from-home eating trends as in other categories, the pandemic did impact how consumers shop for their pets such as accelerated growth in e-commerce channels.
Also, the total U.S. pet population grew by an estimated high-single-digit percentage this past year with new pet parents showing a willingness to spend more for their pets compared to historical trends.
We expect top-line growth on a comparable basis for the pet business in fiscal '22, supported by higher pricing, category growth, continued marketing support, and innovation for our leading treats portfolio, and premium food offerings.
Turning to our coffee business, net sales were comparable to the prior year despite lapping the COVID-19 stock up purchasing and demonstrated growth on a two-year basis.
Consumer adoption of K-Cups continues to grow with 3 million incremental households purchasing a Keurig machine last year.
In the last 52 weeks, retail sales of our brands grew 17%.
This was over twice the category rate and we gained over a point of share.
Our share gains further accelerated in more recent periods as all our brands continue to grow, including Folgers.
Cafe Bustelo and Dunkin' are the two fastest-growing brands in the coffee category.
Over the last 52 weeks, Cafe Bustelo retail sales grew 21% and Dunkin' grew 16%.
The Dunkin' brand, representing $1 billion in all-channel retail sales dollars was a top share gainer in the coffee category growing nearly triple the total at-home coffee category rate in measured channels over the last 52 weeks.
The Folgers brand gained 3 million new households at the height of the pandemic and has the highest repeat rate of any brand for new households gained during the pandemic.
We will continue to build up this momentum with initiatives to reinvigorate the iconic brand rolling out in the second half of fiscal year '22.
As new coffee habits formed during the pandemic, we anticipate retaining a substantial portion of these new consumers for the long term.
In our consumer foods business, net sales decreased due to the Crisco divestiture and increased 1% on a comparable basis and reflected strong growth on a two-year basis.
Smucker's Uncrustables frozen sandwiches continue to deliver exceptional growth with net sales and household penetration each increasing 16% in the quarter.
For our combined U.S. retail and away-from-home segments, the Uncrustables brand delivered nearly $130 million of net sales this quarter, recording its 28th consecutive quarter of growth.
The brand delivered over $400 million of net sales this year and is on track to exceed our $500 million target in fiscal year 2023.
Across our retail businesses, we delivered strong financial results this year, while significantly increasing investments in our brands, strengthening our balance sheet, and returning cash to shareholders, all of which are key building blocks for supporting long-term growth and increasing shareholder value.
I'll briefly touch on the current supply chain and cost environments.
Our operations have run efficiently, and we have had no material disruptions to date.
We continue to monitor global supply chain challenges specifically as it relates to the availability of transportation, labor, and certain materials.
Broad-based inflation is impacting many of the commodities, packaging materials, and transportation channels that are important to our business.
We are mitigating the impact through a combination of higher pricing inclusive of list price increases, reduced trade, and net revenue optimization strategies, as well as continued cost management.
We have recently implemented net price increases across all business segments with most becoming effective during the month of July.
Let me now provide additional details on our outlook for fiscal 2022.
As the U.S. emerges from the pandemic, we believe elevated at-home consumption for our brands will continue into fiscal 2022.
Our confidence is supported by the increased pet population, elevated work-from-home benefiting breakfast and lunch occasions, and consumers' investments in at-home brewing equipment.
Lapping sales from divested businesses will have a material impact on year-over-year net sales growth in fiscal 2022.
When excluding the non-comparable net sales, we anticipate top-line growth supported by higher net pricing, the continued momentum of our brands, and a significant recovery in our away-from-home business.
Year-over-year earnings per share is expected to decline.
The growth in comparable sales and benefits from cost savings programs are anticipated to be more than offset by the impact of higher costs and the timing of pricing actions, as well as the loss of earnings from divestitures.
On a two-year basis, we expect growth for both comparable net sales, as well as adjusted earnings per share as we continue to demonstrate underlying growth for the business.
Finally, as we emerged from the pandemic with a heightened focus on health and wellness, we remain dedicated to having a positive impact on our employees, our communities, and our planet.
This includes supporting the quality of life for people and pets strengthening the communities we serve both locally and globally and ensuring a positive impact on our planet with a focus on sustainable and ethical sourcing.
We look forward to sharing more details including the achievement of our 2020 environmental targets and information regarding our new ESG goals when we release our Corporate Impact Report this summer.
In summary, I would like to reinforce three key points.
First, we continue to deliver strong financial results, and our actions to deliver our priorities are leading to improvement in key metrics, including market share that position us well for the future.
Second, we are reshaping our portfolio to increase our focus on faster growth opportunities within pet food, coffee, and snacking.
And finally, we are sharpening our focus on cost management and becoming a more efficient and agile organization.
We are exiting this pandemic a stronger company, and our actions taken over the previous year support consistent delivery of long-term growth and shareholder value.
I'll begin by giving an overview of fourth-quarter results, which finished above our expectations, then I'll provide additional details on our financial outlook for fiscal 2022.
Net sales decreased 8%.
Excluding the impact of divestitures and foreign exchange, net sales decreased 3%.
This was primarily driven by unfavorable volume mix due to lapping the prior-year stock-up during the beginning of the pandemic, most notably for pet food and our Canadian baking business.
Higher net price realization was a 1 percentage point benefit, primarily driven by peanut butter and our pet business.
Adjusted gross profit decreased $79 million or 10% from the prior year.
This was mostly driven by unfavorable volume mix, with noncomparable impact to the domestic businesses and higher costs, partially offset by the higher net pricing.
Adjusted operating income decreased $120 million, or 28%, reflecting the decreased gross profit and higher SG&A expenses.
The increase in SG&A expense was primarily driven by increased marketing investments and incentive compensation, partially offset by reduced selling and distribution costs.
Below operating income, interest expense decreased $3 million, and the adjusted effective income tax rate was 23.3% compared to 23.4% in the prior year.
Factoring all this in, along with share repurchases that resulted in a weighted average shares outstanding of 108.9 million, fourth-quarter adjusted earnings per share was $1.89.
I'll now turn to fourth-quarter segment results, beginning with U.S. retail pet foods.
Net sales decreased 12% versus the prior year.
Excluding the noncomparable net sales for the divested Natural Balance business, net sales decreased 6% versus the prior year.
Net sales grew at a 2% CAGR on a two-year basis excluding the divestiture.
Dog snacks continue to perform well, decreasing just 1% in the fourth quarter after growth of 12% in the prior year.
Cat food decreased 4%, following an 18% growth in the prior year.
Dog food net sales decreased 15%, reflecting anticipated declines versus the prior year.
Pet food segment profit declined 32%, primarily reflecting lower volume mix, increased marketing investments, and increased freight and transportation costs, partially offset by higher net pricing.
Turning to the coffee segment.
Net sales were comparable to the prior year and increased 5% on a two-year CAGR basis.
The Dunkin' and Cafe Bustelo brands grew 10% and 18%, respectively, offset by a 7% decline for the Folgers brand, which benefited the most from consumers stocking up on coffee in the prior year.
For our K-Cup portfolio, net sales increased 14% and accounted for over 30% of the segment's net sales with growth across each brand in the portfolio.
Coffee segment profit decreased 9%, primarily driven by increased marketing expense.
In consumer foods, net sales decreased 13%.
Excluding the prior-year noncomparable net sales for the divested Crisco business, net sales increased 1%.
On a two-year CAGR basis, net sales, excluding the divestiture, grew at a 9% rate.
The fourth-quarter comparable net sales increase relative to the prior year was driven by higher net pricing of 4%, primarily due to a list price increase for peanut butter in the second quarter, partially offset by unfavorable volume mix of 3%.
Growth was led by the Smucker's Uncrustables frozen sandwiches, which grew 16%.
Consumer foods segment profit decreased 29%, primarily reflecting the noncomparable profit from the divested Crisco business, higher costs, and increased marketing expense, partially offset by the higher net pricing.
Lastly, in international and away-from-home, net sales declined 7%.
Excluding the prior-year noncomparable net sales for the divested Crisco business.
, net sales declined 5%.
The away-from-home business increased 7% on a comparable net sales basis, primarily driven by increases in portion control products.
International declines of 15% on a comparable net sales basis were primarily driven by declines in baking, partially offset by pet food and snacks.
On a comparable two-year CGAR basis, net sales for the combined businesses declined at a rate of 2%.
Overall, international and away-from-home segment profit decreased 30%, primarily driven by lower volume mix, partially offset by a net benefit of price and costs and favorable foreign currency exchange.
Fourth-quarter free cash flow was $183 million, an increase in cash provided by operating activities was more than offset by a $31.6 million increase in capital expenditures.
Capital expenditures for the fourth quarter were $108 million, with the increase over the prior year, primarily related to the capacity expansion for Uncrustables frozen sandwiches.
On a full-year basis, free cash flow was $1.26 billion, with capital expenditures of $307 million, representing 3.8% of net sales.
In the fourth quarter, repurchases of 1.5 million common shares settled for $174 million.
Over the course of the fiscal year, we repurchased 5.8 million shares for $678 million, reducing our outstanding share count by approximately 5%.
We finished the year with cash and cash equivalent balances of $334 million, compared to the prior year-end of $391 million.
We paid down $84 million of debt during the quarter and $866 million for the full year, ending the year with a gross debt balance of $4.8 billion.
Based on a trailing 12-month EBITDA of approximately $1.8 billion, our leverage ratio stands at 2.6 times.
We anticipate maintaining a strong balance sheet and leverage ratio, enabling a balanced capital deployment model, which includes strategic reinvestment in the business through capital expenditures and acquisitions while returning cash to shareholders through increasing dividends and evaluating share repurchases over time.
Let me now provide additional color on our outlook for fiscal 2022.
The pandemic and related implications, along with cost inflation and volatility in supply chains, continue to cause uncertainty for the fiscal year 2022 outlook.
Any manufacturing or supply chain disruption, as well as changes in consumer mobility and purchasing behavior, retailer inventory levels, and macroeconomic conditions could materially impact actual results.
We continue to focus on managing the elements we can control, including taking the necessary steps to minimize the impact of cost inflation and any business disruption.
As always, we will continue to plan for unforeseen volatility while ensuring we have contingency plans in place.
This guidance reflects performance expectations based on the company's current understanding of the overall environment.
Net sales are expected to decrease 2% to 3% compared to the prior year, including lapping of sales from the divested Crisco and Natural Balance businesses.
On a comparable basis, net sales are expected to increase approximately 2% at the midpoint of the sales guidance range.
This reflects benefits from higher pricing actions across multiple categories, primarily to recover increased commodity and input costs, along with continued double-digit sales growth for the Smucker's, Uncrustables brand, and the recovery in away-from-home channels, partially offset by a deceleration in at-home consumption trends.
We anticipate full-year gross profit margin of 37% to 37.5%, which reflects an 85-basis-point decline at the midpoint versus the prior year.
This factors in higher net pricing effective in the month of July, along with cost and productivity savings and a mixed benefit associated with the divestitures.
This will be more than offset by higher costs experienced throughout the full year.
These cost increases are driven by a high single-digit increase from commodities, ingredients, and packaging.
SG&A expenses are projected to be favorable by approximately 4%, reflecting savings generated by cost management, and organizational restructuring programs, a reset of incentive compensation, and total marketing spend of 6% to 6.5% of net sales, which reflects a stepdown from fiscal year 2021, partially driven by programs that were pulled forward into the fourth quarter.
We anticipate net interest expense of approximately $170 million and an adjusted effective income tax rate of approximately 24%, along with a full-year weighted average share count of 108.3 million.
Taking all these factors into consideration, we anticipate full-year adjusted earnings per share to be in the range of $8.70 to $9.10.
At the midpoint of our guidance range, year-over-year adjusted earnings per share is anticipated to decline 2%, mostly attributable to around a $0.20 net impact of divested earnings and the timing of benefits from shares repurchased.
Approximately one-third of the share repurchase benefit was recognized in fiscal 2021.
The adjusted earnings per share guidance further reflects benefits from the increase in comparable net sales, primarily due to pricing actions along with the company's cost management and organizational restructuring programs, which are expected to fully offset higher commodity ingredient, and packaging costs, and the timing of input cost recovery.
Given the timing of cost increases and recovery through higher net pricing, as well as a shift in timing of marketing expenses, earnings are anticipated to decline in the first half of the fiscal year, most notably in the first quarter with an anticipated decrease of over 20%.
We project free cash flow of approximately $900 million, with capital expenditures of $380 million for the year.
The increase for capital expenditures primarily relates to capacity expansion for Smucker's Uncrustables.
Other key assumptions affecting cash flow include depreciation expense of $230 million, amortization expense of $220 million, share-based compensation expense of $35 million, and restructuring costs of $25 million, which includes $15 million of noncash charges.
On a two-year basis, our full-year guidance reflects net sales, excluding divestitures to grow at a 3% to 4% CAGR, and modest adjusted earnings-per-share growth at the midpoint of the guidance range.
The two-year growth reflects the recovery of earnings related to the divested businesses through both organic growth and shares repurchased and accounts for the lapping of the unprecedented stock-up purchasing during the onset of the COVID-19 pandemic.
In closing, I am incredibly proud of our employees who continue to deliver exceptional financial results.
Because of their dedication, our business has strong momentum and we've positioned ourselves better than ever to serve the needs of consumers and their pets.
With continued financial discipline, we are committed to delivering sustainable and consistent, long-term value for our shareholders.
Operator, please queue up the first question. | q4 revenue $109 million.
provides update on transformation plan.
confident that we will see significant benefits beginning in 2021.
six flags entertainment - estimates that net cash outflow in q1 of 2021 will be, on average, $53 to $58 million per month.
striving to become cash flow positive for last nine months of 2021.
six flags entertainment - believes has sufficient liquidity to meet cash obligations through end of 2021 even if all its parks are unable to open. | 0 |
And joining me on the call today are Dale Gibbons, our -- and our Chief Credit Officer, Tim Bruckner.
I'll begin by laying out Western Alliance's approach to the COVID, an economic crisis.
First and most importantly, I hope that everyone on the line is doing well, and that your families and loved ones are safe and healthy.
These wishes are especially extended to all the care and safety workers actively putting themselves in harm's way to protect our communities.
At Western Alliance Bank, our people remain healthy and engaged, and despite the vast majority working-from-home for the last month, continue to go above and beyond the call of duty to serve our customers and the communities we operate to navigate this challenging time.
Our business continuity plans have been working as anticipated, and I am proud of the entrepreneurial spirit our people continue to demonstrate to get the job done and develop unique solutions for our clients.
First, I'd like to lay out the business actions Western Alliance has taken in light of the evolving environment.
Although we did not anticipate the widespread severity and likely duration of the virus, we did start assessing potential risks and mitigants as early as mid-January.
And as the breadth of the pandemic became apparent, we accelerated implementing plans in mid-February to prioritize asset quality, capital and liquidity management.
We have since divided the business into appropriate risk segments led by senior managers with deep credit and workout experience to monitor and force the early engagement with our borrowers and begin the necessary credit triage process.
For example, Robert Sarver is leading the hotel franchise group, while I am leading the warehouse lending and gaming groups, Dale has corporate finance; and Tim Bruckner coordinates overseas and directs' all credit activities.
Our overall risk management approach is focused on establishing individual borrower level strategies in which we are proactively engaging in customer conversations to evaluate and agree upon financial plans focused on liquidity management to conserve resources in anticipation of an elongated economic downturn.
Today, we have had direct dialogue with all borrowers with over $3 million in exposure or 86% of our portfolio, and substantial dialogue below this level.
We assume that all borrowers will have some level of COVID-19 impact and are focused on evaluating our borrowers' remediation efforts, access to capital and contingency plans.
We're also very pleased that Congress and the entire federal government came together to expeditiously pass the CARES Act and stimulus measures a few weeks ago.
Additionally, we applaud the Fed's actions to reduce interest rates to support liquidity in the financial markets to quantitative easing for a wide variety of asset classes and provide support for small and medium-sized businesses through its innovative new lending programs.
We recognize that the SBA has a large task in front of them, and I'm extremely proud to say that our people work tirelessly with them so that we could successfully process the PPP program loans on the first day.
We have dedicated over a quarter of our workforce to avail our clients of this important program and have successfully approved over 2,600 applications totaling $1.5 billion today.
We anticipate funding approximately $150 million per day.
As part of our broader risk management strategy, we have prioritized implementing the PPP program as the most expedient method to quickly get incremental liquidity to our clients.
Furthermore, we believe that the newly initiated mainstream lending program when implemented provides incremental liquidity for our large clients as well as PPP participants.
Our approach to loan modifications and deferment request is to look for resourceful ways to partner with our clients along with assessing their willingness and capacity to support their business interests.
We are asking our clients to work hand-in-hand with us for a long-term solutions to hopefully short-term challenging environment, whereby our clients contribute liquidity, capital or equity as an integral component to loan modifications.
Our longer term solutions-based approach distinguishes us from industry standardized 90-day deferral programs.
Our approach collectively uses the resources of the borrower, government and the banks' balance sheets to develop solutions that extend beyond six-month window provided for in the CARES Act.
This negotiation process has likely slowed our modification pipeline as approximately $400 million has been processed today.
We learned during the last downturn when both the borrower and the bank use their resources to bridge the gap, it generates a mutually favorable outcome.
With all of this as the backdrop, I'd like to walk through our financial performance for the quarter.
Despite a uniquely challenging operating and rate environment, I am proud to report that in the first quarter, Western Alliance generated $163.4 million of operating pre-provision net revenue, up 10% year-over-year and 3% quarter-to-quarter.
We continued with the adoption of CECL accounting changes this quarter, which resulted in a provision for credit losses of $51.2 million for the quarter, 47% of which was driven by our robust balance sheet growth.
Dale will go into more detail in a bit on how the unique features of CECL drove our provisions, but our ACL to funded loan ratio now stands at 1.14%.
WAL generated net income of $84 million or $0.83 per share and tangible book value per share was $26.73.
This quarter, we produced a NIM of a 4.22% and had net recoveries of $3.2 million and continue to improve our operating leverage.
Even with our increased vigilance, organic balance sheet continue to be healthy in Q1 for both loans and deposits.
Deposits grew $2 billion to $24.8 billion as we gained market share in several of our key business lines as well as traction in one of our recently launched deposit initiatives, which added over $400 million.
This highlights the continued strength of our diversified funding channel and overall deposit franchise to generate stable low-cost liquidity irrespective of the macroeconomic environment.
Continuing on our strong momentum from 2019, total loans increased $2 billion to $23.1 billion.
Approximately $1.5 billion of this was through organic loan growth from new client projects and another $500 million was credit line drawdowns, of which approximately half was redeposited into the bank.
Let me take a moment now to make a few high level comments on Western Alliance's loan portfolio.
We believe that our well-diversified business model and purposeful decisions made over the past decade regarding conservative underwriting criteria and sector allocations positioned the portfolio to withstand the current economic environment.
At quarter end, asset quality was stable with a decline in totally adverse graded loans and OREO to assets of 1.2% from 1.27% in Q4.
Western Alliance has no direct energy or large retail mall exposure.
We stopped making loans to the quick service restaurants sector several years ago with current exposure of only $150 million.
Our construction and land and development portfolio is now under 9% of our loan book.
In our institutional lot banking business, which makes up 30% of the CLD portfolio, we have not received any deferral request at this time.
Single family residential construction, which composes another 27%, were still experiencing positive absorption trends through March.
However, April's traffic has fallen off.
Our portfolio is extremely well positioned coming into the pandemic and right now is performing as expected.
We are especially focused on monitoring and engaging with our clients in our hotel franchise finance and technology and innovation segments, which will be reviewed in more detail later in the call.
During the quarter, we repurchased 1.8 million shares at an average price of $35.30.
Additionally, consistent with our 10b5 plan, we repurchased 270,000 shares thus far in Q2.
However, given the rapidly changing environment, we have now paused our share repurchase activity.
Finally, Western Alliance arrives at this crisis in a position of strength uniquely prepared to address what's ahead.
We remain well capitalized and highly liquid with the CET1 ratio of 9.7% and ample liquidity -- total liquidity resources of over $10 billion.
Dale will now take you through our financial performance.
For the first quarter, Western Alliance generated net income of $84 million or $0.83 earnings per share.
Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth as well as the change in the economic outlook due to pandemic.
Strong ongoing balance sheet momentum, coupled with diligent expense management, drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company.
Net interest income and fee income remain relatively stable producing net operating revenue of $285.3 million, primarily a result of lower yields on loans, which was partially offset by lower rates on deposits and borrowings.
Non-interest income declined $10.9 million to $5.1 million from the prior quarter due to mark-to-market of preferred stock holdings of primarily large money center banks of $11.3 million, partially offset by $3.8 million equity investment gain.
To-date, of the $11.3 million mark, $3.5 million has been recovered.
As credit spreads widened during the last quarter, the yield on preferred stocks followed impacting valuations.
We do not believe this represents a premanently reduced valuation and that preferred stock values will continue to recover over time.
Finally, non-interest expense declined $9.3 million as compensation and other operating expenses declined by $7 million.
Regarding implementing CECL in our allowance for credit losses, in our 10-K, we disclosed the adoption impact of $37 million, $19 million of which was attributable to funded loans, $15 million for unfunded commitments and $2.6 million for held-to-maturity securities.
This resulted in a combined January 1st allowance of $214 million.
During Q1, loan growth drove an additional $24 million of required reserves and another $30 million was driven by changes in the economic outlook as a result of the pandemic.
In total, reserve availed during the first quarter was $91 million, an increase of 50% from the year-end reserve.
The quarter end ACL of $268 million was 1.14% of funded loans, up 30 basis points.
Provision expense for the quarter was $51.2 million, which is over 10 times the average quarterly provision during 2019.
As of March 31st, the reserve bill reflects our best estimate of the future economic environment, including the impact of government stimulus programs.
We utilized an assimilation of various Moody's macroeconomic outlook scenarios to capture the most likely economic outcomes in a more severe scenario for potential tail risks.
As the economy continues to change, we will adjust our ACL modeling accordingly.
Turning now to net interest drivers.
Net interest income for the quarter declined a modest $3 million from the prior quarter to $269 million as there was one less day during the quarter compared to Q4 and margin compression was offset by loan to deposit growth.
Investment yield showed a modest improvement of 2 basis points from the prior quarter to 2.98%.
However, on a linked quarter basis, loan yields increased 31 basis points due to the lower rate environment.
The average yield of our portfolio at quarter end or the spot rate was 5.02%.
Interest bearing deposit cost increased 18 basis points in Q1 to 90 basis points as a result of immediate steps taken to reduce our deposit costs after the FOMC cut rates twice in March.
The spot rate of total deposits at quarter end was 29 basis points.
Total funding costs decreased 11 when all of the company's funding sources are considered, including non-interest bearing and borrowings.
Through the transition to a substantially lower rate environment during the quarter, net interest income was $269 million, a decline of 1.1% from Q4.
Continued strong balance sheet growth and immediate steps taken to reduce the cost of interest bearing deposits counteracted the decline in Prime and LIBOR.
Net interest margin declined 17 basis points to 4.22% during the quarter as their earning asset yield fell 28 basis points, partially offset by 19 basis points funding cost decrease.
With regards to our asset sensitivity, our rate risk profile has declined notably as the majority of our variable rate loan portfolio has flipped to fixed rate as floors have been triggered in the declining rate environment.
Presently, 82% or $8.1 billion of variable rate loans with floors are at the floors.
With the addition of our mix shift primarily to fixed rate residential loans, $16.2 million or 70% of loans are now behaving as a fixed rate portfolio.
This has reduced our interest rate risk on a 100 basis point parallel shock lower scenario to 3% at March 31st from 6.5% one year ago and assumes that rates are held flat at zero across the term structure.
Turning now to operating efficiency.
On a linked quarter basis, our efficiency ratio decreased 200 basis points to 41.8%.
As mentioned earlier, the improvement was attributed to decreases in compensation and other operating expenses while our revenues increased modestly.
As a core component of our strategy, we continue disciplined expense management to sustain industry-leading operating leverage and profitability.
Our core underlying earnings power remains strong as pre-provision net revenue ROA was 2.38%, flat from the prior quarter, while return on assets was down 70 basis points to 1.22% directly related to our provision expense in excessive charge-offs of $54.4 million.
As Kim mentioned earlier, our strong balance sheet momentum from 2019 continued into Q1.
During the quarter, loans increased $2 billion to $23.2 billion and deposits also grew $2 billion to $24.8 billion.
Loan to deposit ratio increased to 93.2% from 92.7% in the fourth quarter.
Our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs.
Shareholders equity declined by $17 million as dividends and share repurchases were matched by net income.
Tangible book value per share increased $0.19 over the prior quarter to $26.73 per share as our share count declined.
We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform's long-term value creation.
Q1 is a seasonally strong deposit quarter, and coupled with the roll out of our deposit initiatives, deposits grew $2 billion.
The increase was driven by growth of $1.3 billion in non-interest bearing DDA primarily from market share gains in our mortgage warehouse operations.
Additionally, HOA continues to perform well and contributed $330 million of low cost deposits.
During the quarter, the relative proportion of non-interest bearing DDA grew to nearly 40% of deposits from 37.5% on a linked quarter basis.
Turning to loan growth.
In line with the industry, the vast majority of growth was driven by increases in C&I loans totaling $1.8 billion, followed by $107 million in construction and land development, and $92 million in residential.
Residential homes now comprise 9.7% of our portfolio, while construction loans decreased as a relative proportion of the portfolio to 8.9% from 9.2% in the fourth.
At the segment level, Tech & Innovation loans grew $626 million, with $124 million from capital call and subscription lines and $176 million from existing technology loan draws, in turn bolstering technology-related deposits by $383 million.
Corporate finance loans grew $408 million, which was primarily due to line draws, two-thirds of which were from investment grade borrowers bringing utilization rates to 38% from 13% during the prior quarter.
Mortgage warehouse also contributed to loan growth of $550 million, approximately 50% of which was due to line draws.
Across the bank, one quarter or about $500 million of our net new loan growth was driven by drawdowns on existing loan commitments from the beginning of the quarter.
In all, total loan growth of $2.2 million for the quarter was fully funded by deposit growth for the same amount.
Overall, asset quality was stable during the quarter with total adversely graded assets increasing $10 million during the quarter to $351 million, while non-performing assets comprised of loans on non-accrual and repossessed real estate increased $27 million to $97 million or 0.33% of total assets, and is now held-for-sale.
Within these categories, we had migration from special mention to substandard and some of the normal investor funding was delayed in tech and innovation.
As a precaution, when remaining liquidity declines below six months, repaying those loans into either special mention or sub for enhanced monitoring and engagement.
This quarter, we also -- we saw the cumulative impact of our efforts of managing certain special mention and substandard loans as several resolved in our favor with no losses, a $100 million of adversely graded loans resolved during the past quarter, 37 loans or $50 million paid-off in full, while the other $50 million were upgraded to pass.
As Ken mentioned in his introduction, we're well positioned entering this economic cycle.
We only incurred $100,000 of gross credit losses during the quarter, which was more than offset by $3.3 million in recoveries, resulting in net recoveries of $3.2 million.
We typically have one or two one-off credit charges every quarter.
However, highlighting the strength of our loan book, we didn't experience any of these in Q1.
We believe early indication in identification and conservative management helps mitigate losses on these assets.
In all, the ACL-to-funded loans increased 30 basis points to 1.14% in Q1 as a result of CECL adoption and the result in provision expense related to Q1 loan growth and changes in the economic outlook.
We continue to generate capital and maintain strong regulatory capital ratios with tangible common equity, the total assets of 9.4% and a CET1 ratio of 9.7%.
In Q1, a reduction of TCE-to-total assets was mainly driven by $2.3 billion increase in tangible assets due to our significant loan growth, while the tangible common equity was affected by $15.4 million of provisions in excess of charge-offs due to CECL adoption.
In spite of reduced quarterly earnings and the payment of quarterly cash dividends of $0.25 per share, our tangible book value per share rose $0.19 in the quarter to $26.73 and is up 15.2% in the past year.
Our diversified deposit generation platform and access to significant liquidity resources is critical in times of economic stress.
Overall, we have access to over $10 billion in liquidity, primarily through our $4.7 billion investment portfolio, of which $2.7 billion are investment grade readily marketable and not pledged on any borrowing base.
Additionally, we have $7 billion in unused borrowing capacity with the Fed, Federal Home Loan Bank and Correspondent.
Our strong capital base, access to liquidity and diversified business model will allow us to address any credit demands in the future.
I'll now hand back the call to Ken to conclude with comments on a few of our specific portfolios.
Regarding our Hotel Franchise Finance business, we believe our focus on the Select Service subsegment, conservative loan to cost underwriting discipline and strong operating partners sets us up for a maximum financial flexibility to weather the duration of the crisis.
Like most hotels in the country, our clients have seen a dramatic reduction in occupancy rates over the last month, and senior management is involved in active dialogue with each borrower to evaluate remediation efforts and contingency plans.
Going into the pandemic, 75% of the portfolio had an LTV under 65% and more than 73% had a debt service coverage ratio of 1.3 times.
Additionally, we only partner with experienced hotel operators with significant invested equity and resources to support ongoing operations.
Fully 66% of the portfolio is with large sponsors who operate more than 25 hotels and 90% operate 10 or more properties with top franchises or flags.
Based on our ongoing constructive dialogue, we believe that sponsors view this as a temporary event and want to continue to maintain and support these properties over the long-term, given their significant equity investments.
We are actively working with them to appropriately utilize the PPP program and the Main Street lending programs, along with their own liquidity as a helpful financial bridge to arrive at a longer-term solution.
Based on the mutually developed financial action plans, we will selectively implement loan modifications along the lines we previously discussed.
This is a prime example where both parties contribute to a comprehensive solution.
Now, regarding our Tech & Innovation business, we primarily financed established growth technology firms with a strong risk profile, mainly companies classified as Stage 2 with an established business model, validated product, multiple rounds of investment, and a path to profitability.
This provides greater operating and financial flexibility in times of stress.
99% of the borrowers have revenues greater than $5 million and have strong institutional backing with 86% backed by one or more DC or PE firms.
During the quarter the portfolio grew $495 million to $2 billion or 8.8% of the total portfolio, which was attributed to $175 million of existing line drawdowns in the technology division and an additional $124 million from capital call lines, a product that historically has had zero losses.
Tech & Innovation commitments grew $284 million in Q1 and utilization rates increased to 60% from 49% in Q4 2019.
The portfolio is fairly granular with average loan size of $6 million and these borrowers are generally liquid with more than 2:1 deposit coverage ratio.
Additionally, since 2007, warrant income has covered cumulative net charge-offs 2 times over.
Currently 14% of technology loans or $164 million has less than six months remaining liquidity, which is in line with historical trends.
Although some fund raising has been delayed, we were pleased to see several investment rounds closed over the last several weeks and days with strong continued sponsored support.
In conclusion, we see increased cash generation driven by our balance sheet momentum going into the quarter-end as well as continued loan growth from the PPP distributions.
We expect pre-provision net revenue to continue to grow to Q2 with the ability to absorb any necessary future provisions.
Given uncertainty surrounding the likely duration of the virus and evolving economic environment, we will continue to reassess our outlook as health and economic facts warrant.
Regarding asset quality, our proactive risk management approach is institutionalized throughout the Company.
We are actively working with our borrowers to develop mutually agreed upon financial plans assuming an elongated economic downturn that leads to long-term solutions.
Our strong collateral positions and little unsecured or consumer lending should serve us well in mitigating potential risk of loss as we navigate these uncertain times.
We stand ready to implement the likely next phase of PPP and the Main Street Lending Program to assist our clients and communities.
Finally, Western Alliance has assembled a seasoned management team that has weathered several economic downturns and is applying the lessons learned from the Great Recession to face these uncertain economic times.
And with that we'll open up the line, operator, and we'll take everyone's questions. | compname reports q3 adjusted earnings per share $1.14.
q3 adjusted earnings per share $1.14.
q3 gaap earnings per share $0.69.
q3 sales rose 2.2 percent to $1.91 billion.
compname says tightened its 2021 sales guidance to a range of $7.90 billion to $8.05 billion.
sees fy 2021 adjusted earnings per share $4.20 to $4.30. | 0 |
Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.
The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures.
As usual, I'll start with a quick overview of our consistent strategy, a few comments about the quarter, and then Kevin and Mike will expand and give more color.
To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times as well as our steady focus on intrinsic shareholder value creation through all phases of the cycle.
To summarize, here are some of the reasons why we believe this: About 90% of our net sales are generated by proprietary products, and around three quarters of our net sales come from products for which we believe we are the sole source provider.
Most of our EBITDA comes from aftermarket revenues, which generally have significant higher margins, and over any extended period of time, have typically provided relative stability through the downturns.
We follow a consistent long-term strategy.
Specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.
Second, we utilize a simple, well-proven, value-based operating methodology.
Third, we have a decentralized organization structure and unique compensation system closely aligned with shareholders.
Fourth, we acquire businesses that fit this strategy and where we see a clear path to a PE-like return.
And lastly, our capital structure and allocations are a key part of our value-creation methodology.
Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market.
To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.
The commercial aftermarket revenue, typically the largest and most profitable portion of our business, dropped sharply in the second half of fiscal-year 2020, as we expected, following the steep decline in air travel due to COVID.
Sharp drops have happened during other severe shocks though not to this magnitude and likely duration.
At this point, there are some indications that Q3 of our fiscal-year 2020 was the bottom.
To the positive, we saw significant sequential increases in commercial aftermarket bookings in our fiscal-year Q1, but the stalling of the air travel recovery concerns us with regards to timing.
Our commercial aftermarket simply will recover as more people worldwide fly again, though not necessarily in lockstep.
This is starting to happen slowly and somewhat erratically, but the timing of the recovery is still not clear.
In addition to safety, the two most important items we continue to focus on are the things we can, to some degree, control.
One, we are tightly managing our costs.
Our revenues were down significantly in fiscal-year 2021, Q1 versus the prior year Q1, but our costs are down about the same.
The mixed impact of low commercial aftermarket revenues continues to impact our margins, but we have been able to mitigate part of this impact.
We raised an additional $1.5 billion at the beginning of our third quarter of fiscal-year '20.
The money raised was an insurance policy for these uncertain times.
It now seems unlikely that we will need it.
We continued to generate cash in Q1 of 2021.
We generated about $275 million of positive cash flow from operations and closed the quarter with almost $5 billion of cash.
This is prior to the acquisition that we made in January.
Absent some large additional dislocation or shutdown, we should come out of this with substantial firepower.
We continue to look at possible M&A opportunities, and are always attentive to our capital allocation.
But the M&A and capital markets are always difficult to predict, but especially so in these uncertain times.
In general, on capital allocation, we still tend to lean toward caution, but we feel better now than we did six months ago for sure.
M&A activity in this last quarter was more active.
As I'm sure you saw, we made a good-sized acquisition after the quarter end.
We bought the Cobham Aero Connectivity business, which is an antenna and radio business, for a purchase price of $965 million.
I must admit, it does feel good to play some offense again.
This is a good proprietary sole-source business with high aftermarket content.
We also like the customer diversity.
As usual, we expect to get a PE-like return on this transaction.
Though we are not giving overall guidance for TransDigm, for the little less than nine months that we will own the Cobham business in fiscal '21, we expect it to contribute roughly $160 million in revenue with EBITDA as defined margins running in the 25% to 35% range.
The revenue is impacted somewhat by the historical calendar year versus fiscal-year shipment timing.
We paid for the Cobham business with cash on hand, so -- but for the tax impacts, much of this will drop right through the earnings.
We also sold two small nonproprietary former Esterline businesses that did not fit our model for about $30 million so far in 2021.
The total revenues for these businesses in fiscal-year '20 were roughly $35 million, and EBITDA was in the 10% revenue range.
We continue to investigate the sale of a few other less proprietary defense businesses that don't fit as well with our consistent long-term strategy.
At this point, it's too soon to know when or if we will sell these businesses.
We still don't have sufficient clarity to give 2021 guidance.
When the smoke clears enough for us to feel more confidence, we'll reinstate the guidance.
In general, we are planning to keep tight control on expenses and hold our organization roughly flat until we see more clear signs of a pickup.
We believe we are about as well positioned as we can be for right now.
We'll watch the market develop and react accordingly.
Now let me hand it over to Kevin to review our recent performance and to give more information on Q1 and other thoughts.
Today, I'll first provide my regular review of results by key market and profitability of the business for the quarter.
I'll also comment on fiscal 2021 outlook and some COVID-19-related topics.
Our Q1 fiscal 2021 was another challenging quarter, considering the continued slowdown across the commercial aerospace industry in a difficult global economy.
In Q1, we continued to see a significant unfavorable impact on the business from the pandemic as demand for travel has remained depressed.
Despite these headwinds, I am pleased that we were able to achieve a Q1 EBITDA as defined margin approaching 43%, which was a sequential improvement from our Q4 EBITDA as defined margin.
Now we will review our revenues by market category.
For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2020.
That is assuming we own the same mix of businesses in both periods.
In the commercial market, which typically makes up close to 65% of our revenue, we split our discussion into OEM and aftermarket.
Our total commercial OEM market revenue declined approximately 40% in Q1 when compared with Q1 of the prior year period.
The pandemic has caused a significant negative impact on the commercial OEM market.
We are under the assumption that demand for our commercial OEM products will continue to be reduced throughout fiscal 2021 due to reductions in OEM production rates and airlines deferring or canceling new aircraft orders.
Longer term, the impact of COVID-19 is fluid and continues to evolve, but we anticipate negative impacts on our commercial OEM end market for some certain -- uncertain period of time.
On a positive note, Q1 demonstrated significant sequential bookings improvement compared to Q4, which is likely an indicator of OEM destocking slowing.
Additionally, it is encouraging that the MAX has been recertified in multiple countries and added back to route schedules, although the near-term impact to our business will likely be minimal given the low build rates.
Now moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenues declined by approximately 49% in Q1 when compared with Q1 of the prior year period.
In the quarter, the decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interior submarkets.
There was also a decline in the commercial transport freight market but at a less impactful rate.
On a positive note, the total commercial aftermarket revenues increased sequentially by approximately 5% when comparing the current quarter to Q4 fiscal 2020.
This increase was driven by the commercial transport aftermarket.
Our quarterly commercial aftermarket bookings were down in line with observed flight traffic declines resulting from decrease in air travel demand and uncertainty surrounding COVID.
However, Q1 also demonstrated significant sequential bookings improvement compared to Q4, and the bookings in Q1 modestly outpaced sales.
This is likely the result of destocking slowing at the airlines.
To touch on a few key points of consideration.
Global revenue passenger miles are still at unprecedented lows, though off the bottom as a result of the pandemic.
IATA's most recent forecast expects the final reported revenue passenger miles for calendar year 2020 to be 66% below 2019 and that calendar year 2021 average traffic levels will be about 50% of pre-COVID crisis levels.
Cargo demand was weaker prior to COVID-19 crisis as FTKs have declined from an all-time high in 2017.
However, a loss of passenger belly cargo due to flight restrictions and reduced passenger demand has helped cargo operations to be impacted to a lesser extent by COVID-19 than commercial travel.
Business jet utilization data was -- point to stagnant growth before the current disruption.
Now during the pandemic and in the aftermath, the outlook for business jets remains unpredictable as business jet flights were rebounding but due to personal and leisure travel as opposed to business travel.
However, now we face the typical slower winter season, and the sustainability of this trend is especially difficult to foresee.
Although the longer-term impacts of the pandemic are hard to predict, we continue to believe the commercial aftermarket will recover as long as air traffic continues to improve.
The recent approval and rollout of several vaccines will greatly aid in this recovery.
We believe there is a global pent-up demand for travel.
And in due time, passengers across the globe will return, and flight activity will increase.
Historically, personal travel has accounted for the largest percentage of revenue passenger miles, and forecasts still seem to indicate a pickup in personal travel in the back half of this calendar year, followed later by business travel.
We are hopeful this will be the case.
For now, the timing of the recovery is uncertain.
And in the meantime, we will continue to make the necessary business decisions and remain focused on our value drivers.
Now let me speak about our defense market, which traditionally are at or below 35% of our total revenue.
The defense market, which includes both OEM and aftermarket revenues, grew by approximately 1% in Q1 when compared with the prior year period.
Defense bookings declined slightly in the quarter driven primarily by a modest decline in defense aftermarket bookings.
As we have said many times, defense sales and bookings can be lumpy.
We continue to expect our defense business to expand throughout the year due to the strength of our current order book.
I'm going to talk primarily about our operating performance, or EBITDA as defined.
EBITDA as defined of about $474 million for Q1 was down 30% versus prior Q1.
EBITDA as defined margin in the quarter was just under 43%.
I am pleased that amid a disrupted commercial aerospace industry and in spite of the mix impact of low commercial aftermarket sales, we were able to expand our EBITDA as defined margin by approximately 40 basis points sequentially.
This result was made possible by our cost-mitigation efforts and a consistent focus on our operating strategy.
Now moving to our outlook for 2021.
As Nick previously mentioned, we are not in a position to issue formal fiscal 2021 sales, EBITDA as defined and net income guidance at this time.
We will look to reinstitute guidance when there is less uncertainty and we have a clearer picture of the future.
We, like most aero suppliers, remain hopeful that we will realize a more meaningful return of activity toward the second half of the calendar year.
This will be driven by increased vaccination availability and an initial recovery in personal and vacation travel.
For now, we are encouraged by the recovery in commercial OEM and aftermarket bookings in the first quarter.
As for the defense market, and as we said on the Q4 earnings call, we expect defense revenue growth in the low single-digit to mid-single-digit percent range for fiscal 2021 versus prior year.
Additionally, given the continued uncertainty in the commercial market channels and consistent with our commentary on the Q4 earnings call, we are not providing an expected dollar range for EBITDA as defined for the 2021 fiscal year.
We assume a steady increase in commercial aftermarket revenue going forward and expect full year fiscal 2021 EBITDA margin roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery.
This includes Cobham Aero Connectivity, which should have limited dilutive effects to our EBITDA margin.
Barring any other substantial disruptions of the commercial aerospace industry recovery, we anticipate EBITDA margins will continue to move up throughout the year, with this fiscal Q1 being the lowest.
Mike will provide details on other fiscal 2021 financial assumptions and updates.
Additionally, I would like to touch on our environmental, social and governance initiatives or ESG initiative.
2020 was a year of progress for our ESG program, though we are still in the beginning of our ESG journey.
Ongoing conversations with our stakeholders have been an integral part of building and evolving our ESG efforts.
As a leader in the aerospace industry, we recognize we need to extend our industry leadership to ESG initiatives as well.
These initiatives are a priority, and we are dedicated to continuous improvement as we move forward on our ESG journey.
More information regarding our ESG initiatives can be found within our recently published 2020 Stakeholder Report that is posted on the TransDigm homepage.
Let me conclude by stating that although Q1 of fiscal 2021 continued to be significantly impacted by the pandemic's disruption of the commercial aerospace industry, I am pleased with the company's performance in this challenging time and with our commitment to drive value for our stakeholders.
There is still much uncertainty about the commercial aerospace market, but we have a strong tenured management team that is always ready to act quickly and as necessary.
The team is focused on controlling what we can control while also monitoring the ongoing developments in the commercial aerospace industry and ensuring that we are ready to respond to demand as it comes back.
I am confident that as a result of our swift cost-mitigation efforts and focus on our operating strategy, the company will emerge more strongly from the ongoing weakness in our primary commercial end markets.
We look forward to the remainder of 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us.
I'm going to quickly hit on a few additional financial matters.
So I'm not going to rehash that in detail.
For the quarter, organic growth was negative 24% driven by the commercial end market declines that Kevin mentioned.
A quick note on taxes.
The lower than expected GAAP tax rate for the quarter was driven by significant tax benefits arising from equity compensation deductions.
This is just timing.
Barring some deviations in the rates in this first quarter, our tax rate expectation for the full year is unchanged.
That is, we still anticipate our GAAP cash and adjusted tax rates to all be in the 18% to 22% range.
Moving to cash and liquidity.
We had a nice quarter on free cash flow.
Free cash flow, which we traditionally define at TransDigm as EBITDA as defined less cash interest payments, capex and cash taxes, was roughly $200 million.
We then saw an additional $70 million-plus come out of our net working capital driven by accounts receivable collections.
We ended the quarter with $4.9 billion of cash, up from $4.7 billion of cash at the end of last quarter.
Note that this was prior to the acquisition of the Cobham Aero Connectivity business, the majority of which closed on January 5.
There's one remaining piece of that acquisition, a Finland facility, representing 2% of the purchase price that's going through regulatory approvals now and should close soon.
Pro forma for the closing of this acquisition, our Q1 net debt-to-EBITDA ratio was a shade higher than 7.5 times Assuming air travel remains depressed, this ratio will continue ticking up through the end of Q2 of our fiscal 2021 when the last remaining pre-COVID quarter rolls out of the LTM EBITDA computation.
Beyond Q2 of fiscal '21, the ratio should stabilize with a potential for improvement should our commercial end markets start to rebound.
From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time. | fiscal 2021 financial guidance will not be issued at this time.
commercial air travel demand recovery is expected to continue to be slow and uneven. | 1 |
Before turning the call over to Hugh, there are a few housekeeping items I'd like to address.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons but should not be considered superior to or the substitute for our GAAP financial measures and should be read in conjunction with GAAP financial measures for the period.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in yesterday's release, which is available on our website at www.
Our guiding principle at Regis is to generate long-term value for our shareholders and key stakeholders.
In that regard, I was honored to be asked to chair our company's Board of Directors, in addition to my continuing role as President and Chief Executive Officer.
I believe that assuming the Chairman's role will help ensure continuity of leadership in our multiphase transformational strategy, during a period of ongoing change.
The second quarter does represent an important milestone where we gained greater clarity into the end date of our portfolio transformation.
Based on our year-to-date results and a robust pipeline of potential transactions, we now believe that our transition to a fully franchised business will be substantially complete by the end of this calendar year.
This improved visibility into the cadence of our portfolio transfer transition enabled us to begin meaningful reductions in our cost structure and to initiate other plans we have for the business including reengineering our capital structure, so that so that it will be appropriate for a fully franchised capital like growth platform.
We are pleased to report this quarter that we continue to make meaningful progress in our ongoing strategic transformation to capital light high growth franchise company in August 2019 we estimated that it would take us 18 to 24 months to complete our conversion to a fully franchise portfolio.
However, due to the success we've had in the first half of fiscal year 2020 are, we expect that we will substantially complete this conversion at a somewhat earlier date than we originally anticipated.
In the first half of fiscal 2020, we have converted 988 salons to franchise owners, with line of sight to the sale of approximately 900 additional salons.
This means that net of closing roughly 350 to 500 underperforming salons, which typically occurs at lease expiration.
We have approximately 50% of the remaining company-owned salon portfolio in the pipeline at various stages of transition.
As of December 31, nearly 70% of our portfolio is now franchised.
And you may recall that when I began my tenure as CEO in April of 2017, our salon portfolio was roughly 28% franchised and 72% company-owned.
So by any measure, very significant progress in our portfolio transformation.
As I mentioned, our transition to a fully franchised model has been occurring at a rapid pace.
And as a result, we have been thoughtful and intentional in our plans to begin more aggressive expense reductions.
In January, we announced actions that will reduce G&A by approximately $19 million on an annualized basis.
As we consider the magnitude of these planned G&A reductions, we decided to schedule our actions at the beginning of the third quarter, as we recognized by scheduling the execution of these G&A reductions in January would dilute our second quarter results, given the increased pace of our venditions.
However, we wanted to ensure that our actions to reduce expense did not create an unacceptable level of risk to the stability of our company-owned salons and corporate operations.
We expect to consider further G&A reductions as we draw closer to the end date of our transition and gain additional visibility into our path to sustainable growth.
Further, we believe it is the right time to redesign our capital structure so that our debt facility is better suited for a company that is now 70% franchised.
We recently engaged Guggenheim Securities to help us design the optimal capital structure for what is now a franchise business.
Guggenheim has an outstanding track record of success in working with large franchisors and assuming continued favorable market conditions, we anticipate that this process will be successful and that we will complete our replacement financing no later than the fourth quarter.
Once we have completed our financing, we anticipate that we will continue to make investments to prepare the company for the growth phase of our multi-phase transformation.
This could include additional investments in the following franchisor capabilities: frictionless customer-facing technology; the company's new internally developed back office salon management system, which is now in beta; disruptive marketing and advertising; print driven merchandise, including investments we have made in a new private label brand, we've named Blossom, and the relaunch of our historically successful DESIGNLINE brand.
Ongoing investments in stylists' recruiting and education and then stylists and franchise partner education will also be considered.
We may also utilize our cash in the next 18 months to complete any remaining elements of our multiyear restructuring, including closing nonperforming company-owned salons, when it's justified by the economics, although our operational bias is typically to manage these salons to lease expiration; paying down some debt, we determined that it's wise to do so; supporting our ongoing G&A reductions through severance programs and if needed, capital investments in salon refurbishments and remodels as we consolidated our various brands into what we have called the Fab 5.
And as you all know, we have utilized cash to repurchase our shares in circumstances where we believe that would be in the best interest of our shareholders.
We decided to push the pause button on share repurchases during the second quarter in order to reduce our debt levels and continue investments in other growth initiatives.
Upon completion of our refinancing, management and the board will continue to assess our capital allocation strategies on a periodic basis as we have done historically.
Despite the inherent variability and near-term risks associated with our transformational strategy, we remain convinced that a fully franchised business has the potential to generate a higher return on its capital and will prove to be in the best long-term interest of our shareholders and franchise constituents.
We do have a significant amount of work ahead of us in order to substantially complete the portfolio transformational phase of our strategy by calendar year-end.
However, we are determined to bring this phase to a conclusion so that we can continue to shift our time and energy in our talent toward the organic growth phase of our strategy.
Although conditions could change, we have growing confidence in our plan and our ability to successfully execute our multiphase transformation.
Our restructuring and portfolio transformational phases are each moving rapidly toward their end dates.
And we intend for Regis to be well positioned for its growth phase, a period we expect to generate sustainable revenue and earnings in the years ahead.
With that, I'll ask Kersten Zupfer, our Chief Financial Officer, to take us through the numbers.
As you mentioned, we are pleased to share significant progress in our transition to a fully franchised model.
Yesterday, we reported on a consolidated basis, second quarter revenues of $208.8 million, which represented a decrease of $65.9 million or 24% versus the prior year.
The year-over-year revenue decline was driven primarily by the conversion of a net 1,447 company-owned salons to the company's franchise portfolio over the past 12 months and the closure of 172 salons, of which the majority were cash-flow negative and not essential to our future plans.
When targeting salons for closure, our bias is to exit the location at lease expiration, unless the economics justify a course of action to buy out of the lease early.
The headwinds in the quarter were partially offset by a $5.8 million increase in franchise revenues and $33.6 million of rent revenue recorded in connection with the new lease accounting guidance adopted in the first quarter of fiscal 2020.
Second quarter consolidated adjusted EBITDA of $17 million was $3.6 million or 17.5% unfavorable to the same period last year, and was driven primarily by the elimination of the EBITDA that had been generated in the prior period from the net 1447 company on salon that have been sold and converted to the franchise portfolio over the past 12 months.
Second quarter adjusted Eva dial was also impacted by lower comp, minimum wage increases and strategic investments in technology.
The decline in adjusted EBITDA was partially offset by a $5.6 million increase in the gain associated with the sale of company-owned salons.
Excluding discrete items and the income from discontinued operations the company reported decreased second quarter 2020 adjusted net income of $4.6 million or $0.13 earnings per diluted share as compared to adjusted net income of $8 million or $0.18 earnings per diluted share for the same period last year.
The year-over-year decrease in adjusted net income was driven primarily by the elimination of adjusted net income that had been generated in the prior year from salons that were sold and converted to the company's asset-light franchise portfolio over the past 12 months.
On a year-to-date basis, consolidated adjusted EBITDA of $46.8 million was $1.1 million or 2.3% favorable versus the same period last year.
The year-over-year favorability was driven primarily by a $24.7 million increase in the gain, excluding noncash goodwill derecognition related to the year-to-date sale and conversion of 988 company-owned salons to the franchise portfolio.
Excluding the impact of the gains second quarter year-to-date adjusted EBITDA totaled $5.6 million, which was $23.7 million unfavorable year-over-year and like the second quarter results, this unfavorable variance is also driven largely by the elimination of EBITDA related to the sold and transferred salons over the past 12 months.
As you noted, we disclosed at the close of fiscal year 2019 that our transition to a capital-light franchise model would initially have a dilutive impact on the company's adjusted EBITDA.
So this decline in our reported adjusted EBITDA was not unexpected.
Nevertheless, please note that as we continue our transition, we are certainly paying attention to cash from operations.
As you know, we do not provide guidance.
However, assuming no unexpected changes in market conditions and after adjusting for unusual and transition-related items.
Our objective is for our run rate trajectory to be cash flow positive in the fourth quarter as we accelerate into the end state of our transition.
Looking at the segment-specific performance and starting with our franchise segment second quarter franchise royalties and fees of $29.3 million increased $6.7 million or 29.8% versus the same quarter last year, driven primarily by increased franchise salon counts.
Product sales to franchisees decreased to $1 million year-over-year, to $16.9 million, driven primarily by a $6.5 million decrease in products sold to TBG, partially offset by increased franchise salon counts.
As a reminder, franchise same-store sales are calculated in a manner that is consistent with how we calculate our same-store sales in our company-owned salon portfolio and represents the total change in sales for salons that have been a franchise location for more than 12 months.
As we are in this transition phase, salons are leading company-owned comps but not entering franchise comps for 12 months, which adds temporary noise to same-store sales comparisons.
Second quarter franchise adjusted EBITDA of $13.1 million grew approximately $4.6 million year-over-year, driven by growth in the franchise salon portfolio and better leverage of our cost structure, partially offset by lower margins on franchise product sales.
We believe that the franchise portfolio may have been temporarily challenged by the operational complexity of onboarding new owners and transitioning salons to a more -- to our more experienced owners, among other factors.
With the revenue recognition and the lease accounting guidance we have adopted over the last two years as well as sales of merchandise to TBG at cost, our EBITDA margin percentage is not comparable year-over-year.
After adjusting for the noncontributory revenue associated with ad fund revenue, franchisee rent revenue and TBG product sales EBITDA margin was approximately 37.5%, which is approximately 4.2% favorable year-over-year and is in line with where we would expect it to be.
Year-to-date, franchise adjusted EBITDA of $24.9 million grew approximately $6.6 million or 36% year-over-year.
Now looking at the company-owned salon segment, second quarter revenue decreased $105.3 million or 45% versus the prior year to $128.9 million.
This year-over-year decline is driven and consistent with the decrease of approximately 1,598 company-owned salons over the past 12 months, which can be bucketed into two main categories.
First, the conversion of 1,498 company-owned salons to our asset-light franchise platform over the course of the past 12 months.
These net company-owned salon reductions were partially offset by 51 salons that were brought -- bought back from franchisees over the last year and 21 new company-owned organic salon openings during the last 12 months, which we expect to transition to our portfolio in the month's end.
Second quarter company-owned salon segment adjusted EBITDA decreased $17 million year-over-year to $4.2 million.
Consistent with the total company consolidated results, the year-over-year variance was driven primarily by the elimination of the adjusted EBITDA that had been generated in the prior year period from the company-owned salons that were sold and converted into the franchise platform over the past 12 months.
The quarter was also impacted year-over-year by increases in stylist minimum wage and styles commissions and a decline in same-store sales in our company-owned salon.
As you might expect, we are carefully monitoring our company-owned salons as we continue through our transition.
Our objective is to maintain focus and stability in those salons until they are venditioned.
On a year-to-date basis, company-owned salon consolidated adjusted EBITDA of $15.7 million was $33.2 million unfavorable versus the same period last year.
The unfavorable year-over-year variance is driven by the elimination of the adjusted EBITDA related to the sold and transferred salons over the past 12 months, partially offset by management initiatives to rightsize the source structure in the field.
Of course, it's important to note that our company-owned salon performance will continue to become less critical to the future trajectory of our business as we accelerate our conversion to franchise.
Turning now to corporate overhead.
Second quarter adjusted EBITDA of $0.3 million increased $8.8 million and is driven primarily by the $15 million of net gains excluding noncash goodwill derecognition from the sale and conversion of company owned salons, the net impact of management initiatives to eliminate noncore, nonessential G&A expense and lower year-over-year incentive and equity compensation.
In January, based on the improved visibility into the speed of our transition, we began meaningful reductions in our expenses.
By eliminating approximately 290 positions, including 15 contractors across the U.S. and Canada, which is expected to result in approximately $19 million of annualized G&A savings as the company accelerates into its multiyear transformation.
We expect the removal of these G&A costs will also positively impact the company's cash from operations in the back half of fiscal 2020 and in future periods.
Lastly, I wanted to point out that vendition cash proceeds during the second quarter were approximately $71,000 per salon compared to approximately $69,000 per salon in the first quarter of our fiscal 2020, which is consistent quarter-over-quarter.
However, as we vendition more Signature Style salons this fiscal year, we may have lower net proceeds per salon due to the cost of converting some of these salons as part of our brand consolidation efforts, along with more SmartStyle venditions.
Looking now at the balance sheet.
At the end of the quarter, we made a decision to pay $30 million toward our outstanding debt, which decreased our cash balance to $49.8 million as of December 31, 2019.
We paid down the debt to remain in compliance with the net leverage covenants that are part of our existing credit facility.
Given our successful vendition process, we have known for some time that our existing credit facility would not be appropriate for our end state franchise business and that we would need to reengineer our credit facility to meet the opportunities inherent in our new business model.
We believe we now have the visibility and facts that we need to move forward with our refinancing efforts.
After careful consideration, we retained Guggenheim because they have a strong track record of establishing capital structures for growth-oriented franchise companies.
We expect a successful outcome in our refinancing efforts and to complete the process, no later than the fourth quarter of this fiscal year.
Turning now to cash flow.
I thought it might be helpful to provide a high-level reconciliation of how we see adjusted EBITDA flow-through to cash from operations and our free cash flow.
When looking at the cash flow statement, the single largest use of cash is approximately $17 million use of working capital.
As we noted in the prior quarter, this net use of cash is significantly impacted by cash outlays associated with the wind down of company-owned salons as we convert to a fully franchised platform, including transaction-related payments and severance payments related to restructuring our field teams to better align with our future state.
As you noted, we also invested in our new Blossom brand of our private label merchandise, which was received in December and will be in the salons in the spring.
We have also invested in the repackaging and reformulation of our historically successful DESIGNLINE private label brands.
In addition to change in working capital, when reconciling the adjusted EBITDA to operating capital, you will need to take into account the fact that the $41.2 million net gain from the conversion of our company-owned salons to the franchise platform are included in our net income and adjusted EBITDA but not included in cash from operations as the proceeds are reported as inflows in the investing section of the cash flow statement.
I also wanted to provide a brief update on TBG.
At the end of December, TBG transferred back to Regis 207 of its North American mall-based salons, a roughly 10% of the company's portfolio.
When TBG approached Regis about their financial situation in late 2019, we just determined that acquiring the salons, where we just had continuing obligations under real estate leases, would provide greater control over the outcome and maximum optionality for these locations.
This was always a previously considered strategy for these salons.
The remaining lease liability associated with the TBG salons is approximately $30 million and Regis will operate the salons until lease end date or until a new franchise owner is identified.
Essentially, we are now managing these salons in the normal course and will treat the former TBG salons as we would any other location in our company-owned salons portfolio.
We continue to believe the overall transaction, which was always intended to mitigate the company's lease obligation on these salons, was a financial and strategic success.
As a reminder, when we executed the original transaction with TBG back in October of 2017, the lease liability for the mall-based portfolio was approximately $140 million, and as noted, is less than $30 million today. | estimates it lost approximately $44 million in revenue due to reduced traffic and store closures associated with covid-19 pandemic. | 0 |
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and 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. | q4 gaap earnings per share $0.95.
qtrly adjusted operating results of $87.3 million, or $0.95 per share.
co is now projecting 2022 earnings to be within range of $5.05 to $5.45 per share. | 1 |
In addition, on the call, we will discuss non-GAAP financial measures.
Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's Annual Report, Quarterly Report and other forms filed or furnished with the SEC.
He is a seasoned public company CFO with exceptional strategic, analytical and change management skills.
He's an experienced developer of team capability and an outstanding addition to the Six Flag's team.
He played a vital role as interim CFO during a very challenging time.
He will continue to report to me in a large operational role that will compliment his individual development and skills and position him to contribute significantly to our long term success.
This quarter tested everyone at the company and I am proud of how the entire team rose to meet the challenges that the world is facing.
Seeing how the team responded over the last several months gives me even more conviction that Six Flags is a truly special company.
In the early part of the quarter, we were in a crisis management mode.
It was an all hands on deck effort to keep our people safe, reduce our cash burn and bolster our liquidity position.
However, as a situation has evolved over the last summer months, we have switched from defense to offense.
Our number one priority is always safety, but we have broadened our focus.
We learned how to operate profitably with reduced capacity today and how we can be an even stronger company on the other side of the pandemic.
In this very dynamic environment, I am proud of how the team has reached a level of nimbleness and agility.
We have been able to respond very quickly and effectively as the situation continues to evolve.
And the trends we are seeing in the business.
Then Sandeep will discuss our financial performance and liquidity position.
Before opening up for QA, I will highlight our transformation initiative to drive earnings growth, and improve the guest experience, so that we emerge stronger and more profitable after the crisis.
On March, 13, we suspended our operations in response to the COVID 19 pandemic and local government mandates.
Our immediate focus was on liquidity and cash flow.
We shored up our liquidity and implemented aggressive cost saving measures that partially offset the resulting revenue decline.
We also proactively communicated with our guests to preserve our act past base during this period of uncertainty.
These efforts have been very successful as we limited our net cash outflow in the second quarter to approximately $25 million per month, a significant improvement compared to the average $30 million to $35 million per month that we projected on our last earnings call.
Over the last few months we work closely with local health authorities, disease experts and others in the theme park industry.
We also solicited extensive feedback from our guests to understand their expectations and they socially distance world.
This work has enabled us to implement best-in-class safety protocols, including health screenings of team members, temperature checks of both team members and guests, mandatory facemask requirements for anyone in our parks, pervasive social distancing markers, that abundance of hand sanitizing and hand washing stations added throughout our parks in frequent sanitization of rides and other high touch points.
We also established clean teams to uphold the highest standards of cleanliness.
The crisis has allowed us to accelerate the introduction of technology into our parks that will have ongoing benefits even after the crisis subsides.
We have used technology to remove some of the pain points common theme parks.
These include advanced reservations online, which spread out the entry times for guests to avoid wait times at the gate, contactless temperature and security screening to ease entry into the park, mobile food ordering to reduce the time it takes to fulfill an order and encourage guests to add on to their order through easier menu access and testing of reverse ATM machines to reduce cash transactions.
In addition, we we'll be testing our newly developed virtual queuing system in one of our parks.
Waiting in long lines is consistently ranked as the number one pain point and our guests experience in virtual queuing technology will allow customers to push a button on their smartphone to secure a seat on one of our major coasters without physically standing in line.
If a testing is successful, we will begin rolling the technology out to other parks.
With our new operating protocols and technology in place, we have resumed limited operations at 14 of our parks.
In addition, we opened our Safari as a stand-alone attraction at Six Flags Great Adventure and animal experience at Six Flags Discovery Kingdom, our hotel waterpark at The Great Escape in our campground at Darien Lake.
We've used a cautious and phased approach with limited attendance in accordance with local conditions and government guidelines.
Our park reopenings initially experienced solid demand as our customer saw opportunities to have fun in the safe and outdoor environment that our parks provide.
In addition, guest feedback on our enhanced safety protocols has been very positive.
However, a recent spike in coronavirus cases in many of the states in which we operate has had a negative impact on demand to this our parks.
It is very difficult to forecast future demand trends in this rapidly changing environment.
Based on capacity limitations designed to ensure a safe environment for guests as well as current demand trends.
We expect daily attendance to be approximately 25% to 30% of prior year levels for the foreseeable future.
This has resulted in our reducing some Park schedules to maximize attendance on the days we are open.
There's no question that this is unprecedented environment has created challenges for our business.
However, our parks have a number of advantages top rate during the pandemic compared to other out of home entertainment attractions.
First, our parks our outdoor venues and spread over anywhere from a dozen to 100s of acres, allowing for social distancing.
Second, our parks are open many hours throughout the day reducing the need for people to arrive or leave at the same time.
Third, our parks are regionally diverse and we operate in the largest markets in the U.S., making us not overly reliant on one geographic region.
Fourth, almost 90% of our gas come within driving distance.
So we are not dependent on air travel or other public transportation.
Finally, our parks generate cash flow in excess of their variable costs and significantly less than 25% of their maximum capacity.
Although this crisis has affected our business profoundly in the short term, it has given us the opportunity to make necessary changes in the business that will benefit us in the long term.
I'm very excited to be at Six Flags.
I'm a huge fan of the brand and I've long admired the consumer experience that delivers.
My first month on the job has only confirmed my view that the opportunities ahead are substantial.
And the company is well positioned for its next round of profitable growth.
I will begin by telling you a little bit about myself.
I'll then discuss our second quarter financial results and liquidity position, and end by outlining our team priorities.
I have 25 years of financial strategy experience, primarily in consumer facing businesses.
Most recently, I was the CFO of Guest Incorporated, a publicly traded global multi channel lifestyle brand in the fashion industry and prior to that I worked in financials for Mattel Incorporated, one of the leading toy companies in the world.
As CFO of Six Flags, I believe my primary role in partnership with Mike and the leadership team is to identify and drive a value creation agenda for the company.
I've done this in the past, and believe that with the incredible branded company like Six Flags, we can generate significant value for all stakeholders.
Turning to Six Flags financial performance, results for the second quarter was not comparable to prior, because we suspended the operations of our parks for almost the entire quarter during the pandemic.
As Mike mentioned, we were able to limit our net cash outflow for the second quarter to $76 million.
This was excluding the costs associated with our financing initiatives are approximately $25 million per month.
This represented an improvement compared to the previously projected net cash outflow of $30 million to $35 million per month during the last nine months of 2020.
The improvement was driven by discipline cost management, higher active pass base retention due to the lower than anticipated membership cancellations and Season Pass refund requests, as well as positive cash flow from our parks that have reopened.
Total attendance for the quarter was 433,000, half of which came from our drive thru Safari and our Park in New Jersey, which was our first attraction to open.
As a result, revenue declined by $458 million or 96% to $19 million.
The reduction in revenue included $29 million of membership revenue from our members that have completed that initial 12 month commitment period that we diverted to future periods.
But nearly when our members entered a 13 month membership, we recognize the revenue on a monthly basis, according to their cash payments.
However, as part of our retention efforts, we offer an additional monster our members for every month they could not use their home park.
As a result, for those members who have completed their initial 12 month commitment period, we will recognize revenue at the end of their membership term, whenever those members utilize their additional months.
The decrease in revenue was also partially attributable, to a $29 million reduction in sponsorship, international agreements and accommodations revenue.
This reduction was driven by three things, determination of the company's international contracts in China and Dubai, resulting in no revenues from those contracts in 2020.
Before most sponsorship revenues, while the parks were not operating, the suspension of almost all accommodations operations.
We recognized little revenue from corporate sponsorships in the second quarter, but are working with our corporate partners on a case-by-case basis to defer other planned programs until our parks are open.
We also continue to recognize revenue from our parks being developed in Saudi Arabia.
Guest spending per capita in the quarter decreased 15% to $35.77.
Admissions per capita increased 5%, primarily due to a higher mixer single day pay tickets.
In parks spending per capita decreased 43%, primarily due to the large proportion of attendance from our drive thru Supply Park, where there is no opportunity for in park spending.
On the cost side, cash operating an SGA expenses, increased by $141 million or 60%, primarily due to proceedings measures we took, after we suspended operations.
These savings were partially offset by costs incurred to open and operate our park toward the end of the quarter, including increased costs related to enhanced standardization and additional prevalent preventative measures to help minimize the spread of COVID-19.
In addition we increased our legal reserves by $8 in the quarter.
These expenses associated with several unrelated legal claims.
Adjusted EBITDA for the quarter was a loss of $96 million, compared to income of $180 million in the prior period.
We now have 14 of 26 parks open.
These parks generated more than 50% of our 2019 attendance on a full year basis.
Month to-date in July, we are averaging approximately 30% of Prior attendance at the parks that are open.
We are holding steadily in certain states, but are doing much better and improving in states and I experienced of COVID-19 trends.
This gives us confidence that we will see a rebound once the virus has abated.
In the near-term it is unclear if we will be able to open any of the remaining parks this year, or whether we will close any of the open parks, earlier than prior years.
At this time we are evaluating a modified version of our popular Fright Fest and holiday in the park events.
Turing to our active pass base, which represents the total number of guests enrolled in the company's membership program all that have Season pass.
As anticipated, we lost a significant season -- we lost significant season pass and membership sales while our parks were not operating.
Our Active Pass Base as of the end of the second quarter was down 38% and compared to the prior year quarter.
This includes 2.1 million members compared to 2.6 million at the end of calendar year 2019 and 2.4 million at the end of the first quarter 2020.
Customers typically purchase new season passes or memberships when they are planning to visit a park.
For that reason, the temporary closure of our park had a temporary but large impact on our ability to sell new season passes and memberships.
However, we were pleased with the retention of our existing members as we retained 81% of our members since the start of the year through the second quarter.
Since we opened our parks, we have begun to sell new memberships and season passes.
We are proactively working to retain our existing members and season pass holders in several ways.
First, we offer day-to-day extensions for our season pass holders for each operating day their home park is closed and extended our members by one month for each month that their home park is closed.
Second, we offer to automatically upgrade memberships to the next tier level for the rest of the 2020 season for members who continue to make payments until the parks reopen.
And third, we offer the pause payments for any member requesting to do so.
We are taking members on pause as we open our parks, and we anticipate that most of our pause members will return to active paying members once we reopen our remaining parks.
In addition, we are actively recruiting our cancelled members back to our programs now that park operations are beginning to resume.
We have received very few refund requests of season passes to date.
While we have no contractual obligation to make a refund, and almost all of our existing pass holders have used their pass at least once, the satisfaction of our guests is very important to us.
We are actively engaged in conversations with them to ensure a continued loyalty.
In response to our curtailed operations, we continued to take actions to reduce operating expenses and to defer or eliminate at least $50 million to $60 million of capital expenditures.
We now expect to spend $80 million to $90 million on capital expenditures in 2020, $10 million lower than our previous projections.
We have kept our full-time team members on the payroll and maintain their benefits at the same cost.
We believe this has left us in the best position to open our parks quickly.
However, we will continue to evaluate all options in the future, given the fluidity of the virus and any associated impacts on park operating calendars.
Based on all the cost savings measures we have implemented, the retention of most of our membership base and positive cash flow from the parks that are currently open, we estimate that our net cash outflows will average between $25 million to $30 million per month through the end of 2020.
This includes all operating expenditures and capital expenditures relating to our parks along with contractual rent, interest and partnership park distributions.
Note that partnership park distributions occur only in the back half of the year and represent an average run rate of $7 million per month for the last six months of the year.
We believe we have adequate liquidity to the end of 2021 even if we need to close our parks.
However, if operations remain curtailed, we will likely need a further amendment to our senior secured leverage ratio covenant.
We also incurred approximately $6 million of costs on the strategic work related to the transformation initiative that Mike will discuss.
Costs in future periods are included in our net cash outflow estimates.
However, we will not finalize the cost of associated savings until we complete the work.
We anticipate that a portion of the work will be completed by the fourth quarter of 2020, and the remaining portion will be completed when the parts are again operating at more normal capacity.
Deferred revenue of $182 million was down $53 million or 22% to prior year, driven by fewer membership and season pass sales, while our parks have been closed.
These lower sales were partially offset by the deferral of revenue out of the quarter from our members who have completed their initial 12-month commitment period and extension of visitation privileges into the 2021 season for our season pass holders and members in the initial 12-month commitment period.
Our liquidity position as of June 30 was $756 million.
This included $460 million of available revolver capacity, net of $21 million of letters of credit and $296 million of cash.
This compares to a pro forma liquidity position of $832 million as of March 31, 2020, a reduction of $76 million or approximately $25 million per month.
We do not expect to draw on our revolver until Q1, 2021.
I now would like to turn to our immediate priorities for the company.
First, reopen with caution and prioritize the health of our employees and guests.
Second, focus on liquidity and minimizing cash expenditure while we go through this period of uncertainty.
Third, be conservative with capex, ensuring we only invest in projects with a good return of investment.
And finally, continue building business and team capability.
We have withdrawn guidance due to the uncertain trajectory of the virus.
However, like Mike, I am committed to providing additional disclosures when feasible and being as transparent as possible.
Our capital allocation strategy will be focused on growing the base business and paying down debt to return our net leverage ratio to between three and four times adjusted EBITDA.
We have suspended our dividend and share repurchases for the foreseeable future, and we believe targeting the low end of the range is appropriate given the new environment.
In summary, despite the challenges our entire industry is facing, we have adapted our operations in response to the crisis, and we remain a healthy company with a bright future.
We will not let these difficulties slow down our efforts to build new business capabilities and prepare the company for its next phase of profitable growth.
Now, I will pass the call back over to Mike.
Our focus is on building a stronger base business and reducing our net leverage ratio.
We will be disciplined in this focus post the pandemic.
We are developing a holistic transformation program that will allow us to accelerate growth and unlock significant new efficiencies as we emerge from the pandemic and ramp up to full-scale operations.
We will focus on revenue generation and cost efficiency programs in our base business as we become a more agile, commercially driven and technology savvy organization.
Our transformation will improve the guest end-to-end experience while reducing our operating costs.
To this end, we have initiated a detailed review of our business.
As we complete different work streams, we will provide our expectations for annual earnings improvements.
Our transformation initiative is composed of three elements.
The first element is top line growth.
This element is about improving the end-to-end guest experience, starting with price and simplicity, website redesign and a compelling value proposition for food and beverage.
One focus area that we previously highlighted was the recapture of lost single day guests.
We already saw progress in this area through our focus and targeted offers prior to the COVID-19 crisis and it will continue to be a major focus going forward.
The second element is organizational design.
The purpose of this element is to enhance the guest and team member experience while creating cost efficiencies.
We will reexamine what work belongs in the parks versus headquarters and eliminate any redundancy while being careful to protect the guest and team member experience.
This organizational design will be constructed in a way that fosters an entrepreneurial culture and our park leadership teams.
The third element is non-headcount cost reductions.
We will leverage the scale of Six Flags and examine each area of our cash operating expenses to determine what is essential.
We will capture savings by implementing consistent systems, standards and processes.
In addition, we are beginning to revamp our environmental, social and governance program, which has a special emphasis on diversity and inclusion.
This is a personal priority for me.
I know the importance of this firsthand for my decades of experiences working with diverse teams and customer bases, including in multiple countries and cultures around the globe.
I believe diversity and inclusion provide the necessary foundation for a sustainable and healthy business, more importantly, they are simply the values we should all uphold.
We will integrate diversity and inclusion into our existing business agenda, and we will hold ourselves accountable by measuring our results to ensure that we make sustainable progress.
Our plans will focus on five key areas.
We are creating a diversity and inclusion council made up of members of our team to provide me as CEO, direct feedback on how we are doing and what we can do to improve.
We are conducting robust training on diversity and inclusion for all of our team members, including dedicated sessions with our top 200 leaders on understanding the business rationale, identifying unconscious biases, and learning how to lead open and honest conversations with our team members.
Three, address unconscious biases.
We have updated our grooming, social media and hiring policies.
We are also reviewing and correcting all branded names, park attractions and infrastructure that might be offensive in any way to our guests and team members.
We expect our social media partners to model the same values.
Four, build a diverse team.
We will establish a leadership team that represents the diversity of our marketplace.
We're reviewing and updating our recruiting and talent management programs to foster more objective processes for all team members.
Five, partner with communities.
We will proactively work with minority suppliers to develop long-term alliances.
We will pledge up to $5 million cumulatively in investments and ticket value by the end of 2022 toward programs dedicated to equality and the socioeconomic advancement of people of color.
Our transformation initiative is an ambitious and important program.
And I am confident it will reshape our business for future profitable growth and sustained value creation coming out of the COVID-19 crisis.
We look forward to updating you on our progress during the third quarter earnings call.
Operator, at this point, could you please open the call for any questions. | q2 revenue fell 96 percent to $19 million.
improves cash flow outlook from company's prior guidance.
targeting significant improvement to its financial performance and to guest experience.
six flags - will not make final determination of costs or associated savings until it completes work related to 'transformation initiative'.
anticipates that a portion of work related to 'transformation initiative' will be completed by q4.
resumed partial operations at many of its parks on a staggered basis near end of q2.
total guest spending per capita for q2 of 2020 was $35.77, a decrease of $6.50.
six flags - working with members, season pass holders to extend usage privileges to compensate for any lost days due to temporary park closures.
offered members option to pause payments on their current membership.
active pass base decreased 38 percent as of end of q2 of 2020.
as of june 30, had cash on hand of $296 million, $460 million available under revolving credit facility.
six flags - anticipates it has sufficient liquidity to meet cash obligations through end of 2021 even if currently open parks are forced to close.
six flags - if operations continue to be significantly reduced in 2021, co would likely require additional covenant relief during 2021. | 1 |
During the call, you'll be hearing from Steve Moster, our president and CEO; David Barry, our president of Pursuit; and Ellen Ingersoll, our chief financial officer.
During the call, we'll be referring to certain non-GAAP measures, including loss before other items, adjusted segment EBITDA, and adjusted segment operating income or loss.
I hope you all are staying safe and healthy.
Following my opening comments, I'll hand the call over to David Barry to discuss our Pursuit business, and then I'll come back on to cover the GES business.
Before turning to the business, I, first and foremost, want to commend our team members at Viad for their resiliency, positivity, and dedication during these challenging times.
Like many businesses, we've had to make tough decisions by way of employee furloughs and wage reductions in order to protect our financial position in this unprecedented operating environment.
Nevertheless, our team members have not missed a beat in acting quickly to help maintain the health and safety of our clients, guests, and the communities we operate in as our No.
Now moving into our business.
The first two months of the quarter were largely in line with our expectations.
In March, we began to experience some operational impacts as the spread of COVID-19 began to reach all corners of the world, including some event postponement and cancellations.
There were some signs of reprieve as CONEXPO-CON/AGG took place in early March with less than 3% of the floor space affected by exhibitor cancellations and attendee registrations of more than 100,000.
However, by the end of March, travel and live event activity had essentially halted and with continued travel restrictions and social distancing guidelines in place, we are anticipating a very weak second quarter for 2020.
In response, we took swift and effective steps to bolster our company's liquidity and financial position.
We drew on our revolving line of credit to increase our cash position, and we've obtained a waiver of our financial covenants for the second quarter.
We implemented aggressive cost-reduction actions, including furloughs, mandatory unpaid time off, and salary reductions for all employees across the company.
Our executive management team voluntarily reduced its base salaries by 20% to 50%, and each of our nonemployee members of our Board of Directors has agreed to reduce his or her cash retainer by 50% for payments typically made to them in second quarter of 2020.
We have limited all nonessential capital expenditures and discretionary spending.
We have suspended future dividend payments and share repurchases.
And finally, we've made changes to our executive management team to reduce costs and prioritize client-facing team members.
In addition to some other terminations, Jay Altizer, president of GES, will be leaving the company, and I will be taking over the leadership of GES.
As many of you know, this is a position I know well, having led GES before bringing Jay on board about two years ago.
During the last two years, GES has undergone significant streamlining to improve the cost structure and create a more nimble organization, putting us in a much better position today to navigate the current environment.
While these are extremely difficult steps to take, these actions are necessary to ensure that Viad and GES can outlast the challenging road ahead.
I firmly believe the management team that's in place today is the right one to steer the company through these challenging times.
We have successfully navigated past periods of disruption with a strict focus on cash flow and liquidity, a proven playbook that we are once again turning to.
And as with other prior macro shocks, we believe this one presents us with an opportunity, if not a mandate, to rethink and reimagine how we run our business so that we can emerge in a stronger, more flexible position.
So Pursuit came into the year with lots of momentum, and we saw a very strong start to 2020.
At the end of February, revenue and EBITDA were well ahead of plan, with revenue up significantly from the prior year.
And that's largely due to our acquisition of a controlling stake in the Mountain Park Lodges and outstanding results at FlyOver Iceland.
By the middle of March, though, the effects of the global health crisis and pandemic were becoming more clear.
So working with regional health authorities in three countries, we moved quickly to both facilities and organized teams into two workstreams, one being shutdown mode and the other being post-crisis recovery.
More than anything, this decision to organize our teams along multiple workflows has given us the bandwidth to move quickly in a crisis and make good decisions.
In the past 61 days, we've supported our communities through the donation of PP&E to regional health authorities, and we fed literally thousands of team and community members through a volunteer-driven meal program.
Like all of you, we stand strongly behind emergency responders, doctors and especially nurses who are working bravely to help those who are sick, and we offer our sympathies to those who have lost loved ones.
And It's obvious to point out that most of our second quarter bookings were impacted by governmental stay-at-home orders and the overall reduction in domestic and international travel, resulting in large numbers of cancellations.
We're not isolated from the global impact on travel and hospitality, we find ourselves among many fine brands and companies that are facing these same challenges.
Safety first is and always has been our No.
It was never a question of if we would be reopening, but more importantly, how?
Last week, we launched Pursuit Safety Promise, which was constructed using material from the CDC and regional health authorities.
As guests return to our iconic locations and our team members are present to host them, we've taken steps to ensure that we can do that safely.
And you can see all about that on the specifics on the Pursuit website.
So fast forward 60 days, looking to our iconic locations and FlyOver experiences, we're seeing the world begin to open back up.
FlyOver Iceland reopened last week in Reykjavik, and we expect to benefit from the over 30,000 units of presold product already in the hands of our Icelandic guests in that market.
And for our first weekend of operation, we handily surpassed our visit projection while maintaining a safe environment for visitors.
We appreciate the support of the Icelandic government as they've moved quickly to support both workers and businesses in this unprecedented global pandemic.
As travel restarts, we believe Iceland's thoughtful management of this public health crisis and renowned reputation as a safe destination, will position the country and our FlyOver Iceland experience well.
So let's travel to Canada, Western Canada, and we expect to begin safely opening facilities in Banff National Park and Jasper National Park at the beginning of June.
We expect visitation to be below 2019 levels with less international visitors.
However, we do anticipate more Canadians traveling within the country than usual.
To date, we have bookings in late June, and well into the third and fourth quarters of 2020.
We continue to take more every day.
For the week ending May 10, we were net positive for bookings, meaning we took more new reservations than cancellations at both the Mount Royal Hotel and the Glacier View Lodge.
Canadian government has been very industry-focused, has enacted several programs that have been super helpful, including wage subsidies of up to 75% for team members, and that's called the CEWS program.
And this has been extended to August, as well as everything from rent abatements within National Parks.
We head north to the great state of Alaska, we expect the National Parks in Denali and Kenai Fjords will open for summer 2020.
When they do, we'll be there to safely host guests and staff.
Our properties and attractions will open in Alaska on a staggered basis beginning mid-June, because we expect business levels to be impacted by the partial cancellation of many cruise departures from the lower 48.
We'll be prepared to adapt our properties and attractions accordingly.
So that means we'll shrink and expand the operating capacity of our experiences based on demand.
Down the West Coast of Vancouver, talk about Vancouver for a second.
Vancouver obviously expects that international visitation will be down from historical levels, but we do expect more Canadians will visit Vancouver and enjoy the culture and beauty of that amazing city, including FlyOver Canada.
And next, south of Montana, we expect to begin opening our facilities around Glacier National Park in June.
Over 90% of guests to this area are self-driving Americans, and so with record low gas prices and the overall safety allure of a family road trip, we anticipate attendance in Glacier will be less impacted than other locations.
In terms of future projects, we've made great progress on Sky Lagoon in Iceland and are on track for a late spring 2021 opening.
The team has been working hard on FlyOver Las Vegas.
And we've made great strides on the development of the creative product that will be shown in 2021.
But finally, we believe that the power of iconic locations will not be dimmed.
And looking back throughout history and now looking ahead into 2021, Pursuit is well-positioned to benefit from the pent-up perennial demand for iconic, unforgettable and inspiring experiences.
So back over to Steve to talk about GES.
Through February, GES performed well with overall results tracking slightly ahead of forecast.
We were looking forward to a tremendous year with strong momentum on the corporate side and an incremental $100 million of revenue from three nonannual events all set to take place this year.
Fortunately, the first of the major nonannual events, CONEXPO-CON/AGG took place as scheduled in early March before wide-sweeping stay-at-home orders and other restrictions went into place as a result of COVID-19.
As event activity essentially halted, we drew upon our logistical capabilities to help our communities in the battle against COVID.
We partnered with facilities, other contractors and members of the trade to convert four large exhibition centers in Chicago, London, New York City and Edmonton, Canada into temporary hospitals or shelters.
This was around the clockwork completed in a very short time, and we're proud of our employees for their drive and commitment to this important work.
Where we sit today, event activity has largely been canceled or postponed through July.
Exactly when large-scale events will resume remains unclear and will ultimately be determined by the lifting of restrictions by local authorities and at the discretion of the event organizers.
Just yesterday, MINExpo, one of our three major nonannual events that was scheduled to take place in Las Vegas in September, officially announced that it was postponing until September 2021.
And based on a reopening plan recently announced in Illinois, it appears unlikely that IMTS will be able to take place as previously scheduled for this September in Chicago.
That said, we do still have events on the books for the third and fourth quarter, including the International Woodworking Fair, a biannual event that is set to take place in Atlanta this August.
And we continue to receive and win RFPs for client work in late 2020 and 2021.
So there are definite signs that the live event industry is ready for a comeback as circumstances permit.
We are closely monitoring commentary and decisions made by local governments to understand how they intend to handle the reintroduction of exhibitions and conventions in their economic reopening plans.
While we wait for those decisions, we have effectively hibernated GES by leveraging its high variable cost model to minimize operating costs, while retaining the ability to reactivate parts of the company as business returns.
We expect certain sectors will return faster than others, including pharma and technology, which are two of our strongest verticals on the corporate side of our business.
We are taking this opportunity to design and build a better business, one that's more profitable, less asset-intensive, and more focused on our clients' future needs.
Our focus continues to be on transforming our exhibition business, which is the largest part of our revenue today and driving share gains in our corporate business, while smaller competitors struggle to stay alive during this challenging time.
When we begin to restart GES, we will do so with the future in mind and expect to emerge leaner, more nimble and more client-focused.
As a service business, we have a highly variable, largely labor-based cost structure, which allowed us to act very quickly when the COVID-19 restrictions began occurring.
Both business segments were able to flex down very quickly as conditions weakened.
At Pursuit, we immediately reduced more than half of our costs and still have additional cost levers to pull if conditions do not begin to improve in the coming months.
We can expand and contract the operating capacity of our experiences based on fluctuating business levels, which is a core competency for us, given the normal seasonal demand patterns of this business.
At GES, more than two-thirds of our costs are entirely variable with an even larger percentage able to be quickly adjusted based on business demand.
We essentially entered a hibernation mode until events return, reducing our semi-variable cost by approximately 70%, and we stand ready to quickly turn the faucet back on as events return.
In addition to reducing our costs, we took a variety of other steps to preserve cash.
We significantly reduced or eliminated planned capital expenditures, including both nonessential maintenance and small growth capital projects, and we slowed the pace of the two Pursuit FlyOver projects in development.
We amplified our focus on working capital management, we engaged in productive dialogues with landlords and local tax jurisdictions to eliminate or defer spending where possible and we received some benefits from various government relief programs, including wage subsidies offered in Canada, the U.K. and the Netherlands, as well as U.S. payroll tax deferrals available under the CARES Act.
We believe we have an adequate cash position and balance sheet to weather the near-term impacts of COVID-19.
At March 31, our cash balance was $130.5 million, and in early April, we drew the remaining $33 million down on our revolver, bringing our total cash at the beginning of the second quarter to approximately $163 million.
Given the swift and deep cost savings actions we've taken, we have significantly reduced our operating costs and expect our cash outflow during the second quarter will approximate $40 million.
This assumes continued collection of outstanding receivables, minimal new revenue, and no postponed events coming back in the quarter.
As it relates to our revolving credit facility, we were in compliance with all financial covenants at the end of the first quarter, and we have already received a waiver of financial covenants for the second quarter.
This waiver, combined with our cash position, gives us important breathing room to negotiate longer-term covenant relief and line up additional sources of capital as we prepare for COVID impacts to persist into the third quarter and perhaps beyond.
We are working closely with our lender group and outside advisors to ensure that Viad is sufficiently capitalized to withstand the downturn and emerge in a position of strength, with Pursuit poised to continue its pre-COVID growth trajectory.
As David mentioned, we believe experiential trips will rebound more quickly than large events, and this economic downturn may ultimately bring interesting investment opportunities we hope to be able to pursue.
Now switching over to our preliminary first-quarter results, which were in line with our pre-announcement in mid-March.
First, let me comment on the preliminary nature of these results.
The impact of COVID-19 has necessitated additional asset impairment testing, which we are currently working through.
We do not expect the noncash impairment charges to impact cash flow, debt covenants or ongoing operations.
However, we do expect the impairment charges to have a material impact on the final GAAP financial results presented in our Form 10-Q, which we expect to file no later than June 15, 2020.
Preliminary revenue was $306 million, up 7.1% from the 2019 first quarter primarily due to positive share rotation of approximately $57 million at GES, partially offset by show postponements and cancellations due to the COVID-19 pandemic.
January and February were in line with our original expectations, while March was impacted by postponements and cancellations resulting from virus concerns, causing us to reduce our original guidance for the first quarter and withdraw our full-year guidance.
GES revenue was $292.5 million, up $17.6 million or 6.4%.
This growth was largely due to the occurrence of a nonannual CONEXPO-CON/AGG trade show in early March before the COVID effects were fully felt.
Pursuit revenue was $13.5 million, up $2.9 million or 26.8%.
This is a seasonally slow quarter for Pursuit and although we began to feel the effects of COVID-19 during late March, Pursuit finished the quarter with higher revenue than 2019, largely due to strong pre-COVID results from our acquisition of Mountain Park Lodges and our new FlyOver Iceland attraction.
Preliminary net loss attributable to Viad was $10.6 million versus $17.8 million in the 2019 first quarter.
And preliminary net loss before other items was $8.5 million versus a loss of $10.2 million in the 2019 first quarter.
This non-GAAP measure excludes impairment and restructuring charges, acquisition, integration and transaction-related costs, and attraction start-up costs, as well as a legal settlement recorded in the 2019 first quarter.
Preliminary adjusted segment operating loss was $8.4 million versus a loss of $11 million in the 2019 first quarter, and adjusted segment EBITDA was $6.9 million, up $4.7 million from the 2019 first quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenue at GES and the elimination of performance-based incentives partially offset by increased seasonal operating losses at Pursuit driven by the June 2019 acquisition of Mountain Park Lodges and the opening of FlyOver Iceland.
GES adjusted segment EBITDA was $19.1 million, up from $10.9 million in the 2019 first quarter.
And Pursuit adjusted segment EBITDA was negative $12.2 million versus negative $8.8 million in the 2019 first quarter.
The second quarter will be extremely difficult, but our quick move to reduce variable expenses into increased liquidity will help protect our financial position.
We've essentially been in hibernation mode since early in second quarter, maintaining the lowest level of expenses we prudently can, while we wait for the slow resumption of travel and events.
At Pursuit, as you know, the seasonally strongest period is June through September.
And as David said, we believe the business will be the first to recover and are beginning to see signs of this.
GES is expected to take longer, although we are hopeful that as certain locations begin to lift restrictions, events will start to take place again during the third quarter.
We've controlled the factors we can control.
We've reduced expenses, prudently managed our balance sheet and maintained very close contact with our lending partners.
We are in a good financial footing to manage through a brutal second quarter and hope to emerge in the third quarter with growing visitation and bookings at Pursuit and the cessation of cancellations for future events at GES.
And now I'll hand the call back to you, Steve, for your concluding remarks.
In closing, the spread of COVID-19 affected our overall results for first quarter and we anticipate continued impact in the near term as planned events further unfold, air travel remains at a bare minimum for the time being, and the state-by-state regulations continue to shift.
We expect GES will experience a patient Rebound, whereas Pursuit will see more benefit in the short term as stay-at-home orders are lifted and domestic regional travel resumes.
As Ellen shared previously, we have taken swift steps to bolster our near term liquidity, and we are prepared to take other prudent steps to ensure we weather the storm.
We have an experienced management team that has navigated through previous downturns and are more than capable of leading this company through this uncertain time.
We see the current environment as an opportunity to reimagine the demand side of our two business segments and map out where we believe to be the most profitable pockets of opportunity and growth as we exit this downturn.
We anticipate making some strategic changes to the business in order to better facilitate the evolving needs of our clients, better serve our guests and provide significant value for our stakeholders as we improve our competitive position in a post-COVID-19 universe.
And we believe in the longevity and resiliency of our business, exhibitions, conferences and corporate events are a vital part of the economic engine, facilitating sales, networking and education and a relatively low-cost and high-impact way.
The replacement of live events by virtual events has been tested in the past and will likely be tested again.
But even in the most productive of virtual worlds, we do not believe that face-to-face meetings will go away.
They may change and our industry will change along with it.
In our GES business, we will focus on shrinking our footprint and choosing which markets we want to be in and which ones we don't.
On the Pursuit side, iconic location and experiences cannot be replaced, and people will not choose to stay at home indefinitely.
We will once again venture out to explore the world in its amazing places perhaps with pent-up demand.
More than ever, we believe that experiences will be more valuable than things. | sees q1 adjusted normalized ffo $0.66-$0.71 per share.
qtrly attributable net income per share $0.29.
qtrly normalized ffo per share $0.83. | 0 |
Joining me 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 Controller and Kevin Hake, Senior VP.
We are pleased with our third quarter performance highlighted by the number of records including record revenue of $904 million, revised record third quarter pre-tax income of $116.2 million, 22% better than a year ago and a very strong return on equity of 27%.
We sold 1,964 homes during the quarter, a decline of 33% from the record sales reported during last year's third quarter.
Despite the decline in sales, housing demand throughout most of our markets remains very strong.
Our decline in sales is due to the fact that we are operating in 15% fewer communities than the year ago and we continue to limit sales in the majority of our communities in order to better manage deliveries and control costs.
Our third quarter monthly sales pace was 3.7 homes per community other than last year, this is the highest monthly per community sales pace we've seen in over 10 years and reflects the underlying strength of demand.
Year-to-date, we have sold 7,340 homes, 1% ahead of last year's record, despite as noted, community count being down 15% and continuing to limit sales in the majority of our communities.
We ended the quarter with 176 active communities.
We will be opening a record number of new communities in 2022.
Specifically, we expect to grow our community count next year by 15% or more and end 2022 with between 200 and 220 communities.
We closed 2,045 homes during the quarter, a 4% decrease from last year.
Clearly, our closings were negatively impacted by the well documented supply chain disruptions that continue to stretch our build times and impact the entire industry.
On average, it is taking us 45 days longer to get homes closed.
We have always been focused on achieving fast and efficient build times, while assuring that homes are properly complete and ready to be delivered.
We will continue to manage in this way.
Our backlog is very strong.
We ended the quarter with an all-time record backlog of $2.5 billion, 40% better than last year.
And units in backlog increased by 20% to a third quarter record of 5,407 homes with an average price and backlog of $471,000 which is 17% higher than a year ago.
In addition to reporting record third quarter income, our returns were also very strong.
Gross margins improved by 160 basis points year-over-year to 24.5%.
And our SG&A expense ratio improved by 90 basis points to 10.7%.
Excluding the one-time charge for debt extinguishment, our pre-tax income percentage improved from 11.2% last year to nearly 14%.
And as noted all of this resulted in a very strong return on equity of 27%.
Now I will provide some additional comments on our markets.
First, let me begin by stating that I'm very excited to announce that we are commencing homebuilding operations in Nashville, Tennessee, one of the nation's most dynamic and fastest growing housing markets, ranking 11th nationally in 2020 based on single-family permits.
Nashville continues to benefit from a very healthy economy, significant population growth and job growth and we look forward to building our competitive position in the market over the next few years.
As our 16th market, Nashville will for reporting purposes be included in our southern region together with Charlotte and Raleigh, our four Texas markets into our three Florida markets.
We experienced strong performance from our homebuilding divisions in the third quarter led by Orlando, Tampa, Minneapolis, Dallas, Chicago, Columbus and Charlotte.
In fact, all of our markets produced strong results.
Our deliveries decreased 8% from last year in the southern region to 1,169 deliveries or 57% of the total.
The northern region contributed 876 deliveries, an increase of 1% over last year.
Our owned and controlled lot position in the southern region increased by 11% compared to last year and increased by 5% in the northern region compared to a year ago.
34% of our owned and controlled lots are in the northern region, while the balance roughly 66% is in the southern region.
We have a very strong land position.
Companywide, we own approximately 22,700 lots, which equates to a roughly two and a half year supply.
On top of that we control the option contracts and additional 20,300 lots.
So in total, our owned and controlled lots are approximately 43,000 lots or about a five year supply.
Based on a record backlog, we expect to finish out the year with another very strong performance.
Our financial condition is strong with $1.5 billion of equity at September 30th and a book value of $53 per share.
We ended the quarter with a cash balance of $221 million and zero borrowings under our $550 million unsecured revolving credit facility.
This resulted in a net debt to net cap ratio of 24%.
Our company is in excellent shape, the best shape ever and we are poised to have an outstanding fourth quarter and an outstanding full year in 2021.
New contracts for the third quarter decreased to 1,964 compared to 2,949 for last year's third quarter.
And in last year's third quarter our new contracts were a record and we're up 71% from the prior year.
Our new contracts were down 32% in July down 41% in August and down 24% in September and our cancellation rate was 8% in the third quarter.
As to our buyer profile about 50% of our third quarter sales were the first time buyers compared to 51% in the second quarter.
In addition, 39% of our third quarter sales were inventory homes compared to 43% in the second quarter.
Our community GAAP was 176 at the end of the quarter, compared to 207 at the end of last year's third quarter and the breakdown by region is 85 in the northern region and 91 in the southern region.
During the quarter, we opened 26 new communities while closing 25 and during last year's third quarter we opened 12 new communities.
We have opened 63 new communities in the first nine months of this year compared to 51 last year.
We delivered 2,045 homes in the third quarter, delivering 37% of our backlog compared to 58% a year ago.
Year-to-date, we delivered 6,322 homes, which is 16% more than a year ago.
We now have 5,300 homes in the field, which is 20% more than the 4,000 we had this time last year.
Revenue increased 7% in the third quarter reaching a third quarter record $904 million.
Our average closing price for the quarter was $430,000, a 13% increase when compared to last year's third quarter average closing price at $380,000.
And our backlog average sale price is an all-time record of $471,000 up from $404,000 a year ago and our backlog average sale price for our smart series is $374,000.
Our third quarter gross margin was 24.5%, up 160 basis points year-over-year.
And our third quarter s SG&A expenses were 10.7 of revenue improving 90 basis points compared to 11.6 a year ago, this reflects greater operating leverage and it was our lowest third quarter percentage in our company history.
Interest expense decreased $1.3 million for the quarter compared to last year.
Interest incurred for the quarter was $9.3 million compared to $10 million a year ago.
This decrease is due to lower outstanding borrowings and higher interest capitalization due to higher levels inventory under development than last year.
And during the third quarter we issued $300 million of senior notes due 2030 and used the majority of the proceeds to redeem all of our $250 million of senior notes that were due in 2025.
This resulted in the $9.1 million loss on early extinguishment of debt.
We are very pleased with our returns for the third quarter.
Our pre-tax income was 13% and 14% excluding our debt charge versus 11% a year ago, and our return on equity was 27% versus 19% a year ago.
During the quarter, we generated $132 million of EBITDA compared to $111 million last year's third quarter.
And we used $34 million of cash flow from operations for the first nine months compared to generating $197 million a year ago, primarily due to our increased land purchases.
We have $23 million of capitalized interest on our balance sheet this is about 1% of our total assets.
And our effective tax rate was 22% in the third quarter compared to 23% in last year's third quarter.
We currently estimate our annual effective rate this year to be around 22%.
And our earnings per diluted share for the quarter increased to $3.03 per share from $2.51 per share last year.
During the quarter we repurchase 243,000 of our outstanding common shares for $16 million, and we have $84 million available under our current repurchase authority.
Our current plans based on the existing market conditions are to continue repurchasing our shares.
Our mortgage and title operations achieved pre-tax income of $9.9 million, compared with $19.2 million in 2020 third quarter.
Revenue decreased 28% from last year to $20.8 million.
This was due to a lower volume of loans closed and sold and due to more competitive market conditions significantly lower pricing margins than we experienced in last year's third quarter.
The loan to value on our first mortgages was 82% compared to 84% in 2020 third quarter, 81% of the loans closed were conventional and 19% FHA or VA compared to 76% and 24% respectively 2020 third quarter.
Our average mortgage amount increased to $349,000 compared to $314,000 last year.
However, loans originated decreased to 1,554 loans down 5% from last year and the volume of loans sold decreased by 8%.
Our borrower profile remains solid with an average down payment of almost 18% and an average credit score on mortgages originated by M/I Financial of 751 up from 747 last quarter.
Our mortgage operation captured 85% of our business in the third quarter, the same as last year.
We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors.
At September 30, we had $142 million outstanding under the M/I warehousing agreement which expires in May of 2022.
We also had $70 million outstanding under a separate $90 million repo facility which we recently extended through October 2020.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually.
As far as the balance sheet we ended the third quarter with cash of $221 million and no borrowings under our unsecured revolving credit facility.
Total homebuilding inventory at 9/30/21 was $2.4 billion, an increase of $0.5 billion from September 30 of last year.
And our unsold land investment at 9/30/21 is $991 million compared to $762 million a year ago.
At 9/30, we had $663 million of raw land and land under development and $328 million of finished unsold lots.
We own 4,343 unsold finished lots with an average cost of $75,000 per lot and this average lot cost is about 16% of our $471,000 backlog average sale price.
Our goal is to own a two to three years supply of land and we now own 23,000 lots, which is about a two and a half year supply.
During the third quarter we spent $231 million on land purchases and $124 million own land development for a total of $355 million, which was up from $196 million in last year's third quarter.
And at the end of the quarter, we had 62 completed inventory homes and 1,042 total inventory homes.
And of the total inventory 658 are in the northern region and 384 in the southern region.
Last year at 9/30, we had 266 completed inventory homes and 1,113 total inventory homes. | q3 earnings per share $3.03.
q3 revenue rose 7 percent to $904.3 million.
qtrly homes delivered decreased 4% to 2,045. | 1 |
With me, I have Scott Barbour, our President and CEO, and Scott Cottrill, our CFO.
A copy of the release has also been included in the 8-K submitted to the SEC.
We delivered another quarter of record financial performance in the third quarter of fiscal 2021.
Sales grew 24% year-over-year, driven by 17% non-residential sales growth and 36% residential sales growth, as we continue to execute at both ADS and Infiltrator in a favorable demand environment.
In fact, sales across each of our end markets increased double digits in the quarter.
It was very encouraging to see the demand in our non-residential end market increase 17% this quarter.
We continue to benefit from growth in horizontal construction, such as warehouses, distribution centers, data centers and developments that follow the residential build-out.
There was continued strength in the regions we have experienced growth this year, such as the Atlantic Coast and Southeast, and we experienced a rebound in regions that have been softer this year like the Northeast and Western United States.
In addition, allied product sales in the non-residential market increased 23%, giving us confidence in the underlying market strength.
We also continue to experience strength in our residential market with 36% growth in the quarter, driven by favorable dynamics in new home construction, repair/remodel and on-site septic, accelerated by the material conversion strategies at both businesses.
Our indicators are showing that homebuilders continue to acquire land for future development and that there's an overall shortage in available homes, which bodes well for both the front end, new community development stake with ADS and at the home completion stage with on-site septic at Infiltrator.
The retail market, which is roughly 25% of our residential sales, continues to experience strong growth as well with the continued strength in remodeling and home improvement.
Sales in the agriculture market increased 33% this quarter, driven by the programs we put in place around organizational changes, new product introductions, and improving execution as well as favorable weather and market dynamics.
These dynamics are being driven by favorable indicators such as higher farm income and strong crop pricing, which is leading to farmers to invest in land productivity through better field drainage.
Improving field drainage is a low-risk, proven method of increasing per acre yield for farmers.
International sales also increased 18%, primarily driven by double-digit growth in our Canadian business, which represents about 70% of the international revenue.
Canada is doing well across both the construction and agriculture end markets with similar market trends to the United States.
Additionally, this quarter, we were able to leverage our pipe manufacturing facilities in Mexico to help service the strong demand we experienced in the United States.
We expect a slower recovery from the COVID-19 pandemic in our Mexico and our export businesses, but these markets will recover and return to growth.
Finally, Infiltrator continues to exceed expectations with 37% sales growth in the third quarter.
Infiltrator continues to see double-digit growth in tanks and leach field products with strong growth in Georgia, North Carolina, Florida and Tennessee among other states.
This was led by their material conversion strategy of displacing concrete septic tanks with plastic tanks and the economic advantages of septic chambers in leach field systems.
Moving to our profitability results.
We achieved another quarter of record adjusted EBITDA during the period.
Adjusted EBITDA margin increased 540 basis points overall in our first full quarter of comparable results from the Infiltrator acquisition.
The increase in profitability in both businesses was driven by leverage from the strong sales growth, favorable pricing and material costs as well as contributions from our operational productivity initiatives.
In January, we hosted a well-attended ADS Distributor Conference to touch base with our partners and outline how we are thinking about the business moving forward.
We have many new faces and roles among our senior leadership team and with that comes new focused programs to build on the ADS value proposition, including the service component of our business.
The ADS value proposition includes not only the products we design and manufacture, it includes the delivery and design services led by the logistics and transportation we provide to our distribution partners and customers.
This speaks to ADS' unique model, is not just a pipe manufacturer, but also a large specialized logistics and transportation company.
We are committed to investing in the people, processes, technology and fixed capital to deliver on customer expectations and increased capacity to meet our customers' needs.
We also talked to our customers about the new ADS brand and our digital marketing initiatives.
You may have noticed we updated the ADS logo, and are in the process of rolling out our refreshed brand to encompass the progress we've made over the last several years.
Our new brand identity not only visually updates the look of ADS to reflect who we are as a company today, it reflects where we are going.
Our products and services platform, sustainability initiatives and community involvement all drove the new brand look and tag line, Our Region is Water, setting the tone for our updated mission and values, which will be rolled out over the next several months.
Looking forward, we believe the demand environment in calendar 2021 will look similar to what we experienced overall this past year.
We are certainly fortunate that as part of the construction industry supply chain, we could manufacture and ship our products over the last 12 months without significant interruption.
My observation is that the construction industry, including the manufacturing, distribution and contractors weathered the pandemic and related economic disruptions better than many parts of the economy.
We will continue executing on our material conversion and water management solution strategies in what I expect to be a favorable demand environment, benefiting from our national presence as well as our favorable geographic focus in end market exposure.
Our confidence in these favorable trends is supported by the strength of our order book, our project tracking, the book-to-bill ratio in the backlog.
While we have some cost headwinds coming at us in the fourth quarter, including inflationary costs, such as materials and transportation, we are confident we will be able to offset them through favorable pricing, level loading at our facilities, operational productivity initiatives, our recycling programs and the capital deployment initiatives.
In summary, we did a great job executing this quarter, and we'll look to build on our strong market position, execution and new levels of profitability going forward.
We will stay focused on employee health and safety and delivering on the needs of our customers.
As we look ahead, we are well-positioned to capitalize on residential development and horizontal construction, while continuing to generate above-market growth due to execution of our material conversion and water management solution strategies.
We will remain focused on disciplined execution as we look to close out on a very strong 2021.
On Slide 6, we present our third quarter fiscal 2021 financial performance.
I'll be brief on this slide, as Scott has already covered a lot of the details here, but I want to reiterate a few key points.
The very strong 24% revenue growth we reported this quarter was driven by both volume and pricing as well as strong growth across both our ADS legacy and Infiltrator businesses as well as in each of our end markets and product applications.
The demand environment for our products remain strong, and we expect this strength to continue as we move forward into calendar 2021.
The 52% growth in consolidated adjusted EBITDA was driven not only by this strong topline growth, but by favorable material costs, operational efficiency initiatives as well as our synergy programs.
Finally, we continue to monitor our costs and are committed to offsetting increases that materialize through a combination of pricing as well as operational and productivity initiatives and continue to look to expanding margins year-over-year as we move forward.
Overall, we are very well-positioned to leverage the favorable demand environment anticipated due to our market-leading position, national relationships, breadth of products and services, as well as our geographic and end market diversity.
Moving to Slide 7.
Our year-to-date free cash flow increased by $141 million to $391 million as compared to $250 million in the prior year.
These impressive free cash flow results were driven by our strong year-to-date sales growth and profitability as well as execution on our working capital initiatives.
Our working capital decreased to 16% of sales, down from 19% of sales last year.
In addition, we ended the quarter in a very favorable liquidity position, with $224 million of cash and $339 million available under our revolving credit facility, bringing our total liquidity to $563 million.
It is also worth noting that our trailing 12-month leverage ratio is now 1.1 times.
Given our strong balance sheet position, capital deployment remains one of our top strategic initiatives.
Our first priority continues to be investing organically in the ADS and Infiltrator businesses to support growth, innovation, productivity, safety and new product development.
M&A is our next priority.
We remain very focused on following our disciplined acquisition process as we move forward into calendar 2021.
Finally, on Slide 8, we increased our revenue and adjusted EBITDA guidance ranges for fiscal 2021.
Based on our performance to date, order activity, backlog and current market trends, we currently expect net sales to be in the range of $1.915 billion to $1.950 billion, representing growth of 14% to 17% over last year.
Adjusted EBITDA to be in the range of $550 million to $565 million, representing growth of 52% to 56% over last year.
And we expect to convert our adjusted EBITDA to free cash flow at a rate of greater than 60% for the full year.
Operator, please open the line. | advanced drainage systems - fiscal 2022 adjusted.
ebitda is unchanged and expected to be in range of $635 million to $665 million.
sees fy2022 capital expenditures to be in range of $130 million to $150 million. | 0 |
Actual results may differ materially from these statements.
For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures.
I think I would say that the only thing maybe more compelling than our quarterly results is the impending merger between Kite Realty Group and RPAI.
Regarding that, please note at this time, we're unable to provide any additional information beyond what we've disclosed publicly to date.
What I can tell you is that every day we learn more about our RPAI, our conviction regarding the merits of this transaction grows exponentially.
We are very much looking forward to discussing the outlook of the combination after we close the merger.
In the meantime, the primary goal on both sides is continued operational outperformance.
With respect to our second quarter results, the continuing theme is retailer demand.
During the quarter, we leased 637,000 square feet, which is nearly double the amount of square footage as compared to the second quarter in 2019 and an additional 211,000 square feet sequentially.
Blended lease spreads were 14.7% and 9.2% on a GAAP and cash basis, respectively.
The outsized volume widens our total retail portfolio lease to occupied spread to 310 basis points with current signed, not opened NOI of approximately $12 million.
Our anchor acceleration program is also progressing nicely.
We've signed three anchor leases this quarter for a cumulative total of seven anchor leases since the program's inception.
These seven leases are expected to generate cash yields of over 36%.
Not only will we realize a healthy uptick in NOI based on these deals, but we're vastly improving the merchandising mix and creating value.
Backfilling empty Stein Mart spaces with tenants such as Adidas, Aldi and Total Wine, will dramatically increase traffic and compress the cap rate of the underlying synergy.
With respect to the remaining boxes, demand remains extremely strong with several leases in negotiation and at the LOI stage.
We look forward to providing more details on these deals on our next call.
We've also been experiencing healthy demand for our small shop space across a variety of categories such as beauty and cosmetics, healthcare, service tenants and the return of fast casual and full-service restaurants.
The strong box and small shop demand resulted in a portfolio retail leased rate of 91.5%.
This 100 basis point increase from last quarter is indicative of the continuing recovery in our financials.
Many of you asked when will we fully recover to pre-pandemic levels, while we still don't know the exact date, we do know that we're quickly gaining ground.
While the last 18 months have been tumultuous, to say the least, through it all, we remain focused and work to operate from an offensive posture.
Today, we find ourselves driving toward the completion of a transformative merger.
The opportunity currently in front of us was only made possible by virtue of the successful execution of a series of initiatives prior to the end of 2019.
This puts KRG in one of the strongest financial positions in our sector, which allowed us to intensely focus on operations during COVID, which resulted in sector-leading collection rates.
I think it's worth taking a look back at the hard work over the past several years that put us into this position of strength.
During Project Focus, we shed our lower growth in most vulnerable assets, resulting in a portfolio of high-quality properties with long-term durable cash flows.
We exited some low growth markets to focus on markets that are benefiting from favorable demographic trends.
We reduced our leverage and cleared out our near-term maturities.
Our net debt to EBITDA currently sits at 6.4 times despite the fact that our lease rate dropped by over 500 basis points in 2020.
We dialed down our development pipeline and structured our non-retail projects to minimize risk and capital outlay.
We started in this business as developers across all property types.
If there's one thing we learned is that development should never be a financial mandate, but rather a risk-adjusted decision around the highest and best use of the property.
We also learned, like most things in life, when it comes to development, timing is everything.
Finally, we assembled the best team in the industry, a team that embodies our intentional and results-driven culture, a team that is poised to get even stronger once we join forces with RPAI.
Nothing ever happens great without great people.
With all this in mind, the next bold move we are taking doesn't represent a new direction for KRG, but rather the next step down a path that we are firmly committed to.
It's been an intense few months, and it's going to remain that way through the end of the year.
I have the utmost confidence that the teams will remain focused, maintain operational excellence and emerge as a unified best-in-class platform.
Like John, I couldn't be more thrilled about the impending merger.
Having spent two years at RPAI, I am uniquely positioned to understand the quality of the combined portfolios, the cultural similarities and the potential of the platform.
Turning to our first quarter results.
We generated $0.34 of NAREIT FFO, and we also generated $0.34 of FFO as adjusted.
As a reminder, we are guiding to 2021 FFO on an as-adjusted basis, so as to reduce the noise associated with the 2020 receivables and 2020 bad debt.
As set forth on page 19 of our supplemental, the net 2020 collection impact in the second quarter was minimal with the collection of $1.6 million of prior bad debt, offset by $500,000 of accounts receivable, we now deem uncollectible.
We continue to refrain from giving same-property NOI guidance for 2021, provided that we are committed to reporting the same.
Our same-property NOI growth for the second quarter is 10.1%, primarily driven by a reduction in bad debt as compared to the prior year period.
This includes the benefit of approximately $500,000 of previously not bad debt that we collected in the first quarter.
Excluding those amounts, our same-store NOI growth would be 8.9%.
That 120 basis point difference is just noise from 2020 and is precisely why we didn't provide guidance on this metric.
It's also important to note that when comparing same-store results across the peer group for 2021, keep in mind that KRG consistently achieved the highest levels of rent collections in 2020.
With respect to outstanding accounts receivable items, as of last Friday, the balance on our outstanding deferred rents stands at $2.1 million compared to $6.1 million as of December 31, 2020.
Furthermore, less than $0.5 million of deferred rent payments are currently delinquent, of which 70% is already reserved.
The current outstanding balance on our small business loan program is $1.2 million as compared to $2.2 million at inception and not a single borrower under the program is delinquent.
Our balance sheet and liquidity profile not only remains solid, but continue to improve.
Our net debt-to-EBITDA was 6.4 times, down from 6.6 times last quarter.
Pro forma for the $12 million of signed-but-not-opened NOI, our net debt-to-EBITDA is six times.
Excluding future lease-up costs, we have only $17 million of outstanding capital commitments and of roughly $620 million of liquidity.
We are extremely pleased with the flexibility in our balance sheet.
We are raising our 2021 guidance of FFO as adjusted to be between $1.29 and $1.35 per share, an increase of $0.02 at the midpoint.
Our guidance assumes full year 2021 bad debt of approximately $6.4 million, of which $2.6 million had been realized as of June 30, 2021.
This guidance assumes no additional transactional activity including the previously announced merger.
We are looking forward to closing the merger with RPAI, and I am excited to provide 2022 guidance for the combined company.
Again, as John mentioned earlier, we are unable to answer any questions on the pending merger.
So please focus your attention on our operating results. | compname reports trust q1 ffo per share of $0.34.
q1 ffo per share $0.34.
raising 2021 guidance for ffo, as adjusted, to $1.26 to $1.34 per share. | 0 |
Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
drhorton.com and we plan to file our 10-Q early next week.
The D.R. Horton team delivered an outstanding third quarter, highlighted by a 78% increase in earnings to $3.06 per diluted share.
Our consolidated pre-tax income increased 81% on a 35% increase in revenues to $7.3 billion and our pre-tax profit margin improved 490 basis points to 19.4%.
Our homebuilding return on inventory for the trailing 12-months ended June 30 was 34.9% and our consolidated return on equity for the same period was 29.5%.
These results reflect our experienced teams and their production capabilities, our ability to leverage D.R. Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Housing market conditions remained very robust, and we are focused on maximizing returns and increasing our market share further.
However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction time to become less predictable.
As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align to our current production levels and are selling homes later in the construction cycle, when we can better ensure the certainty of home close date for our homebuyers.
We expect to work through these issues and increasing our production capacity.
We started construction on 22,600 homes this quarter and our homes in inventory increased 44% from a year ago to 47,300 homes at June 30, 2021, positioning us to finish 2021 strong and to achieve double-digit growth again in 2022.
We believe our strong balance sheet, liquidity and low leverage positioned us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments.
Earnings for the third quarter of fiscal 2021 increased 78% to $3.06 per diluted share compared to $1.72 per share in the prior year quarter.
Net income for the quarter increased 77% to $1.1 billion compared to $630.7 million.
Our third quarter home sales revenues increased 35% to $7 billion on 21,588 homes closed, up from $5.2 billion on 17,642 homes closed in the prior year.
Our average closing price for the quarter was $326,100 and the average size of our homes closed was down 2%.
The value of our net sales orders in the third quarter increased 2% from the prior year to $6.4 billion, while our net sales orders for the quarter decreased 17% to 17,952 homes.
Our average number of active selling communities increased 1% from the prior year quarter and was down 3% sequentially.
Our average sales price on net sales orders in the third quarter was $359,200.
The cancellation rate for the third quarter was 17%, down from 22% in the prior year quarter.
As David described, in this very strong demand environment, our local teams are restricting the sales order pace in each of their communities based on the number of homes in inventory, construction time and lot position.
They continue to adjust sales prices to market on a community-by-community basis, while staying focused on providing value to our buyers.
Based on the stage of completion of our current homes in inventory, production schedules, and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter.
As a result, we expect our fourth quarter net sales orders to be lower than the third quarter.
However, we are confident that we will be well-positioned to deliver double-digit volume growth in fiscal 2022 with 32,200 homes in backlog, 47,300 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenue in the third quarter was 25.9%, up 130 basis points sequentially from the March quarter.
The increase in our gross margin from March to June exceeded our expectations and reflects the broad strength of the housing market.
The strong demand for a limited supply of homes has allowed us to continue to raise prices or lower the level of sales incentives in most of our communities.
On a per square foot basis, our revenues were up 4.7% sequentially, while our stick and brick cost per square foot increased 3.5% and our lot cost increased 1.7%.
We expect both our construction and lot costs will continue to increase on a per square foot basis.
However, with the strength in today's market conditions, we expect to offset any cost pressures with price increases.
We currently expect our home sales gross margin in the fourth quarter to be similar to or slightly better than the third quarter.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.
In the third quarter, homebuilding SG&A expense as a percentage of revenues was 7.1%, down 80 basis points from 7.9% in the prior year quarter.
Our homebuilding SG&A expense, as a percentage of revenues, is lower than any quarter in our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports our business.
We have increased our housing inventory in response to the strength of demand and we expect the current constraints on our supply chain to ultimately subside.
This quarter, we started 22,600 homes, up 33% from the third quarter last year, bringing our trailing 12-month starts to 94,500 homes.
We ended this quarter with 47,300 homes in inventory, up 44% from a year ago.
15,400 of our total homes at June 30 were unsold, of which 500 were complete.
At June 30, our homebuilding lot position consisted of approximately 517,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
25% of our total owned lots are finished and at least 44% of our controlled lots are or will be finished when we purchase them.
Our growing and capital efficient lot portfolio is a key to our strong competitive position and it'll support our efforts to increase our production volume to meet homebuyer demand.
Our third quarter homebuilding investments in lots, land and development totaled $1.8 billion, of which $910 million was for finished lots, $540 million was for land development and $350 million was to acquire land.
$300 million of our total lot purchases in the third quarter were from Forestar.
Forestar, our majority owned subsidiary, is a publicly traded well-capitalized residential lot manufacturer operating in 55 markets across 22 states.
Forestar is delivering on its high-growth expectations and now expects to grow its fiscal 2021 lot deliveries by approximately 50% year-over-year to a range of 15,500 to 16,000 lots with a pre-tax profit margin of 11.5% to 12%, excluding their $18.1 million loss on extinguishment of debt recognized during the quarter.
At June 30, Forestar's owned and controlled lot position increased 91% from a year ago to 96,600 lots.
61% of Forestar's owned lots are under contract with D.R. Horton or subject to a Right of First offer under our master supply agreement.
Forestar is separately capitalized from D.R. Horton and had approximately $470 million of liquidity at quarter end with a net debt-to-capital ratio of 37.8%.
With a strong lot supply, capitalization and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.
Financial Services pre-tax income in the third quarter was $70.3 million with a pre-tax profit margin of 37.3% compared to $68.8 million and 43.9% in the prior year quarter.
The year-over-year decline in our Financial Services pre-tax profit margin was primarily due to lower net gains on loans originated this quarter caused by market fluctuations and increased competitive pricing pressure in the market.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our homebuyers.
FHA and VA loans accounted for 45% of the mortgage company's volume.
Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 and an average loan-to-value ratio of 89%.
First-time homebuyers represented 58% of the closings handled by the mortgage company this quarter.
At June 30, our multi-family rental operations had 11 projects under active construction and an additional four projects that are completed and in the lease-up phase.
Based on leased occupancy in our marketing process, we expect to sell two or three of these projects during the fourth quarter of fiscal 2021.
Our multi-family rental assets sold $458.3 million at June 30.
Last year, we began constructing and leasing homes as income-producing single-family rental communities.
After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is marketed for sale.
During the third quarter, we sold our second single-family rental community for $23.1 million in revenue and $11.4 million of gross profit.
At June 30, our homebuilding inventory included $303.1 million of assets related to 44 single-family rental communities, compared to $87.2 million of assets related to 10 communities at the beginning of the fiscal year.
We are pleased with the performance of our single and multi-family rental teams and we look forward to their growing contributions for our future profits and returns.
Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
During the nine months ended June, our cash provided by homebuilding operations was $276 million even while we have reinvested significant operating capital to expand our homebuilding inventories in response to strong demand.
At June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.7 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
We believe this level of homebuilding cash and liquidity is appropriate to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 16% at the end of June with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months.
At June 30, our stockholders' equity was $13.8 billion and book value per share was $38.54, up 27% from a year ago.
For the trailing 12-months ended June, our return on equity was 29.5% compared to 19.9% a year ago.
During the quarter, we paid cash dividends of $72.1 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August.
We repurchased 2.6 million shares of common stock for $241.2 million during the quarter for a total of 8.1 million shares repurchased fiscal year-to-date for $661.4 million.
Our remaining share repurchase authorization at June 30 was $758.8 million.
We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.
In the fourth quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $7.9 billion to $8.4 billion and our homes closed to be in a range between 23,000 and 24,500 homes.
We expect our home sales gross margin in the fourth quarter to be in the range of 26% to 26.3% and homebuilding SG&A, as a percentage of revenues, in the fourth quarter to be approximately 7%.
We anticipate our Financial Services pre-tax profit margin in the range of 40% to 45% and we expect our income tax rate to be approximately 23.5%.
For the full fiscal year of 2021, we now expect consolidated revenues of $27.6 billion to $28.1 billion and to close between 83,000 and 84,500 homes.
This year, we have prioritized reinvestment of our operating capital to increase our housing and land and lot inventories to support higher demand.
Our other cash flow priorities remain balanced among increasing our investment in our multi and single-family rental platforms, maintaining conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to reduce our outstanding share count by approximately 2% from the beginning of fiscal 2021.
In closing, our results reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands.
Our results also illustrate the growth opportunity in front of us as we increase production capacity in response to homebuyer demand.
Our strong balance sheet, liquidity and low leverage provide us with a significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions.
We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.
As a result of these efforts, we are incredibly well-positioned to continue growing and improving our operations.
We will now host questions. | d r horton q3 earnings per share $3.06.
q3 earnings per share $3.06.
qtrly homes closed increased 35% in value to $7.0 billion on 21,588 homes closed.
qtrly consolidated revenues increased 35% to $7.3 billion.
qtrly net sales orders increased 2% in value to $6.4 billion on 17,952 homes sold.
homebuilding revenue for q3 of fiscal 2021 increased 35% to $7.1 billion from $5.2 billion in same quarter of fiscal 2020.
at june 30, 2021, company had 47,300 homes in inventory.
housing market conditions remain very robust.
have slowed our home sales pace to more closely align to our current production levels.
homebuyer demand exceeding our current capacity to deliver homes across all of our markets.
are also selling homes later in construction cycle when we can better ensure certainty of home close date for our homebuyers.
sees 2021 consolidated revenues of $27.6 billion to $28.1 billion. | 1 |
Today, you will hear from our president and chief executive officer, Tom McInerney, followed by Dan Sheehan, our chief financial officer and chief investment officer.
Our actual results may differ materially from such statements.
Also, references to statutory results are estimates due to the timing of the filing of the statutory statements.
Sarah has been with Genworth for 10 years and she held several leadership roles in Genworth's finance organization.
She knows Genworth and our two businesses very well.
We refreshed Genworth's board of directors over the last two years with the addition of four new directors who received strong support at Genworth's May 2021 annual shareholders' meeting.
As more fully described in our proxy statement issued last April, our new directors bring excellent credentials to the board, and they've already stepped up to challenge management and guide the company forward.
Melissa was appointed executive vice president and chief human resources officer.
She's a strong advocate for our people and understands the vital role they play in delivering current results and implementing our vision for the future.
She has played a leading role on Genworth's HR team, including working with Genworth's various businesses and functional units.
She will focus on our post-COVID strategy, our return-to-work arrangements, talent management and talent development of Genworth's key leaders and managers.
Greg was named executive vice president and general counsel.
Greg hails from Brooklyn and has a strong litigation background.
He led Genworth's litigation function for many years.
He was also instrumental in the resolution of the AXA litigation with Genworth and as Genworth's Chief Liaison with AXA in their ongoing legal dispute with Banco Santander.
life division for many years.
Let me now turn to Genworth's outstanding performance for the full year 2021.
Genworth's U.S. GAAP net income for the full year was $904 million.
Adjusted operating income for 2021 was $765 million.
Adjusted operating income was $1.48 per share, which is well above analysts' expectations and our own internal projections.
These outstanding results were led by a record year for NAT and adjusted operating income available to Genworth shareholders in 2021 was $520 million.
life and runoff achieved excellent financial results during 2021.
Full year adjusted operating income for U.S. life and runoff combined was $321 million, led by strong LTC adjusted operating income of $445 million for the year.
GAAP accounting regime based on new long-duration targeted improvement or LDTI rules, Genworth will also be highlighting U.S. life's statutory results.
statutory results when assessing the financial condition and performance of life insurers.
Therefore, because of the importance that insurance regulators put on statutory accounting and the fact that future statutory results will be based on a consistent methodology, we think that highlighting these results going forward will provide important additional information for shareholders and investment analysts.
We have included our statutory information through September 2021 on pages 15 and 16 of the investor deck.
life statutory after-tax net income for the full year to be approximately $660 million.
The strong net income result was driven by outstanding results for LTC, with pre-tax statutory income of approximately $910 million in 2021.
The GLIC consolidated statutory balance sheet was significantly strengthened this year.
We expect GLIC's capital and surplus to increase from $2.1 billion at the end of 2020 to approximately $2.9 billion at year-end 2021.
Similarly, GLIC's negative unassigned surplus is expected to improve from negative $1.8 billion to approximately negative $1.0 billion at year-end.
GLIC's RBC ratio at year-end 2021 is projected to be approximately 290, an increase of approximately 61 points from 229 at the end of 2020.
The significant improvements in the GLIC RBC ratio and statutory balance sheet were driven by excellent statutory net income in 2021, primarily from the strong LTC results.
The year-end statutory results in RBC calculations are preliminary as they are still under review and they will be filed with our year-end statutory filings.
I'm very pleased with our strong statutory results for the year.
Moving on from our strong 2021 financial results.
I want to provide an update on the five strategic priorities we announced last year.
The first strategic priority is to maximize the value of our equity position in Enact to benefit Genworth's shareholders.
Genworth's board considered several different options for Enact in 2021, including selling 100% of Enact, maintaining 100% ownership before deciding ultimately to move forward with a partial IPO.
Our objective has always been to protect and ultimately unlock Enact's value, enabling us to maximize value for Genworth shareholders over the longer term.
The various third-party sale transactions we considered were either not supported by regulators or involves significant regulatory risks, which we would potentially delay the timing of returning cash proceeds to Genworth shareholders.
Genworth therefore decided to proceed with a partial IPO and sold approximately 18.4% of Enact shares, which we believe was the best viable option for shareholders.
Genworth's 81.6% retained interest will allow us to receive significant future cash flows from Enact to enable delevering at Genworth and return of capital to Genworth shareholders.
But at the same time, we retain future optionality with our holdings in Enact, including a tax-free spinoff to Genworth's shareholders, as well as other options.
Genworth has decided that retaining our current holdings in Enact for the foreseeable future is the best option.
As we achieve our debt target and return capital to Genworth shareholders, we will continue to be open to other options in the future.
In the interim, we believe Enact has various levers to create near and long-term value, and Genworth will continue to advance initiatives that support Enact's value as the majority owner like debt reduction and other levers to further improve our holding company ratings, which we'll discuss later.
I'm extremely proud of the significant progress achieved in 2021 on our second strategic priority, which is to reduce Genworth's holding company debt to approximately $1 billion.
This has been a long-term objective for the company because this amount of debt is much more appropriate given Genworth's annual operating cash flows to the parent holding company.
We reduced our outstanding debt by approximately $2.1 billion last year, including paying off the AXA promissory note and redeeming the $400 million of parent holding company debt due in 2023.
We now have approximately $1.2 billion of parent holding company debt outstanding.
However, because Genworth ended the fourth quarter with cash of $356 million, our net debt position is already below $1 billion.
We will look to continue to reduce our debt to meet our target in the near term.
Looking at other key indicators of balance sheet strength.
Our U.S. GAAP debt to capital ratio at the end of the year was 13%, one of the lowest among life insurers that report this metric.
Looking ahead, we expect Genworth's interest coverage ratio to improve significantly.
After we retire the remaining of Genworth's $280 million of debt due in 2024, our pro forma cash flow coverage will be approximately five times based on a conservative view of projected future cash flows.
We are hopeful that with a substantial reduction in outstanding parent holding company debt in 2021, our improved cash interest coverage ratio, significant excess cash available to repurchase our outstanding 2024 debt, the long duration of the remaining 2034 and 2066 debt and the expectation of continued strong U.S. statutory net income that the rating agents will continue to upgrade the parent debt ratings over time.
The third strategic priority is perhaps the most important priority for the next several years.
Since the end of 2012, Genworth has made outstanding progress on moving the legacy LTC portfolio closer to breakeven.
We continue to define our multiyear LTC rate action plan, or MYRAP.
During 2021, Genworth delivered a new record for approved LTC rate increases of $403 million from 45 states on 173 separate rate filings.
The net present value of the 2021 LTC rate increases was approximately $2.3 billion.
During the fourth quarter annual LTC assumption review, we made long-term assumption changes mainly to our benefit utilization trend assumptions based on cost of care growth.
2021 margins reflect the updated unfavorable benefit utilization trend assumptions fully offset by higher model future in-force rate actions.
Our 2021 LTC margins remain positive, in the $0.5 million to 1 -- $0.5 billion to $1 billion range, and the assumption update did not cause a financial statement impact in the quarter.
Dan will review the assumption changes in more detail during his remarks.
We have the strongest and most experienced LTC premium increase team in the industry, led by Jamala Arland.
Jamala Arland and her team are continuously improving the LTC projection models to capture more accurate data and determine the level of actuarial active premium increases to request.
Regulators have a high regard of Genworth's LTC projection models, which have made the premium approval process more efficient.
These models have also helped us update the level of net present value, or NPV, from prior approved premium increases and benefit reductions given our new cost of care assumptions.
In addition to the approximately $2.3 billion NPV benefit from the $403 million of approved increases in 2021, the models project based on the latest assumption changes that the NPV achieved since 2012 has improved by an additional $2.8 billion compared to our earlier projections.
As of the end of 2021, Genworth now projects that the LTC premium increases and benefit reductions achieved since 2012 have improved the legacy LTC portfolio by $19.6 billion on a net present value basis.
This is a $5.1 billion increase from the $14.5 billion that reported at the end of 2020.
I am incredibly proud of the progress we've made toward stabilizing the legacy LTC book through our holistic approach, and I look forward to sharing further updates in the future.
The four strategic priority is advancing Genworth's LTC growth initiatives.
This is an important long-term priority because we believe that Genworth can only stand on its own without ongoing support from Enact dividends if we bring the legacy LTC portfolio closer to breakeven and develop a viable growth strategy that Genworth investors believe is sustainable.
If we can achieve both objectives, it would facilitate the future spinoff of Genworth's 81.6% of Enact because the remaining Genworth business would be viable as a stand-alone public company.
To support our growth strategy, we are in the process of standing up a new business line, Global Care Solutions.
And we have hired Joost Heideman as CEO to lead Genworth's LTC growth initiatives that will be developed within the new business line.
Joost has approximately 30 years of experience in the insurance industry.
He has worked for both large global insurers and for venture capital has focused on new health insurance models in emerging markets.
Joost worked with me at ING Group for over a decade, including stints helping me oversee ING's worldwide insurance and investment management businesses in over 40 countries and restructuring ING's very large side agency distribution channels in the emerging markets in Asia, Latin America and Eastern Europe.
After leaving ING in 2014, Jos was chairman and CEO of Unive, a mutual life and health insurer in the Netherlands.
He was working with Dutch venture capitalist to develop a new digital health insurance venture in East Africa in 2020 until the COVID-19 pandemic halted that venture.
I'm very pleased we were able to recruit Joost in 2020 as an outside consultant to help us develop our LTC growth strategies and that he will now be overseeing the implementation of those strategies as the CEO of global care solutions.
Because of the geopolitical challenges between China and the U.S., we have reduced our focus on China opportunities until those issues become more transparent.
LTC businesses as part of our new global care solutions.
The first business will offer fee-based advice consulting and services in the aged care space.
We see meaningful opportunities to provide advice, consulting and services to address the needs of elderly Americans, their caregivers and their families.
Genworth's CareScout subsidiary, led by Ed Motherway, currently provides some of these services.
Acquired by Genworth in 2008, CareScout is a market leader in providing LTC care assessments and care support through our network of 35,000 clinicians nationwide.
Joost and Ed will work together to further develop the long-term opportunities for CareScout.
Genworth has not funded CareScout over the last five years as our focus had been directed toward seeking premium increases on our legacy LTC portfolio.
We see tremendous potential in the business as part of our LTC growth strategy, so we are making an investment of approximately $8 million in CareScout in the first quarter to expand its clinical assessment capabilities in care support solutions.
This investment will allow CareScout to extend their assessment services to help support the many healthcare organizations that are experiencing a high volume of patients, ongoing assessment staffing shortages and numerous work for disruptions due to the COVID-19 pandemic.
We expect this investment to triple the annual assessment revenues in the next few years to approximately $30 million.
Longer term, CareScout and its future service affiliates are expected to provide a diversified source of capital-light fee-based revenues as we deploy new capabilities and solutions to meet the needs of a growing marketplace.
Our CareScout and other service strategies are based on converting these considerable capabilities into a viable and scalable advice, consulting and service businesses for the elderly and their families.
The second LTC growth business strategy is based on transforming the existing LTC insurance market.
The new Genworth LTC products to be sold in the market will be designed to solve the myriad of issues that have plagued the legacy LTC insurance business.
The most important change is to transform the LT insurance market is to implement an annual rerating model.
Genworth believes the primary problems with all insurers' legacy LTC insurance products were caused by the level premium regulatory model.
Legacy LTC products were sold pursuant to a regulatory regime designed to make premium adjustments difficult to obtain even though it is impossible to price products with assumptions that will hold, and of course, they did not hold for 30 to 40 years.
We are in the process of finalizing Genworth's first new LTC individual insurance product.
The new product is priced for a mid-teen return using pricing assumptions that we believe are conservative.
The product has a maximum lifetime benefit of $250,000, and the pricing assumptions for the key LTC risk were interest rates, lapses, morbidity and mortality are based on Genworth's current experience and projections for these factors.
However, because we understand that these pricing assumptions may not hold over the next 30 to 40 years, we will only write new business in states that will allow annual rerating to change premiums if pricing assumptions and market reality differ over time.
We have had extensive discussions with regulators, and we believe enough regulators support the concept of annual rerating to move forward with the product.
However, because of regulatory issues with the need for large premium increases on Genworth's legacy books and the need for many states to change to their current rate stabilization rules, some of which require legislative action, we do not expect to be able to launch the new LTC product in most states right away.
We may, however, decide to accelerate the launch with a handful of states who seem enthusiastic about bringing a new innovative LTC product into their state's insurance market.
I believe that these innovative forward-thinking states can help rebuild a robust long-term care insurance market that contributes to solving the massive long-term care funding crisis based in the country and that is at the core of Genworth's multifaceted growth initiatives.
Genworth's current financial strength and ratings are also an issue for the viability of the new LTC product.
We have a new Genworth insurance company, which will only write new business and will not have any legacy LTC business.
We expect that 75% of the risk with a new LTC product will be reinsured with the A+ rated reinsurer, though the level of reinsurance that we expect to be reduced to 50% over time.
Preliminary discussions with AM Best have provided a good understanding of their methodology around investment-grade ratings.
Genworth expects to offer several additional new and innovative LTC products, including hybrid products and a nonguaranteed LTC benefit product in the future.
Genworth's fifth strategic priority is returning capital to our shareholders.
Given that our net debt position is now below $1 billion, and we expect Enact to share their dividend policy later this year, we plan to consider initiating a capital management program later in 2022.
We'll have an update on Genworth's capital management plans on the next earnings call.
In closing, I'm very pleased with the strong operating performance and the progress on our strategic priorities achieved in 2021.
We have made outstanding progress on Genworth's turnaround, and I remain confident in our plans to drive shareholder value.
The fourth quarter was another excellent quarter for Genworth, with net income of $163 million and adjusted operating income of $164 million or $0.32 per share.
In the fourth quarter, we also continued to make significant progress on our debt management strategy.
In this quarter alone, we fully retired $400 million of debt due in August 2023 and reduced our February 2024 debt maturity by $118 million for a total of $518 million.
Even with this debt management activity, we ended the quarter with a solid holding company cash and liquidity position of $356 million.
Turning to the operating companies.
For the fourth quarter, Enact reported adjusted operating income of $125 million to Genworth and a strong loss ratio of 3%, driven in part by a $32 million pre-tax reserve release on pre-COVID delinquencies.
I'll note that Genworth's fourth quarter adjusted operating income excludes 18.4% of minority interest, which accounted for $29 million of adjusted operating income.
Last quarter, minority interest accounted for only $4 million of adjusted operating income due to the timing of the initial public offering in September.
Absent minority interest, Enact's adjusted operating income increased, largely driven by the favorable reserve development in the quarter.
Enact saw a 9% year-over-year increase in insurance in-force growth, driven in part by $21 billion of new insurance written in the quarter.
In addition, Enact finished the quarter with an estimated PMIER sufficiency ratio of 165% or approximately $2 billion of published requirements.
The decline in the PMIER sufficiency versus the prior quarter was largely driven by the dividend they paid in the quarter.
Subsequent to the quarter, in January, Enact executed an excess of loss reinsurance transaction, which will cover the 2022 production and is expected to provide approximately $300 million in PMIERs credit.
Reinsurance transactions are a key part of their credit risk transfer program that is designed to provide cost-effective capital relief and reduce loss volatility.
We're very pleased with Enact's performance for the full year and the fourth quarter, which included the payment of its first dividend as a public company.
The $1.23 per share dividend generated $163 million for Genworth.
With respect to our expectations for future dividends from Enact, Enact is evaluating its dividend policy and expects to initiate a regular common dividend around mid-2022.
We reported $41 million of adjusted operating income in the quarter, driven by the continued strength of LTC earnings from the multiyear rate action plan and variable investment income.
Mortality continued to be elevated in the quarter, in part from COVID-19, which benefited LTC earnings but negatively impacted our life insurance results.
Results in the quarter also included charges in our term universal life and universal life insurance products of $102 million related to assumption updates and DAC recoverability testing.
In our long-term care insurance business, we reported strong results with fourth quarter adjusted operating income of $119 million compared to $133 million reported in the prior quarter and $129 million in the prior year.
As we discussed last quarter, while our overall GAAP margins are positive, we've established a GAAP-only profits followed by losses reserve, which covers projected losses in the future.
This reserve reduced LTC earnings by $121 million after tax during the quarter.
As of year-end, the pre-tax balance of the profits followed by losses reserve was $1.3 billion, up from $625 million at year-end 2020.
Our fourth quarter adjusted operating earnings from in-force rate actions were $296 million after tax and before applying profits followed by losses, which increased from $225 million in the fourth quarter of 2020.
The legal settlement on our LTC choice one policy forms continued to favorably impact our results by $57 million or $14 million after profits followed by losses this quarter.
The choice one legal settlement applies to approximately 20% of our LTC policyholders.
As of quarter end, approximately 65% of the settlement class had reached the end of this election period.
We currently expect the remaining class members to make their elections over the course of this year.
There are two other similar legal settlements pending.
The one for our PCS 1 and PCS 2 policy forms comprises approximately 15% of our LTC policyholders and is subject to final court approval.
Should the settlement be approved in the near term, we expect claimants to start making their elections in mid to late 2022.
Additionally, we've reached an agreement in principle for a settlement on our choice two policy forms, which covers approximately 35% of our LTC policyholders or as many policies as the two other settlements combined.
The choice two settlement is still subject to the execution of a formal agreement in the court schedule and ultimate approval.
Subject to these events, we anticipate that we'll begin implementing an approved settlement by early 2023.
While our financial results in 2021 have been favorably impacted by the choice one legal settlement and the other two settlements are expected to positively impact future financial results, it's difficult to quantify their overall impact on our financials as full implementation will take several years that is subject to specific policyholder elections.
In terms of LTC invoice rate action approvals, it was a record year for Genworth due in part to regulators' recognition of the importance of actuarially justified rate increases for Genworth and the industry.
During the quarter, we received approvals impacting approximately $223 million of premiums with a weighted average approval rate of 36%.
On a year-to-date basis, we received approvals impacting nearly $1.1 billion in premiums with a weighted average approval rate of 37%.
This is favorable compared to the prior year when we received approvals impacting $1 billion in premiums with a weighted average approval rate of 34%.
We experienced favorable variable investment income at LTC again this quarter, reflecting higher limited partnership income, gains on treasury inflation-protected securities, bond calls and mortgage prepayments.
While we saw a very strong variable net investment income in 2021, which is not subject to reductions from profits followed by losses, we do expect this investment performance to moderate over time.
Claim terminations in the fourth quarter were higher versus the prior quarter and lower versus the prior year, as noted on page eight.
We made a minimal adjustment to our previously established COVID-19 mortality reserve for the quarter, decreasing the cumulative balance to $134 million.
As the pandemic continues, mortality experience may fluctuate, and the COVID-19 mortality adjustment would be reduced if mortality experience becomes unfavorable.
New active claims are higher than the prior year, but new claims incidence experience remains lower than pre-pandemic levels and continues to drive favorable incurred but not reported, or IBNR, claim reserve development.
In the fourth quarter, given the gradual increase in incidents, we reduced our COVID-19 IBNR claim reserve by $34 million, resulting in a cumulative balance of $75 million.
We completed our annual review of key actuarial assumptions in each of our product lines during the fourth quarter.
Our assumptions for LTC claim reserves or disabled life reserves held up in the aggregate and the margin for policies not yet on claim included in our active life reserves remains positive.
Therefore, we did not increase our reserves and there was no P&L impact from these updates.
Please note that the COVID-19 pandemic impact to the businesses were not considered when reviewing our long-term assumptions as they are not currently expected to be indicative of future trends or loss performance.
As part of the LTC active life margin testing process, we reviewed our long-term assumptions relative to experience.
During this year's assessment, we updated several assumptions with respect to lapses, mortality, expenses, interest rates, and most significantly, benefit utilization trends.
Margin testing results for the LTC block are shown on page nine.
These results remain positive in both the historical and acquired blocks.
The combined margin was approximately $500 million to $1 billion, which is consistent with the prior year's range.
As Tom outlined, given the expected future increase in the cost of care, we expect our long-term benefit utilization to trend higher than previously assumed.
This is one of our key long-term assumptions that impacts trends modeled over a 60-year period.
Prior to this update, we had assumed that the long-term benefit utilization would improve over time.
Based on our experience, it has not improved as much as we predicted, largely due to the cost of care growth driven both by broad-based inflation and minimum wage increases in some large states, among other factors.
Therefore, we've increased the outlook for our future benefit utilization trend.
Since margin testing remained positive, we're not required to increase our LTC active life reserves for policies not yet on claim as the model benefit from adjustments to our multiyear rate action plan offsets the approximately $4 billion impact from the assumption updates.
I'm pleased that our progress on the multiyear rate action plan and other risk mitigation actions, combined with future actions, have allowed us to absorb these assumption updates without incurring any charges in our financial results.
A multiyear rate action plan is essential to our strategy of proactively managing and mitigating adverse emerging experience.
And with this updated trend assumption, it further emphasizes the ongoing need for rate actions.
The success of the multiyear rate action plan has strengthened our ability to pay claims in two ways.
First, there is the increased premium revenue.
Second, in connection with approved rate actions and the legal settlements, we've managed our long-term exposure to generous product features, like lifetime benefits and compound inflation riders, as policyholders have elected benefit reductions to mitigate rate increases.
As evidenced on page 13, 44% of policyholders have selected reduced benefit or non-forfeiture options, which reduces our long-term risk.
Our peak claim mirrors are over a decade away, and as always, we'll continue to monitor emerging experience to help evaluate the need for future changes.
We now project the need in aggregate for approximately $28.7 billion in LTC premium increases and benefit reductions on a net present value basis, which is important in our progress toward achieving economic breakeven on our legacy LTC block.
While this amount has increased as a result of the assumption update, we are over two-thirds of the way there, having achieved $19.6 billion in rate actions since 2012.
The $19.6 billion we've achieved has grown significantly since last year, in part because of the value of our 2021 rate action approvals of $2.3 billion.
Additionally, the benefit utilization trend assumption update for higher cost of care growth increased the value of our previously achieved rate actions by $2.8 billion.
The remaining amount we have left to achieve is $9 billion, which has grown from last year, largely to offset the unfavorable impact from the assumption updates.
Based on our proven track record and the strength of the multiyear rate action team and their process, our ability to close the remaining amount is achievable.
As I've shared before, we're managing the U.S. life insurance companies on a stand-alone basis.
Through capital and surplus, rate increases and reduced benefit options, we're working to ensure our ability to pay LTC benefits over the long term.
Turning to our life insurance products.
We reported a fourth quarter adjusted operating loss of $98 million compared to operating losses of $68 million in the prior quarter and $20 million in the prior year.
Overall mortality for the fourth quarter continued to be elevated versus expectations, though improved versus the prior quarter and prior year.
The fourth quarter included approximately $27 million after tax and COVID-19 claims based upon death certificates received to date.
As part of our annual assumption review, we made assumption updates on the term universal and universal life products as well for both mortality and interest rates, which resulted in a combined unfavorable impact of $70 million in the fourth quarter.
In our universal life products, we recorded a $32 million after-tax charge for DAC coverability testing compared to $30 million in the prior quarter and $50 million in the prior year.
These charges continue to reflect unfavorable mortality experience and block runoff.
In fixed annuities, adjusted operating earnings of $20 million for the quarter included the benefit from favorable mortality in the single premium immediate annuity products.
In the runoff segment, our adjusted operating income was $16 million for the fourth quarter compared to $11 million in the prior quarter and $13 million in the prior year.
Variable annuity performance was driven by equity market performance, which was favorable versus the prior quarter though less favorable than the prior year.
life insurance company, statutory financials and cash flow testing results remain in process and will be made available with our year-end statutory filings.
We expect consolidated capital in Genworth Life Insurance Company, or GLIC, as a percentage of RBC to be approximately 290% at December 31, in line with the 291% at September 30.
This is due in part to the expected negative impacts of the life assumption updates and cash flow testing offset by the $170 million statutory capital benefit from the life block reinsurance transaction completed in the quarter.
RBC is significantly higher than the 229% at December 31, 2020, due primarily to the favorable LTC statutory earnings in the year.
This increase was driven by the benefit from in-force rate actions, including the impacts from the choice one legal settlement, favorable investment performance and favorable terminations.
We expect GLIC consolidated year-end capital in surplus to be close to $3 billion as we've seen a strong trend throughout the year.
Pages 15 and 16 highlight recent trends in statutory performance for LTC and GLIC consolidated on a quarter-lag basis due to the timing of when statutory results are finalized.
Statutory earnings for LTC are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist under statutory accounting.
Statutory earnings are also aligned to taxable earnings, which have resulted in strong cash tax payments to the parent holding company throughout 2021.
Rounding out our results, we reported an adjusted operating loss in the corporate and other segment of $18 million, which was an improvement of $31 million from the prior year, reflecting lower interest expense given the reduction of holding company debt, as well as lower corporate expenses.
Turning to the holding company.
We ended the quarter with $356 million of cash and liquid assets.
Page 17 provides a detailed cash activity for the quarter.
Key items in the quarter included the debt reduction of $518 million of principal, the dividend from Enact of $163 million, and $75 million in the intercompany cash tax payments, reflecting strong underlying taxable income from Enact and the U.S. life insurance business.
The holding company received $370 million in cash taxes in 2021.
We will continue to utilize holding company tax assets in 2022 and anticipate that the holding company will receive approximately $200 million in cash taxes in 2022, subject to ultimate taxable income generated.
Given our current tax position, we do not anticipate paying federal taxes in the near term.
In closing, when I think about where we started 2021, I'm incredibly proud of our financial results and the progress we've made against our strategic priorities.
For the full year 2021, net income was very strong at $904 million versus $178 million in 2020, and adjusted operating income was $765 million versus $310 million in 2020.
Enact contributed $520 million in adjusted operating earnings to Genworth in 2021, and we're very pleased with LTC's $445 million in adjusted operating earnings.
While statutory results are still in progress, we estimate full year after-tax statutory net income for the U.S. life insurance business of $660 million, driven by LTC's estimated $910 million of pre-tax statutory income.
Throughout 2021, we improved our financial strength and flexibility each quarter, putting up strong operating results, driving efficiencies to reduce our annual run rate expenses by approximately $75 million, maximizing the value of our assets and reducing our debt and overall cost of capital.
With the completion of the Enact IPO, we achieved rating upgrades from Moody's and S&P at the parent holding company in recognition of the improved credit risk profile and increased financial flexibility.
Enact was also upgraded by Moody's, S&P and Fitch, which has enabled it to expand its customer base and be more competitive against peers.
In 2021, we took a proactive approach to managing our holding company debt, which has strengthened our balance sheet as we head into 2022.
We retired over $2 billion in debt, including the AXA promissory note and of approximately $1.2 billion of parent holding company debt remaining as of year-end.
We plan to retire the remaining 2024 debt of $282 million ahead of its maturity date.
After we retire the 2024 debt, our next debt maturity will be more than a decade away in 2034, and we would expect cash interest coverage to be approximately five times based on a conservative view of projected cash flows, which will be great progress.
While it has been over 13 years since Genworth returned capital to shareholders, we plan on announcing more specific capital management plans later this year given the tremendous improvement in our financial condition achieved in 2021.
The timing is dependent on redeeming the remaining $282 million of debt due in 2024 and Enact's announcement of its future dividend policy.
The bottom line is that we've had a terrific year and are entering 2022 with a strong foundation and a clear path for the future.
We look forward to sharing more with you soon. | q3 adjusted operating earnings per share $0.46. | 0 |
With me on the call today are Rod Larson, president and chief executive officer, who will be providing our prepared comments; and Alan Curtis, senior vice president and chief financial officer.
Our comments today also include non-GAAP financial measures.
There's an old saying that says what doesn't kill you makes you stronger.
And after the events of last year, I feel Oceaneering is stronger on many fronts.
And I'm very proud of what we accomplished in 2020.
With all the challenges presented by the global COVID pandemic, including the crude oil demand destruction and resulting price collapse and the many challenges faced in protecting our workforce, while still satisfying our customer obligations, Oceaneering still delivered improved consolidated adjusted operating results and adjusted EBITDA as compared to the prior year.
We also generated meaningful free cash flow with our cash balance increasing by $78 million from $374 million at December 31, 2019, to $452 million at December 31, 2020.
Today, I'll focus my comments on our performance for the fourth quarter and full-year 2020, our market outlook for 2021, Oceaneering's consolidated 2021 outlook, including our expectation to generate positive free cash flow in excess of the amount generated in 2020, and EBITDA in the range of $160 million to $210 million and our business segment outlook for the full year and first quarter of 2021.
Now, moving to our results.
For the fourth quarter of 2020, we reported a net loss of $25 million or $0.25 per share on revenue of $424 million.
These results include the impact of $9.8 million for pre-tax adjustments associated with asset impairments and write-offs, restructuring and other expenses and foreign exchange losses recognized during the quarter, and $9.6 million of discreet tax adjustments.
Adjusted net income was $1.8 million or $0.02 per share.
We were pleased that our consolidated fourth-quarter adjusted earnings before interest taxes, depreciation, and amortization or adjusted EBITDA was $47.1 million and was sequentially higher than the third-quarter 2020 and exceeded both our guidance and consensus estimates.
Each of our five operating segments recorded sequential improvement and adjusted operating income and adjusted EBITDA despite lower revenue in three out of the five segments.
Fourth-quarter 2020 consolidated adjusted operating income of $9.6 million was the best quarterly performance in 2020 and $4 million higher than the third quarter.
We generated $104 million of cash from operating activities.
And after deducting $15 million in capital expenditures, our free cash flow was $89 million for the quarter.
As a result of good operating cash flow, working capital efficiencies, and capital expenditure discipline, our cash position increased by $93.2 million during the fourth quarter of 2020.
As of December 31, 2020, our cash balance stood at $452 million.
Now, let's look at our business operations by segment for the fourth quarter of 2020.
Subsea Robotics or SSR adjusted operating income improved sequentially on lower revenue.
Adjusted fourth-quarter operating results included recognition of approximately $3 million of cost-structure improvements achieved throughout 2020.
Consequently, our SSR quarterly adjusted EBITDA margin of 33% was better than expected up from the 31% achieved during the third quarter of 2020 and consistent with the margin achieved during the first nine months of 2020.
The revenue split between our remotely operated vehicle or ROV business and our combined tooling and survey businesses as a percentage of our total SSR revenue was 80% and 20% respectively compared to 82% and 18% split in the prior quarter.
As we had anticipated ROV days on hire declined as compared to the third quarter due to expected lower seasonal activity.
Our fleet utilization for the fourth quarter was 54% down from 59% in the third quarter and our days on hire declined for both drill support and vessel-based services.
Average ROV revenue per day on hire of $7,325 was 1% higher as compared to the third quarter.
Days on hire were 12,456 in the fourth quarter as compared to 13,601 in the third quarter.
We ended the quarter and the year just as we began with a fleet count of 250 ROV systems.
Our fourth-quarter fleet use was 60% in drill support and 40% for vessel-based activity as compared to 56% and 44% respectively during the third quarter.
At the end of December, we had ROV contracts on 75 of the 129 floating rigs under contract or 58%, a slight market share increase from September 30, 2020, when we had ROV contracts on 76 of the 133 floating rigs under contract or 57%.
Subject to quarterly variances, we continue to expect our drills support market share to generally approximate 60%.
Turning to manufactured products.
Our fourth-quarter 2020 adjusted operating income improved from the third quarter on lower segment revenue, which was adversely affected by supplier-related delays in our energy products businesses.
Adjusted operating income margin increased to 9% in the fourth quarter of 2020 from 5% in the third quarter of 2020 due primarily to favorable contract closeouts and supply chain savings.
The COVID-19 pandemic continued to dampen demand for our mobility solutions products during the fourth quarter of 2020.
Our manufactured products backlog at December 31, 2020, was $266 million, compared to our September 30, 2020 backlog of $318 million.
Our book to bill ratio was 0.4 for the full year of 2020, as compared with the trailing 12-month book to bill a 0.5 at September 30, 2020.
Offshore Projects Group or OPG, fourth-quarter 2020 adjusted operating income improved sequentially of lower revenue.
Revenue declined less than expected as the Gulf of Mexico experienced higher amounts of installation work and intervention maintenance and repair activities with customers having pushed work into the fourth quarter due to the several third-quarter 2020 hurricanes.
The sequential increase in adjusted operating income was due to better activity-based pricing in the Gulf of Mexico and continued costs improvement.
During the fourth quarter, engineering work continued on the Angola riserless light well intervention project.
For Integrity Management and Digital Solutions, or IMDS, fourth-quarter 2020 adjusted operating income was higher than third quarter of 2020 and a marginal increase in revenue.
The improvement in adjusted operating income was largely driven by more effective use of personnel, as we continue to transform how and where work is performed.
Our Aerospace and Defense Technologies or ADTech fourth-quarter 2020 adjusted operating income improved from the third quarter on higher revenue.
Adjusted operating income margin rose as a result of project mix and better-than-expected performance in our Subsea Defense Technologies business.
Unallocated expenses were higher primarily due to increased incentive compensation accruals related to better fourth-quarter operating and financial performance.
Now, I'll turn my focus to our year-over-year results of 2020 compared to 2019.
For the full-year 2020, Oceaneering reported a net loss of $497 million or $5.01 per share on revenue of $1.8 billion.
Adjusted net loss was $26.5 million or $0.27 per share reflecting the impact of $481 million of pre-tax adjustments, primarily $344 million associated with goodwill impairment and $102 million of asset impairments.
Right now, it's in write-offs recognized during the year.
This compared to a 2019 net loss of $348 million or $3.52 per share on revenue of $2 billion and adjusted net loss of $82.6 million or $0.84 per share.
For the year, activity levels and operating performance within our energy segments were lower than originally projected for 2020.
The COVID-19 pandemic negatively impacted operator investments in oil and gas projects due to a decline in crude oil demand and pricing and entertainment business spending due to limited theme park attendants.
Activity levels and performance within our ADTech segment met expectations for the year.
Compared to 2019, our 2020 consolidated revenue declined 11% to $1.8 billion with revenue decreases in each of our four energy segments being partially offset by the revenue increase in ADTech.
ADTech's contribution to our consolidated results continues to grow representing 19% of consolidated revenue in 2020 as compared to 16% in 2019.
Despite the headwinds of lower activity in our energy segments consolidated 2020 adjusted operating results and adjusted EBITDA improved by $59.6 million and $19.5 million respectively, led by our manufactured products and ADTech segments.
In 2020, each of our operating segments with the exception of OPG contributed positive adjusted operating income, and all our operating segments contributed positive adjusted EBITDA.
2020 operating performance benefited considerably from the cost improvement measures recognized during the year.
We generated $137 million in cash flow from operations and invested $61 million in capital expenditures, resulting in free cash flow of $76 million.
We ended the year with $452 million in cash.
In 2020, we continue to adapt to the challenges posed in our markets as we dealt with the significant challenges presented by the COVID-19 pandemic by establishing and implementing protocols that have allowed us to protect personnel and customers while delivering on our promises.
We implemented a cost and process improvement program and enhanced the performance of our businesses.
This program targeted the removal of $125 million to $160 million of costs, including depreciation.
Some examples of these efforts are efficiency enabling projects, which some may describe as process improvements, rationalizing facilities, restructuring our operating segments to better leverage common attributes, thereby enabling improved productivity and how and where work is performed, initiating supply chain savings, and eliminating nonproductive assets.
Through the end of 2020, we've implemented improvements that put us on the high end of that range.
The majority of these reductions are structural in nature and are expected to benefit our results in 2021 and beyond.
We maintained our commitment to capital discipline by reducing capital expenditures to $61 million as compared to $148 million in 2019 and we maintain focus on our core values.
We're pleased with the notable achievements accomplished during 2020.
We achieved significant improvement in our IMDS business with adjusted operating results, improving by almost $10 million as compared to 2019.
With over $250 million in contract awards during the fourth quarter of 2020 and early 2021, 45% of which is incremental business, this segment is positioned for growth in 2021.
Our Subsea Robotics business, a recognized leader in world-class ROV services secured more than $225 million of contracts during the fourth quarter of 2020.
Our ADTech business met its original performance targets created at the beginning of 2020 before the COVID-19 pandemic.
The business also recorded several important incremental contract wins, including partnering with Dynetics to support their design of the Human Lunar Landing System for NASA and a contract to operate and maintain the U.S. Navy Submarine Rescue systems worth up to $119 million assuming annual renewals over a five-year period.
We maintained our commitment and focus on safety.
The team remained very focused on our life-saving rules, identifying high hazard tasks, and developing engineered solutions to mitigate risks.
Our total recordable incident rate or TRIR of 0.3% for 2020 is a record low for Oceaneering.
The following financial metrics improved in 2020.
EBITDA of $184 million surpassed the $165 million generated in 2019.
Positive free cash flow of $76 million surpassed the $10 million generated in 2019.
Cash increased to $452 million and consolidated adjusted EBITDA margin of 10% surpassed the 8% margin achieved in 2019, despite an 11% decrease in revenue.
We continue to make good progress on our sustainability efforts or environmental, social, and governance initiatives.
From an environmental perspective, we continue to advance our capabilities as a technology delivery company to help our customers meet their reduced emission goals.
We continue the development of clean energy technologies to assist our customers in mitigating carbon emissions.
These initiatives include our Liberty, Isurus, and Freedom ROVs.
We also continue implementing measures to reduce the amount of greenhouse gases emitted from our own operations, including facility consolidations and our employee remote work options, as well as increased recycling efforts.
From a social perspective, we continue to explore new ways to make positive contributions in the communities where we operate and to increase workforce diversity within the company.
During the year, we created Diversity and Inclusion Council to focus on implementing new initiatives that will further diversify our global workforce.
We are leveraging Employee Resource Groups or ERGs, including Oceaneering women's network and our recently launched Oceaneering veterans' network to foster a diverse and inclusive workplace.
From a governance perspective, we are taking action at the board level as well.
We recently announced the addition of two new board members, which expands the diversity of the board while adding new skill sets and perspectives that are crucial as Oceaneering focuses on energy transition strategies.
We also formalized our ESG reporting through our boards nominating and Corporate Governance Committee.
During 2020, Oceaneering filed its first sustainability report, which is posted on our website using the disclosure methodology outlined by the Sustainability Accounting Standards Board or SASB.
Oceaneering continues to hold an ESG index A rating with MSCI.
Now, turning to our 2021 outlook for the markets we serve.
Coming into the year, most analysts and research pointed to continued headwinds for the offshore oil and gas market due to the low level of project sanctioning in 2020 and continued uncertainty surrounding COVID-19.
With the opex plus actions taken at the very beginning of 2021 and growing optimism associated with numerous vaccine approvals, many analysts and energy researchers are now forecasting Brent pricing to stabilize in the $55 to $60 per barrel range for 2021 and longer-term pricing to be in the $50 to $70 per barrel range.
We expect Brent pricing in the $55 to $65 per barrel range will support reasonable levels of IMR activity in 2021.
Similarly, we believe that longer-term Brent pricing forecast of $50 to $70 per barrel will support increased offshore project sanctioning activity in 2021.
Analysts and research service projections for other key metrics we track also support these expectations.
Analyst data suggests that the floating rig count has stabilized and throughout 2021 will remain close to the year-end 2020 levels of approximately 130 contracted rigs.
There were 123 Tree Awards in 2020 and raise that forecasts a modest recovery to around 200 in 2021 and back into the 300 range in 2022, raise that also forecast Tree Installations of 273 in 2021, which approaches the 2020 total of 299.
Also, according to raise did offer projects with an aggregate value of approximately $46 billion were sanctioned in 2020, a 53% decrease from 2019.
Sanctioning levels are expected to increase in 2021 to around $55 billion and return to 2019 levels of around $100 billion in 2022.
Raise that forecast global installed offshore wind capacity to increase by 11.8 gigawatts by in 2021, 37% over 2020.
Our entertainment business will continue to innovate as pent-up demand is expected to grow theme park attendance to pre-pandemic levels by 2022.
And finally, government-related markets we serve are expected to remain relatively stable with continued modest growth for the foreseeable future.
Now, to our 2021 consolidated outlook for Oceaneering.
We anticipate our full-year 2021 operations to yield positive free cash flow in excess of the amount generated in 2020 and the midpoint of our consolidated adjusted EBITDA range to approximate 2020 consolidated adjusted EBITDA.
Based on year-end 2020 backlog and anticipated order intake, we forecast generally flat consolidated revenue with higher revenue in AdTech and IMDS to offset substantially lower revenue from our manufactured product segment.
We forecast relatively flat revenue in our SSR and OPG segments.
These projections assume no significant incremental COVID-19 impacts and generally stable oil and gas prices.
For the year, we anticipate generating $160 million to $210 million of adjusted EBITDA with positive operating income and adjusted EBITDA contributions from each of our operating segments.
Apart from seasonality, we view pricing and margins in the current energy markets to be stable.
We forecast improved annual operating results in our SSR, OPG, IMDS, and AdTech segments and lower operating results in our manufactured products segment.
Our liquidity position at the beginning of 2021 remains robust with $452 million of cash and an undrawn $500 million revolver available until October 2021, and thereafter $450 million available until January 2023.
We expect to further strengthen this position in 2021 by generating positive free cash flow in excess of the amounts generated in 2020.
As has been the case over the past several years, it is our intent to continue to strengthen our balance sheet to ensure that we are well-positioned to deal with our $500 million bond maturity in November 2024.
For 2021, we expect our organic capital expenditures to total between $50 million and $70 million.
This includes approximately $35 million to $40 million of maintenance capital expenditures and $15 million to $30 million of growth capital expenditures.
We continue to closely scrutinize our maintenance and growth capital expenditures focusing on opportunities that will provide near-term revenue, cash flow, and return.
We also continue to invest in new, more efficient technologies that will help our customers and meeting their goals to produce the cleanest safest barrels to help meet their carbon-neutral goals.
In 2021, interest expense, net of interest income is expected to be approximately $40 million and our cash tax payments are expected to be in the range of $35 million to $40 million.
This includes taxes incurred in countries that impose tax on the basis of in-country revenue and bear no relationship to the profitability of such operations.
These cash tax payments do not include the impact of approximately $28 million of CARES Act tax refunds expected to be received in 2021.
Directionally in 2021 for our operations by segment, we expect for Subsea Robotics, our forecast for improved results is based on essentially flat ROV days on higher, minor shifts in geographic mix, and generally stable pricing.
Results for tooling-based services are expected to be flat, with activity levels generally following ROV days on hire.
Survey results are projected to improve on higher geoscience activity.
We forecast adjusted EBITDA margins to be consistent with those achieved in 2020.
For ROVs, we expect our 2020 service mix of 62% drill support and 38% vessel services to generally remain the same through 2021.
Our overall ROV fleet utilization is expected to be in the mid to high 50% range for the year with higher seasonal activity during the second and third quarters.
We expect to generally sustain our ROV market share in the 60% range for drill support.
At the end of 2020, there were approximately 24 Oceaneering ROVs onboard 21 floating drilling rigs with contract terms expiring during the first six months of 2021.
During that same period, we expect 28 of our ROVs on 24 floating rigs to begin new contracts.
For manufactured products, we expect segment performance to decline primarily as a result of the decreased order intake in our energy businesses during 2020.
We continue to closely monitor the impact of COVID-19 pandemic on our mobility solutions businesses, and currently expect to see marginally higher activity and contribution from these businesses in 2021.
We forecast that our operating income margins will be in the low to mid-single-digit range for the year.
For OPG, operating results are expected to improve in 2021 on generally stable offshore activity and margins comparable to the last half of 2020.
Operating results and adjusted EBITDA are forecast to improve largely due to the efficiency and cost improvement measures implemented in 2020 and improved year-over-year contribution from our Angola riserless light well intervention campaign.
Vessel day rates remain competitive but stable, and we expect to see opportunities for pricing improvements during periods of higher activity.
We also anticipate reduced charter obligations and increased flexibility on third-party vessels and an overall improvement in fleet utilization.
As has been the case over the last several years, this segment has the highest amount of speculative work incorporated in our guidance.
For IMDS, results are forecast to improve on higher revenue, with the operating income margin averaging in the high-single digit range for the year.
Good order intake at the end of 2020 is expected to begin benefiting the business in the second quarter of 2021.
We will continue to focus on the effective use of personnel and transforming how and where work is performed.
For ADTech, revenue is expected to be higher, producing improved results with operating income margins consistent with those achieved in 2020.
Growth in this segment is expected to be broad-based, with revenue growth in each of our three government-focused businesses.
For 2021, we anticipate unallocated expenses to average in the low to mid-$30 million range per quarter as we forecast higher accrual rates for projected short and long-term performance-based incentive compensation expense, as compared to 2020.
For our first-quarter 2021 outlook, we expect our first-quarter 2021 adjusted EBITDA to be in the range of $45 million to $50 million on sequentially higher revenue.
As compared to the fourth quarter of 2020, we anticipate higher revenue and relative flat operating results in our ADTech segment, lower activity in operating results, and our SSR and manufactured product segments.
Higher revenue and operating results in our IMDS segment and in our OPG segment, operating results are forecast to improve on substantially higher revenue as we have commenced operations on the Angola riserless light well intervention project.
In closing, our focus continues to be generating free cash flow, maintaining our strong liquidity position, demonstrating meaningful progress in advancing our ESG and energy transition efforts and improving our returns by driving efficiencies and consistent performance throughout our organization, engaging with our customers to develop value-added solutions that increase their cash flow and remaining disciplined in our pricing decisions and capital deployment strategies.
We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take any questions you may have. | q4 adjusted earnings per share $0.02.
q4 loss per share $0.25.
q4 revenue $424 million versus refinitiv ibes estimate of $425 million.
in 2021, expect to generate positive free cash flow in excess of amount generated in 2020.
q1 2021 adjusted ebitda is forecast to be in range of $45 million to $50 million. | 1 |
I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations.
These factors are set forth in the news release issued yesterday.
Additionally, our explanation of how and why we use certain non-GAAP measures and how those measures reconciled to GAAP results is contained within our news release and the slides we posted last night and in our most recent 10-K and 10-Q.
Speaking today will be Joe Nolan, our President and Chief Executive Officer; and Phil Lembo, our Executive Vice President and Chief Financial Officer.
Also joining us today are John Moreira, our Treasurer and Senior Vice President for Finance and Regulatory; and Jay Buth, our Vice President and Controller.
We hope that all on the phone are safe and well, and we look forward to seeing many of you in person next week at the EEI conference.
First, I want to discuss last week's Northeast, which impacted approximately 525,000 customers across our service territory.
Our Eastern Massachusetts customers sustained the greatest damage with more than 450,000 customers impacted.
That's over 35% of Eversource's customers in Eastern Massachusetts.
This storm was far less damaging in Connecticut, Western Massachusetts and New Hampshire.
So as we wrapped up the restoration in those areas, we were able to quickly redeploy resources to the Southeastern Massachusetts, Cape Cod in Martha's Vineyard, areas that took the brunt of the storm.
Our internal resources were supplemented by hundreds of crews from outside the region, and we were able to essentially complete the work over this past weekend.
This experience underscores the benefits of a large T&D organization, one where resources can be shifted based on the greatest need.
Last year, it was Connecticut.
Last week, it was Massachusetts.
Next time it might be in New Hampshire.
We have 9,300 dedicated employees, all focused on providing the best possible experience for our customers.
Lessons we learned last year in Connecticut, particularly regarding communication with municipalities have been vigorously applied this year.
Our customers and community leaders have certainly noticed our enhancements, and we have received many positive comments on our storm response.
When storms have threatened us and recall that we have had glancing blows from three tropical storms this summer in last week's events that I described at the beginning of my comments, I have been at the center of the action from before the storm hits into the lost of our customers has power restored.
I believe that's critical for us to be out front, visible, transparent and collaborative during these major events, something that has been difficult to do as we all work in a remote pandemic restricted environment for the last 18 months.
Next, I want to discuss our Connecticut rate settlement.
In News reports, Governor Lamont, Attorney General William Tong and state leaders were quoted as saying that the settlement provides customers with some well-deserved relief in the short term, greater local control and oversight and an improved customer experience.
Phil will discuss settlement specifics in a moment, but we are very grateful to PURA for the opportunity to move forward on a positive note.
Settling critical regulatory and legal disputes was a necessity to reset our relationship with key Connecticut stakeholders.
We all want the state to move ahead on addressing critical energy and climate issues.
And the outstanding disputes have the potential to delay some of this important work.
Since becoming CEO this past spring, my top priority has been to strengthen our relationship Ins' Connecticut.
I've met regularly with key state policymakers as well as business leaders and customers, underscoring our commitment to the state with the largest number of Eversource employees live and work.
This will continue to be a strong focus for me going forward.
Eversource is fully committed to providing each and every one of our 4.3 million electric, natural gas and water customers across New England with exceptional service.
With Connecticut temporary rate docket now behind us, we can move on to other important topics, where progress has been hindered by the drain in time and resources devoted to strong ESA ES and the interim rate reduction, supporting the build-out of electric vehicle infrastructure, incenting the construction of customer-owned energy storage, installing AMI.
That is the clean energy future, and we will work together with our customers in policymakers to get there.
I'm going to cover some very positive developments in recent months concerning our offshore wind partnership with Orsted.
You can see the status of our current projects on slide three.
Each has advanced since our last earnings call.
To start, our smaller projects, South Fork, has received its final environmental impact statement, and we expect a record of decision to be posted later this month.
BOEM's project website anticipates a decision on South Fork's construction and operating permit or COP in January of 2022, and we anticipate construction beginning early next year.
We continue to expect commercial operation of the 12 turbines, 130-megawatt project by the end of 2023.
In August, we announced that Kiewit will commence construction of the project substation this month in Texas, and that we expect it to be installed in the summer of 2023.
Moving to the 704-megawatt Revolution Wind project that will deliver clean power to Connecticut and Rhode Island.
BOEM continues to anticipate a COP decision in July of 2023, which would support a 2025 in-service date.
State siting hearings have commenced.
Finally, our largest project, Sunrise Wind, which will supply 924 megawatts to New York.
We are looking for federal agencies to complete their final reviews in late 2023, a schedule that would support a late 2025 in-service date.
Last week, we announced that Sunrise will be the first offshore wind project in the United States that will utilize high-voltage direct current technology.
HVDC offers advantages over AC technology when used over long distances.
In Sunrise, we'll have an approximately 100-mile submarine transmission cable from offshore energy production area to the grid connection in Brookhaven, Long island, New York.
We continue to project mid-teens equity returns for these three projects.
The Biden administration continues to show significant support for offshore wind in both words and actions, targeting 30,000 megawatts of offshore turbines by 2030.
We view our partnerships to ocean tracks off of Massachusetts as the best offshore wind sites on the Atlantic seaboard.
Our leases are in close proximity to both the New England and New York markets.
They enjoy strong offshore winds, particularly in the winter, and they have modest ocean depths.
They can hold at least 4,000 megawatts of offshore wind turbines, far more than the approximately 760 megawatts we currently have under contract.
We continue to exercise strong fiscal discipline in using the remaining offshore acreage that we have leased from the federal government.
We did not bid into Massachusetts September RFP for up to 1,600 megawatts of offshore wind.
Current Massachusetts bidding rules discourage imaginative bid packages, Governor Baker and some Massachusetts policymakers are now recognizing that Massachusetts is not benefiting from the same level of economic development as states that place greater emphasis on infrastructure and supply chain development.
As such, the governor recently filed legislation that would eliminate the state's current price cap.
In Rhode Island, we are constructing a service vessel in the state.
In Connecticut, we are partnering with the state on more than $200 million upgrade of the New London State Pier.
The Pier will become the premier site in the entire Northeast for staging offshore wind development.
Onshore construction is underway, which you can see from either I-95 or Amtrak's nearby Boston to New York line.
In New York, I joined members of the Governor Hochul's administration last month and announcing the largest single offshore wind supply chain contract award in New York to support the Sunrise project.
The local company, Riggs Distler, will construct advanced foundation components at the port on the Hudson near Albany.
It is just the latest commitment we have made to New York, which also includes basing an offshore wind maintenance hub in Port Jefferson.
We have an excellent relationship with New York policymakers, and that is where most of our currently contracted offshore wind capacity is headed.
We look forward to bidding into future RFPs, with our strong mix of sites, skill sets, discipline bidding strategies and offsets vast offshore wind experience will make us a formidable contender in any competition that takes a broad look at the benefits of shore winds.
I'll start with our results for the quarter slide four.
Our GAAP earnings were $0.82 per share for the quarter, including the $0.19 charge associated with the Connecticut electric rate settlement and the $0.01 charge relating to our integration of Eversource gas of Massachusetts.
Overall, we experienced improved operating results at the electric transmission and distribution segments and lower results at the natural gas and water segments as well as the parents and other.
Our electric transmission business earned $0.40 per share in the third quarter of 2021 compared with earnings of $0.36 in the third quarter of last year, reflecting a higher level of necessary investment in our transmission facilities.
Our electric distribution business, excluding charges related to the Connecticut rate settlement, earned $0.62 per share in the third quarter of 2021 compared with earnings of $0.60 in the third quarter of 2020.
Higher distribution revenues were partially offset by higher O&M, depreciation, interest and property taxes.
Storm-related expenses remain a headwind for us, costing us $0.01 a share in the third quarter of 2021 compared to the same period in 2020 and a total of $0.05 a share more in 2021 than last year on a year-to-date basis.
Our natural gas distribution business lost $0.06 per share in the third quarter of 2021 compared with a loss of $0.04 in the third quarter of 2020.
Given the seasonal nature of customer usage, natural gas utilities tend to record losses over the summer months, our natural gas segment now -- our natural gas segment loss is now about 50% larger as a result of the acquisition of Columbia Gas of Massachusetts assets back in last October.
And as you recall, we now refer to that franchises as Eversource Gas of Massachusetts.
So Eversource Gas of Massachusetts lost about $0.03 per share in the quarter.
It had no comparable amount in the third quarter of 2020.
I think it's important to point out here that given this is the first full year for our Eversource Gas of Massachusetts or EGMA franchise, modeling its quarterly earnings contribution has varied widely across street estimates, at least the ones that I've seen.
Just to some investors underestimated the $0.14 per share positive contribution from EGMA in the first quarter.
I believe there may have been some underestimate of EGMA losses in the third quarter.
As I said, EGMA lost $0.03 in the quarter, and it was not part of the Eversource family in the third quarter of 2020.
I'd say going forward with a year's track record behind us, I'm sure that the estimates will better reflect the earnings pattern we have for that franchise going forward.
Our water distribution business, Aquarion, earned $0.05 per share in the third quarter of 2021 compared with earnings of $0.07 in the third quarter of 2020.
The lower results were due primarily to the absence of the Hingham, Massachusetts water system that we sold at the end of July of 2020.
The $17.5 million that we earned at our water segment in the third quarter of 2021 is more on -- a more normalized level for that segment.
Our parent and other earned $0.01 per share in the third quarter of 2021 compared with earnings of $0.03 in the third quarter of 2020.
Lower earnings were primarily due to a higher effective tax rate.
Our consolidated rate was 24.8% in the third quarter of 2021 compared with 23.7% in the third quarter of 2020.
Turning to slide five.
You can see that we have reiterated the $3.81 to $3.93 earnings per share guidance that we issued in February.
That range excludes the $0.25 per share of charges related to our Connecticut settlement and storm-related bill credits that we recognized in the first quarter of this year as well as the transition costs related to the integration of the former Columbia Gas of Massachusetts assets into the Eversource system.
Also, we project long-term earnings per share growth in the upper half of the range of 5% to 7% through 2025.
Excluding the impact of the positive impact that we expect from our offshore wind projects.
That growth is largely driven by our $17 billion five-year capital program and continued strong operational effectiveness throughout the business.
For reference, our five-year capital forecast is shown in the appendix.
And through September 30, our capital expenditures totaled $2.3 billion.
From the financial results, I'll turn to our recently approved Connecticut settlement on slide number six.
Earlier, Joe provided you with an overview.
I'll just add a few additional details.
The settlement calls for $65 million in rate credits to CL&P customers over the course of December of 2021 in January of 2022.
And that's about -- in total, $35 per customer over the two months for the typical residential customer.
It provides another $10 million of shareholder pay benefits to customers who are most in need of help with their energy bills.
Further, as part of the settlement, we will withdraw our superior court appeal of the $28.4 million total storm-related credits that customers first saw in their bills in September of 2021.
So these customers will continue.
They'll continue to flow back to customers through August of next year.
As prior of the settlement, the 90 basis point indefinite reduction of CL&P's distribution ROE will not be implemented.
Additionally, the current 9.25% ROE and capital structure will remain in effect.
This will avoid an appeal of the interim rate reduction and will withdraw the pending appeal of the 90 basis point reduction.
CL&P cannot implement new base distribution rates before January one, 2024.
Priorities to the settlement agreed that this review satisfies the statutory requirement in Connecticut that all-electric and natural gas distribution company rates be reviewed once every four years.
That's to determine whether they're just unreasonable.
So as a result, the next statutory mandated review would be in late 2025.
Since CL&P's last distribution rate case was effective in May of 2018, the actual -- the company's actual ROEs have generally ranged between 8.6% and 9%, with the latest reported quarter at 8.6%.
There are some tracking mechanisms that will allow us to recover costs associated with certain new investments over the coming years, such as those to improve reliability or implement grid modernization initiatives, but we will not be able to obtain any additional revenues to offset higher wages, employee benefits costs, property taxes and other inflationary items.
We'll continue to provide superior service to our nearly 1.3 million CL&P customers will also be effectively managing our operations.
It will certainly be a challenge, but one, I know that our entire CL&P and Eversource team is up to meeting.
From the Connecticut settlement, I'll turn to our various grid mod, AMI, electric vehicle initiatives in Connecticut and Massachusetts.
On October 15, CL&P filed a final electric vehicle program designed documents for PURA review and approval, including a proposed budget and program implementation plan for residential managed charging.
PURA will conduct a review process with a final decision targeted for December the eight.
The program is planned to launch January one of 2022, and will support the state's target of having at least 125,000 electric vehicles on the road by the end of 2025.
In terms of AMI, in Connecticut, CL&P is preparing to file an updated proposal based on a straw proposal from Pier to have all our customers on AMI by the end of 2025.
To date, we'll need to replace more than 800,000 meters over the next -- to do that, we'll have to replace over 800,000 meters over the next several years.
Altogether, moving CL&P fully to AMI would involve a capital investment of nearly $500 million we estimate in meters and communication related technologies.
In Massachusetts on slide eight, as we mentioned on our July earnings call.
We've submitted nearly $200 million grid modernization plan to regulators for the 2022 through 2025 period.
The vast majority of that investment would be capital.
We expect a ruling on the entire program by the second quarter of 2022.
Our Massachusetts AMI program is now being evaluated by the Massachusetts Department of Public Utilities, with a decision expected in 2022.
It would involve about $575 million of capital investments over multi-years from 2022 through 2027.
And like Connecticut, would provide significant customer service, reliability, energy efficiency, grid modernization and demand management improvements.
Also in Massachusetts, the DPU is evaluating an extension of our electric vehicle program.
The extension would provide investments of nearly $200 million over the next four years, with about $68 million being capital investments.
We currently expect a decision on this by mid-2022.
Turning to slide nine.
We've been receiving regular questions over the past couple of months about the impact of higher natural gas prices on this winter's electric and natural gas supplies and prices.
So I'll first start with supplies.
First, what do we have to supply?
Our three natural gas distribution companies are required to have access to enough natural gas to be able to serve our firm customers on the coldest day in the last 30-year period.
So we accomplished that through a combination of firm capacity contracts across multiple interstate pipeline systems and through storage, both inside and outside of our service territory.
Our regulators in Connecticut and Massachusetts have had the foresight to allow us to maintain significant in region LNG storage in Waterbury, Connecticut.
And Hopkinton and Acushnet, Massachusetts as well as various facilities that we purchased as part of the Columbia gas of Massachusetts transaction.
Although, these facilities provide us with -- altogether, these facilities provide us with storage connected to our distribution system of nearly 6.5 billion cubic feet.
Our regulators have also permitted us to acquire additional firm delivery capacity that was added to the Algonquin system in recent years through the AIM and Atlantic Bridge expansion projects.
We've also acquired additional firm capacity on the Tennessee and Portland pipelines.
So from a reliability standpoint and supplies, we consider ourselves very well prepared for the winter.
In terms of price, our natural gas sources include a combination of stored gas, where the price has been fixed and pipeline gas from Marcellus Shale basin that is price based on NYMEX related indices.
Because our firm pipeline capacity, we are able to purchase at the Marcellus related price, not at the New England Citygate price.
You can see on the slide that we have in our deck, that there's significant difference in pricing between the two.
Nonetheless, even the Marcellus price is higher this year.
And as of now, we expect the commodity portion of natural gas bills to be approximately 20% higher than last winter's extremely low levels due to COVID, prices were pretty low last year and well below levels we experienced a decade ago after Hurricane Katrina struck the Gulf of Mexico and Louisiana.
Overall, including the distribution charge, we expect natural gas heating bills will be up about 15% on average.
That's about $30 a month to the average for a typical heating customer compared to last winter.
And that's an average across our three natural gas distribution companies.
While a 15% increase is significant it is far less than the -- more than 30% increase that propane heating customers are facing and really a 60% increase that's out there for home heating oil as the alternatives for customers.
Of course, a primary determinant of the total bill is usage, right?
The autumn has been quite mild here in New England, thus far, and natural gas usage has been particularly low.
Nonetheless, a bitly cold month of December or January could cause natural gas cost to increase.
Recognizing the stress that this situation could place on customers.
We've suggested to our regulators that we spread out the recovery of certain charges in our distribution portion of our bill to moderate the potential bill impacts where possible.
We're also taking additional proactive steps and working closely with regulators so that customers understand the current price environment and take actions to address it.
We're intensifying our communications to be sure customers understand the bigger picture macro factors affecting natural gas bills.
And we are urging customers to take advantage of our nationally recognized energy efficiency programs and leverage payment options that we have available.
So on the electric side, it's a bit different.
Natural gas power plants are on the margin in New England year-round, really, except for the coldest days of the year.
So rising natural gas prices are significantly affecting power prices.
Between 60% and 65% of our electric load is bought by customers directly from third-party suppliers.
For the 35% to 40% of our load that continues to buy through our franchises, Connecticut Light & Power, NSTAR Electric and Public Service in New Hampshire, this is mostly residential load and customers will see higher prices, but they are partially protected by the fact that we contract for power in multiple tranches throughout the year.
So lower cost tranches from our purchases earlier in 2022 will offset some of the higher priced tranches that we purchased more recently.
Due to wintertime natural gas constraints in New England, our customers normally see $0.015 to $0.02 per kilowatt hour increase in their retail electric prices in January, an increase that usually reverses as we move into the summer.
This January customers in Massachusetts and Connecticut elected to experience an additional $0.02 to $0.03 increase due to higher gas prices driving power production.
This would be an additional $20, $25 per month for a typical residential customer compared with last winter.
Our New Hampshire customers, the rates remain in effect until February, so there's really no impact at this stage for our New Hampshire customers.
While the vast majority of our residential customers do not use electricity for space heating, we recognize that any increase in energy bills add stress to the household budget.
And we've redoubled our efforts again to urge customers to take advantage of the more than $500 million that we have available on energy efficiency initiatives that we provide customers throughout our states each year.
I should note that similar to natural gas prices, wholesale electric prices were extremely low in 2020.
In fact, they were at a 10-year low.
So the percentage increase is -- that we're reporting here comes off some very low base numbers from last year.
As a reminder, increases and/or decreases in the energy component of our electric bills, our pass-throughs dollar-for-dollar pass-throughs, we earn nothing on providing the procurement service for customers. | compname reports q3 earnings per share $0.82.
q3 earnings per share $0.82.
today reaffirmed its previously disclosed 2021 earnings per share (eps) projection of $3.81 to $3.93 per share. | 1 |
On the call, in addition to myself, you also have Bill Berkeley, our Executive Chairman; and Rich Baio, Group Chief Financial Officer.
We're going to follow a similar agenda to what we've done in the past.
Rich is going to do the initial heavy lift and walk us through the quarter and some of the highlights.
I will follow him with a few comments and then we'll be opening it up for Q&A and happy to take the conversation anywhere participants would like to take it.
So with that, Rich, if you want to get us going please.
The headline in this quarter is a record underwriting profit with premium growth of more than 11% and solid net investment income in gains, which resulted in a return on beginning of year equity of 14.5%.
The company reported net income of $230 million or $1.23 per share.
The breakdown is operating income of $202 million, or $1.08 per share, and after-tax net investment gains of $28 million or $0.15 per share.
Beginning with underwriting income and the components thereof, gross premiums written grew by more than $250 million, or 11.4% to almost $2.5 billion.
Net premiums written grew 11.1% to more than $2 billion, reflecting an increase in both segments.
The insurance segment grew approximately 10% on this $1.75 billion in the quarter, with an increase in all lines of business with the exception of workers’ compensation.
Professional liability led this growth with 37.6%, followed by commercial auto with 21%.
Other liability of 13.1% in short tail lines of 5.6%.
All lines of business grew in the reinsurance and monoline access segment, increasing net premiums written by 18.2% to more than $300 million.
Casualty reinsurance led this growth with 21.9% followed by 13.8% in property reinsurance, and 13.6% in monoline access.
The compounding rate improvement in excess of loss cost trends has partially contributed to the expansion of underwriting income.
Other contributors have included lower claims frequency and non-cat property losses, along with growth in lines of business that are generating the best risk adjusted returns.
Underwriting income increased approximately 250% to $183 million.
The industry continue to experience above average catastrophe losses in the quarter, including the winter storms in Texas.
And we have again, been able to demonstrate our disciplined management to cat exposure.
Our current accident year catastrophe losses were approximately $36 million or 1.9 loss ratio points, including 0.8 loss ratio points for COVID-19 related losses.
This compares with the prior year cat losses of $79 million or 4.7 loss ratio points, which included three loss ratio points for COVID-19 related losses.
The reported loss ratio was 60.6% in the current quarter, compared with 65.5% in 2020.
Prior year loss reserves developed favorably by $3 million or 0.2 loss ratio points in the current quarter.
Accordingly, our current accident year loss ratio excluding catastrophes was 58.9% compared with 61% a year ago.
The expense ratio was 29.5%, reflecting an improvement of 1.9 points over the prior year quarter.
The growth in net premiums earned continues to outpace underwriting expenses by a margin of almost 7%, significantly benefiting the expense ratio.
Although we continue to benefit from reduced costs associated with travel and entertainment due to the pandemic, we are implementing initiatives that will enable us to operate more efficiently in the future.
Summing this up, our accident year combined ratio excluding catastrophes was 88.4%, representing an improvement of four points over the prior year quarter.
Shifting gears to investments.
Net investment income for the quarter was approximately $159 million.
The alternative investment portfolio including investment funds, and arbitrage trading account provided strong results.
The fix maturity portfolio declined due to the lower interest rate environment and the higher cash and cash equivalent position we've maintained over the past few quarters.
We did begin to reinvest cash as interest rates rose in the quarter, however, continue to maintain a defensive position with more than $2 billion in cash and cash equivalents.
Our duration remains relatively short at 2.4 years, enabling us to further benefit from future increases in interest rates and at the same time, our credit quality remains strong at AA minus.
Pre-tax net investment gains in the quarter of $35 million is primarily made up of realized gains on investments of $76 million, partially offset by a reduction in unrealized gains on equity securities of $24 million, and an increase in the allowance for expected credit losses of $17 million.
The realized gain was primarily attributable to the sale of a private equity investment in real estate assets.
Corporate expense partially increased due to debt extinguishment costs of $3.6 million relating to the redemption of hybrid securities on March 1.
In line with our plans to benefit from the low interest rate environment, we've pre funded for a redemption and a couple of maturities in early 2022.
To this end, you will have seen that we announced the redemption of our hybrid securities for June 1, which will result in debt extinguishment costs in the second quarter of approximately $8 million pre-tax.
Stockholders' equity increased more than $100 million to approximately $6.4 billion, after share repurchases and dividends of $51 million in the quarter.
The company repurchased approximately half a million shares for $30 million in 2021 at an average price per share of $63.82.
Our net unrealized gain position in stockholders equity declined by $90 million due to the rise in interest rates in the quarter.
However, this was partially mitigated by our decision to maintain a relatively short duration.
Book value per share grew 2.4% before share repurchases and dividends.
And finally, cash flow from operations, more than doubled quarter-over-quarter to over $300 million.
I noticed that there's a correlation here that, the better the quarter, the less you leave for me to comment on.
So I guess I should be pleased and grateful that there's not much left for me.
Having said that, let me offer a couple of comments that try not to be too repetitive on the heels of Rich's comments.
But I really would like to flag a couple of things.
First off, there is no doubt that there is a meaningful tailwind that exists in the commercial lines marketplace.
And certainly this organization is benefiting from that.
And to that end, our top line, I think this is the highest growth rate we have seen since which I think you have to go back to 2013.
You had mentioned to me when you look back in the history books.
And not only the growth and market conditions attractive, I think what's even more encouraging is that there is a growing amount of evidence that the momentum is going to grow from here and that there is a fair amount of runway still before us.
So again, I think that bodes well for not just how we see the coming quarters unfold, but quite frankly the next several years.
To that end, clearly the domestic economy and certainly parts of the global economy are improving.
And that without a doubt is going to benefit our top line.
We are seeing the health and wellness of our insureds continuing to improve.
In addition to that perfect comment a moment ago, we continue to see the opportunity to push rate further.
You may have noticed that we got approached in 13 points of rate in the quarter, excluding workers’ compensation.
I did have a little bit of a discussion internally and we dug into it as to how do you compare this approaching 13 points of rate with what we saw on the fourth quarter.
And after digging into it, really what this is a reflection of is, there are parts of the portfolio where rate adequacy has gotten to the point where we are so encouraged by the available margin, that we are more interested in pushing harder on the exposure growth, and not as preoccupied and pushing harder on the rate front.
And again, we view that as a real plus.
This is we are coming up for some of the major product lines on a third year in a row where we are getting meaningful rate increases.
And at this stage, we are seeing as Rich suggested rate on rate and in many product lines where we have been getting rate on rate in excess of loss cost trend.
Again, we think that is very encouraging for what that means for margin.
Before I offer a couple of thoughts on the loss ratio, couple other quick data points that I've referenced on occasion in the past.
Renewal retention ratio, in spite of what we're pushing on with rates.
And all of the other underwriting actions that we are taking, is still hanging in there at approximately 80%.
And our new business relativity metric, which is another data point we've shared with many of you in the past came in at 1.024%, which effectively what that means is on as much of an apples to apples basis as we are able to create in comparing a new account versus a renewal account, we are effectively surcharging a new account by 2.4% more.
Why, because a new piece of business unless about, then obviously, it's part of your portfolio that you've been on for some period of time.
And I think it's important because people need to understand when you look at the growth, yes, it is rate, but it's also exposure growth.
But we are not compromising in that growth in the quality of the portfolio.
Rich gave you some detail which complemented the relief on the loss ratio.
Clearly, as he suggested, we're benefiting from the higher rates, couple other data points, I would suggest, we are not taking a lot of credit for shift in terms and conditions, when we come up with many of our loss picks.
We will take some oftentimes, but certainly we are never taking full credit for it.
We want to see how that comes into focus.
So more to come on that front.
The other piece, and I suspect that there has been some other discussion around the impact on frequency due to COVID.
Again, that is something that we have been reluctant to declare victory on.
There certainly are some lines of business where you have more immediate visibility as to what the impact of that reduction in frequency there are other product lines, where there is less visibility.
On that topic, I did want to offer a couple of quick comments on workers compensation, which is the one outlier as we've discussed in the past couple of quarters as far as the marketplace and where things are going.
Clearly workers compensation has been a product line where competition has been on the rise.
We've seen the action of state rating bureaus.
And ultimately we'll have to see how that unfolds over time.
One is, from our perspective, it is likely that the pendulum will swing too far in a certain direction.
And as a result of that, as we have shared with people in the past, it continues to be our view that we expect the workers’ comp market to likely begin to bottom out more visibly, by the end of this year or perhaps the first half of next year.
Could it be a quarter or two later?
Yes, but generally speaking, that's how we see things coming into focus.
The other comments on workers comp that I would like to flag because there's been an observation or two shared around the last picks that we are carrying for the 2020 year and given how benign the frequency has been in 2020.
Why have we not done anything with that pick, and it's very simple.
We do not want to declare victory prematurely.
As we have in the past, start out with what we believe is a measured pick and as that seasons, we will adjust as we see, fit and appropriate.
So, the last comment on comp which I will offer, and I think I've made the comment in the past, is that, I think that the lack of frequency that has existed recently in the comp line due to COVID, as to a certain extent, perhaps subsidize a severity trend, which looks pretty ugly in the comp line.
And certainly it is possible that the marketplace is setting itself up for a disappointment, if there is not an appropriate level of attention paid to loss cost trend, and really unpacking what is going on with severity, what is going on with frequency and what one should expect as frequency returns to a more traditional norm.
I will leave it there as far as comp, that's perhaps more than people were looking for.
Expense ratio, again, Rich touched on.
As we've mentioned in the past, COVID is offering effectively a benefit of about 50 basis points, the expense ratio.
So when he and I sort of do the back of the envelope math, that's what we're back in to the expense ratio.
Having said that, it's also worth noting that we have some meaningful investments that are going on in the business, in particular on the technology as well as the data analytics front.
And these are big lifts, which we think are clearly going to make us a better business more efficient, and will allow us to be able to be making better, more insightful decisions.
And let me just move on briefly to investment portfolio, I'm not going to get into much detail here because Rich really covered it.
I would just say that our approach to focus on total return, our emphasis on alternatives, continues to pay off.
And quite frankly, it is helping to compensate and then some the discipline that we are exercising with how we're managing the fixed income portfolio.
As Rich mentioned, we continue to maintain the duration on the shorter end at 2.4 years.
And the quality is not something that we have or will be compromising on sitting there at AA minus.
That being said, we are being rewarded for that discipline, as you can see where our book value ended up at the end of the quarter.
And while we were not completely insulated, we were far less impacted than those that have decided to take duration out farther.
I just want to offer a couple of quick comments on what I'll refer to as cycle management.
From our perspective, cycle management is the name of the game.
Knowing when to grow, knowing went to shrink.
We as a team are very conscious of the fact that we cannot control the market, we are very conscious of the fact that this is a cyclical industry and we are very aware of the reality that what we are able to control is what we do.
Oftentimes people will ask the Chairman or Rich or myself, where are the best opportunities?
And the answer we give because we do not want to get into the details is, look at our business, look at our public information, look at where we are growing.
We grow where the margins are, we grow where the opportunity is.
And we are not shy or scared or intimidated to let the business go, when we don't think it is a good use of capital.
You can see that very clearly in our numbers.
Right now you can see the discipline that our colleagues are exercising in the workers comp line.
You can see in other parts of the business, whether it be the primary insurance, professional liability line, or what's happening in parts of our reinsurance portfolio.
We are in the business of managing capital and we are going to deploy it where we think it makes sense.
And again, we have our eyes wide open.
And that is a bit of recognition, for where we are.
This business, from my perspective is particularly well positioned for the market conditions we are in, and likely what the market conditions will be tomorrow.
We are here because we have a fabulous team.
We have 6543 people that work together as a team in the interest of all stakeholders.
And we were able to achieve this quarter because of their efforts in spite of the challenges that exists in the world, particularly over the past 12 years. | q3 sales rose 82 percent to $1.4 billion.
q3 earnings per share $1.11.
qtrly adjusted earnings per share $1.13.
steel price volatility is expected to remain a headwind for co.
overall, our businesses are performing well, and underlying end market demand remains healthy. | 0 |
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's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
We continue to gain momentum in the second quarter and completed our fourth consecutive quarter of solid performance after the disruptions from COVID in the first half of last year.
Their perseverance through the past 19 months of COVID-19 turmoil has allowed AZZ to obtain the results we are now reporting.
Overall sales of $216 million improved 6.4% versus the prior year, or 8% when adjusted for the divestiture of SMS. Metal Coatings turned in another excellent quarter with sales up 10.7%, almost $130 million, and Infrastructure Solutions flat at about $87 million.
Sales were somewhat impacted by labor constraints and COVID-19-related material shortages in some businesses.
I will get into the details of this as we go along.
We are pleased to have completed another strong quarter performance.
We continue to generate strong cash flow during the second quarter, while also returning capital to our shareholders.
We generated net income of $18.9 million and earnings per share of $0.76 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 while incurring a 20.4% tax rate for the quarter.
In line with our strategic commitment to value creation, we've repurchased over 290,000 shares for $15 million and distributed $4.2 million in dividends.
In Metal Coatings, which represented 60% of our sales in the second quarter, we achieved 24.4% operating margins on sales of $130 million.
This resulted in operating income being up over 17% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rising zinc, labor and energy costs.
While we have several active acquisition discussions underway, we were slowed somewhat due to the uptick in COVID Delta variant cases that reduced some travel.
Our Metal Coatings team continues to demonstrate their ability to perform and deliver great results while managing labor shortages and the increasing zinc costs.
Our Infrastructure Solutions segment demonstrated continued profitability improvement through their seasonally slow second quarter.
We were up about 4.3% when considering the impact of the SMS divestiture.
The team delivered operating income of $7 million or 130%, up dramatically versus the prior year.
The segment benefited from its realignment actions from last year but did face some labor constraints and material delays.
We are focused on strategic selling initiatives and are well positioned to deliver a strong fiscal year 2022.
For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors, given our strong performance in the first half and due to seeing more opportunities than risk the balance of this year, we are tightening and raising our guidance.
We anticipate sales to be in the range of $865 million to $925 million and earnings per share at $2.90 to $3.20.
This excludes any acquisitions or divestitures.
Metal Coatings is continuing focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increased due to inflation.
Our Infrastructure Solutions segment has seen more normalized business levels and entered the third quarter with some momentum in bookings activity, particularly in electrical.
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 certain customer sites.
The electrical platform is focused on operational execution and growing its e-house and switchgear businesses.
We anticipate continuing to benefit from low interest rates.
While we expect solid performance in the third quarter due to the continued COVID impact on our international markets, we do not anticipate quite as strong of a performance as we experienced in this past first quarter.
While the fall turnaround activity is good, we're seeing several projects that are already likely to stretch into the fourth quarter.
I will note that we are already seeing a lot of activity lining up for the spring season.
For fiscal year 2022, AZZ will continue to execute on our strategic growth objectives to drive shareholder value.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives that drive operational excellence, 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 are actively working to position our core businesses to provide sustainable profitability and regardless of whether we see any infrastructure legislation.
Bookings or incoming orders in the second quarter were $231.8 million, a $23.2 million or a 11.1% increase over the second quarter of the prior year.
Our bookings to sales ratio increased to 107% as we saw improving market conditions across both the Metal Coatings and Infrastructure Solutions segments.
As Tom previously mentioned, second quarter fiscal year 2022 sales of $216.4 million were $13.1 million or 6.4% higher than the prior year second quarter sales of $203.4 million.
We generated gross profit of $55.1 million compared with gross profit of $46.1 million in the second quarter of the prior year.
Our gross margin was 25.5% for the quarter, which was a 280-basis-point improvement compared with a gross margin of 22.7% in the second quarter of last year, as business in both segments continues to recover from the pandemic lows witnessed this time last year.
Operating income for the quarter was $26.5 million compared with $652,000 in the second quarter of the prior year.
During the prior year second quarter, we recorded restructuring and impairment charges of $18.7 million.
We believe the difficult decisions and actions management took last year are strongly impacting our financial results in both of our segments this fiscal year.
We believe we have established a strong foundation for future growth.
Our earnings per share of $0.76 was $0.26 higher than last year's second quarter adjusted earnings per share of $0.50 and $0.83 above the reported loss of $0.07.
The prior-year second quarter loss was significantly impacted by the impairment and restructuring charges and impacts of the pandemic as previously discussed.
Second quarter EBITDA for fiscal year 2022 was $36.6 million compared with adjusted EBITDA reported in the second quarter of fiscal year 2021 of $30.7 million, an increase of $5.9 million or 19.1%.
Year-to-date sales through the second quarter of fiscal year 2022 were $446.3 million, a 7.1% increase from last year's second quarter year-to-date sales of $416.7 million.
Excluding the impact of the SMS divestiture, sales would have increased 11% year-over-year.
Fiscal year 2022 year-to-date net income of $41.3 million was $22.8 million or 122.8% above the prior year-to-date adjusted net income of $18.5 million.
Prior year-to-date net income as reported was $3.8 million.
Year-to-date earnings per share of $1.64 was 131% higher than the prior year-to-date adjusted earnings per share of $0.71.
Turning to our liquidity and cash flows.
We continue to maintain a strong balance sheet and return capital to our shareholders.
The following are our capital allocation highlights: During the quarter, we renegotiated and renewed our five-year credit facility, retaining our facility at $600 million in borrowing capacity, supported by a strong group of banks.
Gross outstanding debt as of the second quarter is $183 million, $4 million above the $179 million in outstanding debt at the end of the second quarter of the prior year, which reflects increased share purchase activity as we have purchased nearly 70 million in outstanding shares during the last year.
Year-to-date, we have deployed $13.1 million in capital investments and we anticipate to still make capital investments of roughly $35 million this year.
Supply chain constraints have impacted and delayed to some extent the timing and spending of our planned capital expenditures.
As Tom noted, we repurchased $15 million in outstanding stock during the quarter and $21.2 million on a year-to-date basis.
We declared and continued our prior history of making quarterly dividend payments.
For the first half of the year, cash flow from operations was $37.8 million, up $5.6 million or 17.4% from prior year as a result of strong sales and solid net income generated by the business.
Free cash flow was $23.2 million, $10.3 million or 79.8% above the $12.9 million realized in the prior year.
We continue to execute on several merger and acquisition opportunities and expect to make announcements regarding the same before the end of our fiscal year.
Here are some key indicators that we are paying particular attention to.
For the Metal Coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity, material and labor cost inflation and progress of infrastructure legislation.
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 fall season is currently looking to be good albeit somewhat muted as noted earlier, due to international customers being impacted by COVID-related issues.
The Electrical platform is benefiting from transmission distribution, utility spending and growing data center and battery energy storage activity.
In regards to the strategic review of Infrastructure Solutions, we have further narrowed the number of options we are pursuing and are increasingly confident that AZZ can and will become predominately a focused metal coatings company.
As we have noted previously, we are having regular meetings with the Board.
But due to the sensitivity of ongoing discussions and confidentiality agreements, we cannot be more specific at this time, but realize we are rapidly approaching one-year anniversary of our announcement.
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.
For Infrastructure Solutions, we are focused on profitability and cash flow.
Our AIS business units should benefit from more normalized turnaround and outage seasons and a solid market for T&D, utility and data center, e-houses and switchgear.
Our corporate office is actively engaged in several merger and acquisition projects, while continuing to maintain tight accounting controls and providing support to the field for acquiring and retaining talent.
And finally, we will soon be issuing our first ESG report.
So please stay tuned. | azz inc q2 earnings per share of $0.76.
compname reports results for q2 of fiscal year 2022; generates earnings per share of $0.76 and revises guidance.
q2 sales rose 6.4 percent to $216.4 million.
azz - sees annual sales to be in the range of $865 million to $925 million.
sees earnings per share to be in the range of $2.90 to $3.20 per diluted share for fiscal year 2022.
qtrly sales of $216.4 million, up 6.4%. | 1 |
Today, Greenbrier announced that effective March 1, our founder, Bill Furman will transition to the role of Executive Chairman and the appointment of Lorie Tekorius as Greenbrier's next CEO and President.
In addition to Bill and Lorie, Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President and CFO are participating in today's call.
As Justin indicated earlier today, we announced our Board of Directors has elected Lorie Tekorius, Greenbrier's current President and Chief Operating Officer to be the Company's next Chief Executive Officer, a position she will assume on March 1, 2022.
Lorie and I along with the Board have been working toward this goal for several years.
Together, we've built a very strong talent bench.
I'm very pleased with the teams we have in place for the future, and I'm also pleased with the strategy that Lorie has evolved which I think will take the Company to higher peaks.
I want to take this opportunity to congratulate Lorie.
Lorie, I know you will do an outstanding job as Greenbrier's next CEO and I look forward to working with you through the transition.
I'm very proud of you.
Everyone joining us today should understand our joint commitment to ensure the smoothest possible transition.
When Lorie become CEO, I will concurrently assume the newly created role of Executive Chair until September 2022, when I will retire from an executive position.
In this role, my focus is on continuing to work with our Board of Directors as well as support Lorie in her transition to CEO.
I will manage as Board member until 2024.
This transaction -- transition is coming at an important and exciting time for the Company.
As we've discussed over the past several quarters, the recovery in our end markets is gaining momentum.
Our fiscal fourth quarter was Greenbrier's strongest quarter of the year.
Greenbrier's fiscal fourth quarter was in fact our fifth quarter in a row with increased new railcar order activity.
It was also Greenbrier's third consecutive quarter with a book-to-bill ratio over 1 leading to a book-to-bill of 1.33 for fiscal 2021.
The spread of the Delta variant has created challenges worldwide for business and society, and it has made the pace of the recovery partly unpredictable.
It continues to impact Greenbrier on a personal level.
Both vaccinated and un-vaccinated individuals across our workforce have experienced isolated COVID-19 infections during the fourth quarter.
I was one of them along with my wife, Jane, despite being both double vaccinated.
Fortunately, our symptoms were mild and we have fully recovered.
Sadly, however, we recently lost another colleague, Pedro Gonzalez [Phonetic].
Pedro was an 18-year veteran of the GRS Kansas City wheel shop.
He was the 10th member of the Greenbrier family we have lost due to COVID-19.
We are supporting his family during this difficult time.
We are urging people to get vaccinated and to keep social distancing.
The health and safety of our employees is paramount.
We continue to maintain a vigilant posture, particularly as we integrate new manufacturing employees in response to expanding production capacity.
Of course, the virus is not the only issue to be faced.
Global markets have been impacted by labor shortages, supply chain disruptions, volatile commodity markets and other disruptive headwinds.
These factors persist into Greenbrier's fiscal 2022, and this is all in addition to what I would term the regular challenges for a manufacturing, maintenance and leasing business as we transition from low production after a rapid downturn and then a rapid spike-up and employment rates to higher employment and greater levels of production activity.
So, this is an environment that demands a disciplined strategy we've adhered to since the outset of the pandemic.
It also demands our best efforts.
Specifically, our strategy has been to first maintain a strong liquidity base and balance sheet, next, to survive the COVID-19 and economic crisis by safely operating our factories while generating cash flow.
Everyone knows that in an upturn, cash is required to replenish working capital and for growth.
And finally, we needed to prepare for and manage well during the economic recovery and the forward momentum in our markets which is now well underway.
Our actions have been purposeful and successful and the result of a strong team effort, a flexible approach and scalable manufacturing capacity or both central to Greenbrier's response to an improving market outlook.
The demand outlook is strong.
It is strong in all of our markets globally, notwithstanding the impact of elevated steel and other input prices to our customers' decision-making processes.
I'm proud of how seamlessly our teams are ramping up to '22 production lines by the end of November from just nine lines of operation at lower rates of production, only nine years ago -- nine months ago, sorry.
This phase of our strategy has presented novel challenges and operational risks as we add a large number of new production lines, many involving product changeovers and adding new people.
Safety, availability of labor and supply chain constraints are key priorities for Greenbrier to manage as production increases.
Importantly, our liquidity position remains strong, maintaining it remains a top priority.
We're balancing efficient management of working capital with protecting our supply chain and ensuring production continuity.
Before I conclude today and hand the call over to Lorie, I would like to remind our listeners that we do not expect to the market recovery to follow a smooth straight line.
Our industry is still recovering from the shock caused by the pandemic.
Uncertainties and obstacles do remain.
It is clear, however, that our strategy has produced and is producing results, and I believe, we are well on the other side of where we have been.
We are also pleased to recently increased the scale of our leasing fleet through our GBX Leasing joint venture.
Our lease investment provides Greenbrier tax advantaged cash flows.
It reduces and in the future will continue to reduce exposure to the inherent cyclicality of freight transportation, equipment manufacturing and other sources.
At GBX Leasing, we are building a long-term annuity stream with solid credits, longer and balanced maturity ladders and product diversity.
While doing so, we are foregoing some immediate revenue recognition in the short term to build for the future.
All factors considered, Greenbrier is extremely well positioned to navigate the months ahead and deliver further value to our shareholders.
Before electing Lorie as CEO, we thought it is important that she sketch out her strategy for the future.
She spent four to five months in thoughtfully putting together that strategy.
In the future, we'll be happy to share the changes that this will bring, but as a headline we look to technology, diversification and services and other ways to take the cycle out of the inherent manufacturing business cycle and growth of the future.
I want to express my appreciation to Bill and the Greenbrier Board for appointing me Greenbrier's next CEO.
I'm honored and humbled to follow Bill as only the second CEO in Greenbrier's history.
Bill and I have worked together toward this goal for some time and I feel well prepared.
I look forward to continuing to work with Bill on this transition and to build on the strong established foundation he created with our senior management team.
Today, we're reporting results from operation that continue the momentum from Q3.
Volatility seems to be the new norm and Greenbrier's employees rose to the challenge.
The resiliency, flexibility and focus allowed Greenbrier to produce great results in addition to providing excellent levels of service and the production of quality railcars.
Supply chain and labor force shortages in the United States were two of the most notable and unfortunately common challenges we're managing today.
In the quarter, Greenbrier delivered 4500 railcars, including 400 units in Brazil.
Q4 deliveries increased 36% from Q3, reflecting manufacturing successful ramping of production over the last six months.
This is our highest level of production and deliveries since fiscal 2020 and we're pleased to see another quarter of double-digit growth.
Our global purchasing group continues to do an outstanding job, even as disruptions spread from basic raw materials and components to resins, paint and industrial gases.
Our global sourcing team has rapidly responded to changing supply dynamics and continues to take measures to ensure we avoid significant production delays or line introduction.
And while hiring is currently challenging in the US, we're fortunate to have a strong and talented labor pool in Mexico, allowing us to add over 500 employees during the quarter and over the last nine months, we've added nearly 2000 employees in our manufacturing business.
Safety continues to be a priority as we bring back our workforce in a measured manner.
In our North American network of maintenance and parts operations or Greenbrier Rail Services, we continue to make improvements in how we manage our operations and interface with our customers, including license [Phonetic].
The continued focus on safety resulted in a record setting Q4 and full year safety performance.
These positive strides were somewhat offset by labor shortages impacting operating efficiencies and an obsolete inventory adjustment in Q4.
Excluding the inventory adjustment, gross margins would have been similar to Q3.
I'm confident we'll be able to leverage the improvements made in GRS for 2022 and beyond.
Our leasing and services group which include our GBX Leasing operations had another busy quarter.
Nearly 70 million of railcars were contributed into GBX Leasing in Q4, bringing the total market value of assets in fiscal 2021 to almost $200 million.
Subsequent to year end, we acquired a portfolio of 3600 railcars, a portion of which will also be held in GBX Leasing.
This purchase provides commodity, age and credit diversity.
Our GBX Leasing fleet is valued at $350 million at the end of September and continues to gain momentum.
As a reminder, GBX Leasing is currently utilizing a non-recourse warehouse credit facility, a portion of which we expect to term out in the next few quarters with more traditional long term railcar financing.
Our enhanced leasing strategy will provide revenue and tax-advantaged cash flow offsetting the cyclicality of railcar production.
Our capital markets team syndicated 1000 units in the quarter and continues to generate liquidity and profitability.
In fiscal 2022, we expect syndication activity to increase meaningfully as overall demand and production levels rise.
And in the next few weeks, Greenbrier will be publishing its Third Annual ESG Report.
I'm excited about the progress shown in the report on a variety of areas and congratulate our internal ESG team for providing a valuable summary of how Greenbrier is serving its stakeholders.
Looking ahead, we continue to see positive momentum in fiscal 2022.
Emerging from an economic recession and cyclical trough can be challenging in the best of times, but with the ongoing impact of the pandemic, labor shortages and supply chain disruptions, this year is going to be a completely different type of challenge.
I'm pleased that we have talented employees and a strong management team with significant industry experience to guide Greenbrier through the next few quarters.
I remain excited about the long-term opportunities for Greenbrier and proud to be leading into the next part of our journey as a company.
And now, Brian Comstock will provide commentary on the railcar demand environment.
While it feels like much has occurred over the last three months, overall, the economy continues to be trending in a positive direction and economic indicators point to a sustained recovery in rail.
While this recovery seems to be more unpredictable, we continue to think about it as a sharper V-shape recovery with a sustainable crust.
Now, instead of discussing industry statistics, I'm going to focus on a few important things from 2021 and how we are approaching 2022.
In Greenbrier's fourth quarter, we had a book-to-bill of 1.5, reflecting deliveries of 4500 units and orders of 6700 units.
This is the third consecutive quarter of growth in our book-to-bill ratio.
For fiscal '21, Greenbrier generated orders of 17,200 units and deliveries of 13,000 units, which equates to a book-to-bill of 1.3.
International order activity accounted for approximately 30% of this new railcar order activity.
New railcar backlog grew by 2000 units or nearly $400 million of value to 26,600 units with an estimated market value of $2.8 billion.
Operations in each continent we operate in are carrying backlog that supports production well into fiscal 2022.
Notably, we ended the fiscal year with a record backlog for Europe, where we have many production lines booked into fiscal 2023.
Greenbrier's lease fleet utilization ended on August 21 at roughly 94% and has grown to over 96% year to date.
Additionally, we are seeing improved lease pricing and term on all new lease originations and lease renewals.
We have seen recovery in all of our markets.
We have also seen significant increases in raw materials, components and shortages of basic supplies.
We are seeing traffic congestion throughout the network, especially at the ports where a record setting number of ships are waiting to be offloaded underlining the fact that when you shut down large portions of the global economy, turning it back on is not as easy as just flipping a switch.
There will be disruptions and unintended consequences.
However, we continue to see growth opportunities in our global markets.
Europe is beginning to see the benefits of a broad scale economic reforms to address climate change.
We are in the early days of a model shift to freight from polluting and congested road travel to efficient higher speed rail service.
We believe this model shift will drive significant growth in railcar demand in the years to come.
This growth is in addition to replacement demand as fleets in EU countries are ageing with many cars already well past the time for replacement.
Equally as exciting is the future of the North American market.
Right now, we are seeing a return to replacement demand levels, but imagine what will happen when the United States follows a similar path as Europe.
Freight rail is one of the more sustainable solutions because of its environmental friendliness.
Similar to Europe, we see an extended period of substantially higher demand except it involves one of the largest freight rail fleets and systems in the world.
With all that being said, Greenbrier's global commercial team is focused on not only the basic blocking and tackling of new railcar orders, leasing and service solutions, but also in continuing to develop a more comprehensive and integrated approach for our customers globally.
Now over to Adrian for more about our Q4 and full financial performance.
Greenbrier's Q4 performance represents the strongest quarter of our fiscal 2021 year as a result of the continuing momentum we've been seeing in our end markets.
I will speak to a few highlights from the quarter and provide a general overview of fiscal 2022 guidance.
Highlights for the fourth quarter include revenue of $599.2 million, an increase of over 33% from Q3.
Aggregate gross margins of 16.4%, driven by stronger operating performance as a result of increased production rates, syndication activity and lease modification fees.
Selling and administrative expense of $55.4 million increased sequentially as a result of higher employee-related costs.
Adjusted net earnings attributable to Greenbrier of $32.9 million or $0.98 per share excludes $1.2 million or $0.03 per share of debt extinguishment losses.
EBITDA of $70.4 million or 11.8% of revenue.
The effective tax rate in the quarter was a benefit of 14.5%.
This reflects the tax benefits from accelerated depreciation associated with capital investments into our lease fleet.
These deductions will be carried back to earlier high-tax years under the CARES Act, resulting in a tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
I'm very proud of the close collaboration between our leasing and tax teams that maximized this benefit to Greenbrier over the course of fiscal 2021.
In the quarter, we recognized $1.6 million of gross costs specifically related to COVID-19 employee and facility safety.
In 2021, we spent nearly $10 million, ensuring our employees and facilities could operate safely.
The quarter also included an unfavorable adjustment for labor and materials in our lease business as well as unfavorable excess and obsolete inventory adjustments of fields repair and parts.
Adjusted net earnings for the year attributable to Greenbrier was $37.2 million or $1.10 per share on revenue of $1.7 billion and excludes $4.7 million net of tax or $0.14 per share of debt extinguishment loses.
EBITDA for the year was $145.2 million or 8.3% of revenue.
Greenbrier has a strong balance sheet and with liquidity of $835 million comprising cash of $647 million and available borrowings of $188 million, we are well positioned to navigate the market disruptions that we expect to persist into calendar 2022.
You may have noticed the tax receivable has grown to a $112 million as of August 31.
We expect to receive most of these refunds in the second quarter of fiscal 2022.
This is an addition to Greenbrier's available cash and borrowing capacity that I just mentioned.
In the fourth quarter, Greenbrier completed almost $1.1 billion of debt refinancing, extending the maturities of our domestic revolving facility and two term loans into 2026 and 2027.
In addition to the GBX Leasing, railcar and warehouse credit facility, Greenbrier's Legacy lease fleet is partially levered with a $200 million six year term loan while the remaining fleet assets serve as collateral in Greenbrier's $600 million US revolving facility.
Also in the quarter, we repurchased an additional $20 million of senior convertible notes due in 2024 and maybe from time to time retire additional outstanding 2024 notes in privately negotiated transactions within the limitations of applicable securities regulations.
Overall in fiscal 2021, Greenbrier completed $1.8 billion of financing activity including $1.5 billion of debt refinancing and the creation of the $300 million GBX Leasing warehouse credit facilities.
We have effectively doubled the maturity profile of our existing cash at favorable interest rates and removed the 2023 refinancing risks.
Greenbrier's Board of Directors remains committed to a balanced deployment of capital designed to protect the business and simultaneously create long-term shareholder value.
Our Board believes that our dividend program enhances shareholder value and attracts investors.
Today, we announced a dividend of $0.27 per share, which is our 30th consecutive dividend.
Based on current business trends and production schedules, we expect Greenbrier's fiscal 2022 to reflect deliveries of 16,000 to 18,000 units, which include approximately 1,500 units from Greenbrier Maxion in Brazil.
Selling and administrative expenses are expected to be approximately $200 million to $210 million.
Capital expenditures of approximately $275 million in leasing and services, $55 million in manufacturing and $10 million in wheels repair and parts.
Gross margins to be lower in the first half of the year, reflecting a few primary factors.
Production reflects more competitive pricing taken during the pandemic 9 to 12 months ago.
Early in the year, we will have some operating inefficiencies due to product line changeovers and continued production ramping.
As production rates stabilize, operating efficiencies will increase benefiting margins.
More production is scheduled for syndication or leasing fleet activity and will be on the balance sheet until final disposition is decided.
We expect margins to improve over the course of the year as we work through less profitable mix, achieve production efficiencies and other factors.
We expect deliveries to be back half weighted with a 40% front half, 60% back half left [Phonetic].
As Bill mentioned earlier on the call, the introduction of GBX Leasing and our shift and leasing strategy has an impact on our production and delivery activity.
Historically, we would build a railcar with a lease and syndicate it a few quarters later.
Now, in addition to direct sales and syndication activity, a portion of production will be capitalized into our lease fleet.
While this activity reduces revenue and margin in the near term, it creates a long term stable platform of repeating cash flows and income and is part of our strategic shift to smooth the impact of the new railcar demand cycles on our results.
In fiscal 2022, approximately 1400 units are expected to be built and capitalized into our lease fleet.
These units are not reflected in the delivery guidance provided.
We consider a railcar delivered when it leaves Greenbrier's balance sheets and is owned by an external third-party.
We have an experienced management team that has a track record of success in identifying and taking advantage of opportunities as well as managing through the challenges and factors we described earlier.
As a result, we are optimistic that our operating momentum will continue into fiscal 2022, albeit in a non-linear fashion. | compname reports q4 adjusted earnings per share $0.98.
q4 adjusted earnings per share $0.98.
q4 revenue $600 million.
appointment of lorie tekorius as company's next ceo and president, effective march 1, 2022.
greenbrier companies - well-positioned to navigate challenges of increasing production rates safely, while ensuring labor and supply chain continuity. | 1 |
On our call today is our CEO, Hikmet Ersek; our CFO, Raj Agrawal; and Head of Treasury and Investor Relations, Brad Windbigler.
During the call, we will discuss some items that do not conform to Generally Accepted Accounting Principles.
We have reconciled those items to the most comparable GAAP measures on our website, westernunion.com, under the Investor Relations section.
We will also discuss certain adjusted metrics.
The expenses that have been excluded from adjusted metrics are specific to certain initiatives, but maybe similar to types of expenses that the company has previously occurred and can reasonably expect to occur in the future.
We weathered COVID-19 better than many companies in 2020, owing to our resilient fundamentals and the foresight behind our leading digital business that had us ready for accelerated demand for digital services.
Before I give you an update about the encouraging first quarter results and share my thoughts about the rest of the year, I would like to take a moment and mention that although we do see some modest economic improvement and there are signs of some COVID-19 recovery like in the US, parts of Europe and parts of Asia Pacific due to progress with vaccinations, at the same time, I am saddened by the hard breaking current situation in countries like India, Brazil and many others.
Our thoughts are with all of the people who are currently navigating this challenging situation.
The recent outbreaks in many countries show us that as a global community, we still have work to do in the fight against the virus.
However, at the same time, I am hopeful and I know that all my colleagues and all our partners in more than 200 countries, we will do their best to recover from the virus as soon as possible.
Back to our business.
The conditions were fairly stable in the first quarter.
I am pleased that trends for our business improved over the quarter and held up well in April, giving us confidence to push forward with an ambitious agenda and reaffirm 2021 financial targets on an adjusted basis.
Raj will discuss our outlook in more detail in a few minutes.
With that, let's review business highlights for the quarter.
Starting with the big picture, our cross-border consumer-to-consumer or C2C business grew principal 28%, which was the highest quarterly growth in years and the third consecutive quarter with growth over 20%.
This really shows the momentum we are seeing today, especially when compared to forecast from third parties projecting modest growth or even declines in principals for 2021.
Total company revenue grew 2% on a constant currency basis, around a 300 basis points increase from declines in the third and fourth quarter of last year.
C2C revenues and transactions grew 4% and 9%, respectively, and both digital and retail revenue trends improved sequentially.
Digital performed exceptionally well again.
Revenues were up from the fourth quarter and grew 45% year-over-year to over $240 million, putting us on target to exceed $1 billion in 2021.
Digital comprised 34% of transactions and 23% of revenues for the C2C segment and was a key source of new customers and incremental profit.
Wu.com delivered impressive results and shows the potential we see as a foundation for a consumer ecosystem.
This is the fourth consecutive quarter of transaction growth of 50% or more and average monthly active users growth of over 40%.
Wu.com led money transfer peers in mobile app downloads by a wide margin and grew principal 78% off of an already large base, which we believe is well ahead of the market.
Our customer engagement efforts also appear to be paying off with favorable trends in retention, transaction per customer and principal per customer.
Digital partnerships revenue more than doubled year-over-year, and it has exceeded our expectation over the past 18 months since we announced it in late 2019.
We continue to have more encouraging developments in the pipeline.
Retail trends improved sequentially from the fourth quarter to the first quarter, despite the effects of additional rates of COVID-19.
While the business is not back to pre-pandemic levels yet, it has demonstrated resilience and we expect continued improvement to the rest of the year, assuming the pandemic and global economy doesn't worsen.
Our business solution trends also improved.
We made progress on key initiatives, including launching our payment solutions in Spain and implementing technology upgrades that will allow us to add differentiated solutions and capabilities.
We are optimistic that the business will continue to rebound over the course of the year.
Shifting to an update on operating and strategic objectives during this quarter.
Starting with wu.com, we continue to invest in consumer acquisition and marketing, which drove 46% growth in average monthly active users for the first quarter.
On the branding side, we launched one of our highest-rated television campaigns in recent years, send more than money, which future wu.com.
We also made progress on a number of product initiatives to improve our customer experience, faster registration, better web page performance and enhanced visibility into transaction status.
We achieved an important platform milestone by completing a major phase of our multiyear settlement transformation project.
We also advanced a number of initiatives that will make us more nimble and efficient like cloud migration and adding artificial intelligence and machine learning into processes to reduce project run times and enhance analytics.
Moving on to our global network.
The team has done a great job optimizing commission costs while still enhancing the quality of our global payments distribution capabilities.
During the quarter, we renewed agreements with 34 existing agents and added 41 new agents with favorable terms.
Over 50% of our global account payout transaction volume was delivered real time.
Our launch with Walmart is off to a good start, and we look forward to getting all 4,700 US locations up and running in the second quarter.
To wrap up the first quarter discussion, despite ongoing challenges from the pandemic, we are off to an encouraging start with financial and operating performance on course with our expectations for 2021.
Given the strong customer trends, we have seen over the last year in our C2C business, including almost 9 million wu.com annual active users in 2020, the agenda for the rest of 2021 is largely centered around enhancing the customer experience.
Convenience, reliability and speed are fundamental for a good customer experience in payments, which makes a high-quality network important.
On the digital side, we can reach billions of accounts today, but we are expanding access to even more accounts with new partnerships.
Speed is increasingly valued by customers, and we already have one of the broadest real-time cross-border payment networks in the industry.
So the focus this year is making it more robust by adding additional direct third-party relationships and multiple partners in markets.
Our retail distribution will continue to benefit from ongoing agent optimization, upgrading the caliber of agents and filling in gaps in distribution.
Platform initiatives for 2021 include upgrading and modernizing technology, incorporating cutting-edge solutions and bolstering our executive talent.
This will enhance customer experience in a number of ways, such as better processing speed and enabling more innovation.
Ultimately, we are working toward building a best-in-class tax stack that can support the range of cross-border use cases, including C2C, C2B, B2C and B2B and serve as a foundation for ecosystems.
I'm really excited about the slate of product initiatives this year that can be impactful for customer experience.
A few examples include improving the functionality of our mobile app advancing dynamic pricing, revamping our customer loyalty program and the pilot in Europe with our Western Union International Bank later this year, extending our offerings to a wider set of financial services.
Given the customer-centric agenda we have for 2021, I think it makes sense to discuss why we are so optimistic about the long-term prospects of serving our core customer segment, the global migrant community.
Let me start by saying, we are extremely proud and privileged to serve the global migrant community and we are honored that they trust Western Union with one of the most important financial aspects of their lives, supporting loved ones in home countries.
As highlighted in our ESG reports for 2018, 2019 and our 2020 report coming in June, we are proud of the contribution our business mix around the world by promoting economic growth and prosperity for the people we serve.
Our purpose underpins our market position and strategy, and we believe our business offers strong potential value creation for all stakeholders.
First, the migrant and their loved ones is a large customer segment for Western Union.
According to the United Nations, there are more than 270 million migrant residents globally and many of them send remittances.
Factoring in remittance, recipients in home country, who also use our services and desire more options for financial services could more than double the potential customer base to over 0.5 billion people.
Second, migrants are a growing, hardworking and upwardly mobile group.
They are expected to drive a significant share of future population growth in higher-income countries and have above-average labor participation rates, higher rates of entrepreneurship and contribute significantly to innovation.
The third and final point, migrants have significant spending power.
According to our 2019 new American economy study, migrants represented $1.3 trillion of spending power in the US alone.
And obviously, globally, this amount is even higher.
To summarize, we believe migrants and their families and loved ones are special group of people that have an important role in societies and economies around the world.
Serving our customers' needs is a good business that offers Western Union organic growth and opportunity to expand into new services.
On top of this, in cross-border expertise and capabilities we gain through serving our core customer segments enables us to offer our cross-border platform for financial institutions and other third parties, extending our market opportunity beyond our own Western Union consumer services.
In closing, I'm pleased with the direction of our business.
Based on what we see internally and in the market, we are confident in the strategy and plan for the year, and we are off to a good start.
Moving to first quarter results.
Revenue of $1.2 billion increased 2% on both a reported and constant currency basis.
Currency translation net of the impact from hedges had a limited impact on first quarter revenues.
In the C2C segment, revenue increased 4% on a reported basis or 2% constant currency with transaction growth partially offset by mix.
B2C transactions grew 9% for the quarter, led by 77% transaction growth in digital money transfer.
Retail money transfer transactions were down in the quarter, but the business continued to move in the right direction with trends improving sequentially from the fourth quarter.
The mix impact from the high growth of digital white label partnerships and account-to-account digital transactions both lower revenue per transaction or RPT, continued to contribute to a spread between C2C transaction and revenue growth in the quarter.
We do expect this gap to moderate over the next three quarters.
Total C2C cross-border principal increased 28% on a reported basis or 26% constant currency, driven by growth in digital money transfer and retail.
Total C2C principal per transaction or PPT was up 15% or 12% constant currency led by retail and wu.com.
Evolving business mix, coupled with changes in consumer behavior, more widely contributed to a higher PPT.
Digital money transfer revenues, which include wu.com and digital partnerships, increased 45% on a reported basis or 44% constant currency.
Similar to the broader C2C business, the mix impact from digital white label partnerships and account-to-account digital transactions contributed to a spread between transactions and revenue growth.
And from our vantage point, the pricing environment in the digital market remains constructive.
As Hikmet mentioned, wu.com had another very strong quarter.
Revenue grew 38% or 37% constant currency on transaction growth of 55%.
Cross-border revenue was up 49% in the quarter.
PPT trends were impressive, and we saw continued double-digit growth.
Digital partnerships, transactions and revenues more than doubled in the quarter.
As you may recall, the business experienced a step-up in transactions in the second quarter of 2020 with the initial global wave of COVID-19, and then another step-up for the second half of 2020.
This strong prior year growth is expected to cause a moderation in growth over the rest of 2021.
Moving to the regional results.
North America revenue was flat on a reported basis or increased 1% constant currency on transaction growth of 1%.
The increase in constant currency revenue and transaction growth was driven by US outbound, partially offset by declines in US domestic money transfer and Cuba where current US regulations limit our ability to operate.
Revenue in the Europe and CIS region increased 8% on a reported basis or 4% constant currency on transaction growth of 28%.
Constant currency revenue growth was led by France and Russia.
Growth in Russia was driven by the incremental digital white label business, which continued to contribute to a spread between transaction in constant currency growth.
Revenue in the Middle East, Africa and South Asia region increased 1% on a reported basis or was flat constant currency while transactions grew 13%.
Qatar had solid constant currency revenue growth in the quarter, while the United Arab Emirates continued to experience soft trends.
Incremental digital white label business in Saudi Arabia was the primary driver of the spread between transaction growth and constant currency revenue growth.
Revenue growth in the Latin America and Caribbean region continued to improve sequentially and was up 3% or 8% constant currency on transaction declines of 8%.
The constant currency revenue growth was driven by a broad increase in principal across the region with higher PPT driving the spread between constant currency revenue growth and transaction growth in the quarter.
Revenue in the APAC region increased 9% on a reported basis or 3% constant currency, led by strength in Australia.
Transactions declined 2%, primarily driven by the Philippines domestic business, which has limited impact on revenue.
Business Solutions revenue decreased 2% on a reported basis or 8% constant currency as COVID-19 continue to impact certain verticals and hedging activity.
However, revenue trends continue to improve sequentially, and we expect will remain on an improving trajectory for the remainder of the year with a broader recovery in cross-border trade.
The segment represented 8% of company revenues in the quarter.
Other revenues represented 5% of total company revenues and declined 18% in the quarter.
Other revenues primarily consist of retail bill payments in the US and Argentina and retail money orders.
The revenue decline was due to the ongoing impact of COVID-19 and the depreciation of the Argentine peso.
Turning to margins and profitability.
Consolidated operating margin in the quarter was 19.2% compared to the prior year period margin of 19.6% on a GAAP basis and 20.5% on an adjusted basis, which excluded costs related to our restructuring program.
The decrease in the operating margin primarily reflects how COVID-19 impacted the level and timing of certain expenses and investments in 2021 compared to 2020, including investments in strategic initiatives and marketing and compensation-related expenses, partially offset by changes in FX.
Foreign exchange hedges had a negative impact of $4 million on operating profit in the quarter and a benefit of $10 million in the prior year period.
Moving to segment margins.
Note that segment margins exclude last year's restructuring charges.
B2C operating margin was 19.6% compared to 20.7% in the prior year period.
Given that our C2C segment comprises almost 90% of total company operating income, the decrease in operating margin was driven by the same factors that impacted total company margin.
Business Solutions operating margin was 13.1% in the quarter compared to 14.1% in the prior year period.
The decline in operating margin was primarily due to an increase in compensation-related expenses.
Other operating margin was 22.6% compared to 26.1% in the prior year period, with the decline primarily due to lower revenue.
The effective tax rate in the quarter was 10.4% compared to a 12.5% effective tax rate on both a GAAP and adjusted basis in the prior year period.
The decrease in the company's effective tax rate was due to changes in composition between higher tax and lower tax foreign earnings and an increase in discrete tax benefits.
Earnings per share or earnings per share was $0.44 compared to the prior year period GAAP earnings per share of $0.42 and adjusted earnings per share of $0.44.
Year-over-year comparisons of earnings per share in the quarter reflects benefits of revenue growth, a lower effective tax rate and share repurchases, offset by increased investments in strategic initiatives and marketing and compensation-related expenses.
Turning to our cash flow and balance sheet.
Cash flow from operating activities in the first quarter was $176 million.
Capital expenditures in the quarter were approximately $97 million driven by agent signing bonuses and should be in a normal range for the full year.
At the end of the quarter, we had cash of $1.5 billion and debt of $3.2 billion.
During the quarter, we took advantage of historically low interest rates to issue new notes.
Proceeds were used to prepay a portion of the term loan in the first quarter, and we repaid our notes due in 2022 in early April.
We returned $172 million to shareholders in the first quarter consisting of $97 million of dividends and $75 million in share repurchases.
The outstanding share count at quarter end was 410 million shares.
And we had $708 million remaining under our share repurchase authorization, which expires in December of this year.
We are also on track to achieve our digital revenue target exceeding $1 billion.
The increase in GAAP earnings per share reflects the sale of an investment, partially offset by expenses related to the early retirement of the company's notes due in 2022.
Both of these items will be reflected in second quarter results.
Excluding the impact of these two items, the 2021 earnings per share outlook would be unchanged, which we have reflected with an adjusted earnings per share outlook.
Note that our outlook assumes no material worsening in current global macroeconomic conditions or the COVID-19 pandemic.
We expect full year 2021 revenues will grow mid to high single-digits on a GAAP basis or mid single-digits on a constant currency basis, which also excludes the impact of Argentina inflation.
Operating margin is expected to be approximately 21.5%, reflecting revenue growth and benefits from our three year productivity program that we expect to generate approximately $150 million of annual savings by the end of 2022, partially offset by higher operating expenses and investments in strategic initiatives.
We expect our effective tax rate will be in the mid-teens range on a GAAP and adjusted basis.
GAAP earnings per share for the year is now expected to be in a range of $2.06 to $2.16, including approximately a $0.06 net benefit in other income on an investment sale and debt retirement expenses that occurred early in the second quarter of 2021.
Adjusted EPS, which excludes those items, is expected to be in a range of $2 to $2.10.
Given the variability that COVID-19 caused on quarterly results, I will provide some context for how we think results may progress over the remainder of the year.
Note that our underlying assumptions include no material worsening in the effects of the pandemic and moderate improvement in global macro environment as the quarters progress.
Starting with revenue, we saw continued positive momentum in April.
And for the second quarter, we expect to see the strongest year-over-year growth rate as we cycle over the largest quarterly decline at the prior year.
For the third and fourth quarter of 2021, given the stability we had in the back half of last year, we expect general stability and trends and similar year-over-year growth rates.
Keep in mind that as a result of COVID-19, our digital business delivered exceptional growth from the second quarter onward in 2020.
So growth rates this year should moderate somewhat for the remainder of, 2021.
Although, we still expect to generate more than $1 billion in digital money transfer revenues this year.
Our retail business experienced a significant decline in the second quarter of 2020.
And while it began to come back quickly, we expect recovery will occur gradually.
As a result, we expect retail will generate growth in 2021.
The Business Solutions segment and other revenues were adversely impacted by COVID-19 in 2020.
So we expect that those businesses will continue to rebound this year.
Moving on to margin.
Based on our current view, we expect that second quarter margin will be below the full year margin outlook, while the back half of the year will be above the full year margin outlook.
To wrap up, we are off to a solid start to the year, optimistic that the macro environment will remain constructive, confident in our competitive position and underlying fundamentals.
And we are enthusiastic that our strategic agenda for the year will position us to realize the significant opportunities we see for our business over the next few years and beyond.
And operator, we are now ready to take questions. | q4 adjusted earnings per share $1.15.
q4 sales $403 million versus refinitiv ibes estimate of $385.9 million.
covid-19 will continue to affect our business in 2021. | 0 |
I am pleased to report the results for the first quarter of 2021.
Our performance shows the increased demand for our properties.
We continued our record of strong core operations and FFO growth, with an 8.1% growth in normalized FFO per share in the quarter.
New customer growth in both our RV and MH business contributed to the positive results in the quarter.
Our new home sales grew by 24%, contributing to the high quality of occupancy at our MH communities.
We ended the quarter with Core Portfolio occupancy of 95.4%.
Home sale leads from websites increased by 37% in the quarter.
Within our RV platform, we were successful in offsetting some of the loss in seasonal business with significant growth in transient business for the quarter.
We ended the quarter with a 15% increase in transient revenue.
Our subscription-based Thousand Trails Camping Pass showed strength this quarter.
Over 5,000 new members purchased the camp pass, which was an increase of 64% over the first quarter of 2020.
In the quarter, we saw an increased demand for upgrades in the Thousand Trail system.
Our members we're looking for expanded access to our portfolio and we saw an increase of $5 million in sales.
We now have 117,000 members with access to the Thousand Trails footprint.
We are approaching our summer RV season and encouraged by the reservation pace and the feedback we have received from our customers.
We recently completed a customer survey and the results support our view that our customers are looking forward to spending time outdoors and at our properties.
The survey results show that 98% of respondents who were new to camping last year, plan to camp again this year.
The respondents indicated that they chose to camp because it felt like a safe choice and they were able to safely travel with their family and friends.
The survey indicate the plan for increased camping adventures with 65% of those responding indicating an intention to more this year.
The survey also showed that 70% of those responding do not plan to travel by plane this year.
In 2020, to help support the safety of our guests and members, we launched a new online check-in option for our RV guests.
Since launch, over 160,000 guests completed the online checking process, allowing them to get to their site more quickly and with less direct interaction.
In addition, we provided our guests an added way to communicate with our onsite teams during their visit by launching a text message program to reduce the number of in-person interaction.
Our guests reported high satisfaction levels based on the experience provided by our teams at our properties.
Based on the first quarter survey results, guests responded to customer experienced questions with a rating of 4.5 out of 5.
We continue to protect and enhance the environments where we live, work and play, and encourage our residents, members and guests to do the same.
Our annual sustainability report will provide updates on our partnerships with conservation focused organizations.
We have increased our efforts through partnerships with leading organizations focused on water conservation, supporting the reforestation movement and ocean conservation.
Our team members did a wonderful job ensuring the safety and well-being of our snowbird residents and guests.
Our COVID response team has been instrumental in arranging 39 vaccination events at our properties that supplied vaccinations for approximately 8,700 individuals.
Our operating team will now turn their attention toward the summer season properties and will focus on delivering excellent customer service to our residents, members and guests as they explore our properties this summer.
I will provide an overview of our first quarter results and walk through our guidance for second quarter and full year 2021.
I will also discuss our balance sheet before the operator opens the call for Q&A.
For the first quarter, we reported $0.64 normalized FFO per share.
The outperformance to guidance in the quarter resulted from better-than-expected transient performance, membership upgrades, and expense savings.
In addition, our guidance did not assume the net contribution from our southern marinas portfolio acquisition.
Core MH rent growth of 4.7% includes 4.1% rate growth and approximately 60 basis points related to occupancy gains.
Core RV and marina rental income from annuals was in line with expectations for the quarter.
Annual RV rental income represents 90% of the combined RV and marina rental income from annuals, and has increased 3.5% with 3.4% from rate.
Within the core marina portfolio, marina rent from annuals represents approximately 99% of total marina rental income.
Core RV and marina rental income from seasonal and transient customers outperformed our expectations.
Included with our guidance assumptions composed in January, we estimated a $10 million decline from combined seasonal and transient revenues compared to first quarter 2020.
The actual decline was approximately $6 million.
The main factors driving this favorable result were increased customer confidence in travel, given declining COVID case counts and increased vaccine availability, as well as the cold weather pattern in February that increased customer demand for stays in warmer climates.
Transient revenues represented approximately two thirds of the combined outperformance.
First quarter membership subscriptions as well as the net contribution from upgrade sales outperformed our expectations.
The main contributor to outperformance was strong demand for our upgrade products.
Upgrade sales volume increased by 640 units compared to first quarter 2020.
The price of upgrade sold increased approximately 10% compared to last year.
In addition to strong demand for upgrades, our camping pass sales volume increased more than 60% during the quarter.
First quarter core property operating maintenance and real estate tax expenses increased 2.3% compared to prior year.
Utility expense payroll, real estate taxes and repairs and maintenance combined represent more than 80% of our core expenses in the quarter, and the average increase across these categories was 2.3%.
In summary, first quarter core property operating revenues increased 2.8% and core NOI before property management increased 1.9%.
Property operating income from the non-core portfolio, which includes assets acquired in 2020 and during the first quarter 2021, was $3.3 million.
Overall, the acquisition properties performed in line with expectations.
Property management and corporate G&A were $25.9 million, flat to first quarter 2020.
A key contributor to the year-over-year comparison is lower travel expenses in 2021.
Other income and expenses were approximately $3.1 million higher than first quarter 2020, mainly from home sale profits and ancillary income.
Interest and related amortization was $26.3 million, slightly higher than prior year.
The first quarter 2021 results include the interest expense resulting from debt used to fund our acquisition activity, offset by the accretive refinancings we closed in the first and third quarters of 2020.
As I provide some context for the information we've provided, keep in mind, my remarks are intended to provide our current estimate of future results.
A significant factor in our guidance assumptions for the remainder of 2021 is the level of demand for transient stays in our RV communities.
We have developed guidance based on our current customer reservation trends.
While macro indicators suggest we're heading in a favorable direction relative to the impact of COVID on daily life, our experience over the past year has shown that circumstances can change.
We intend to continue to monitor the situation closely and we'll manage our business accordingly.
Our full-year 2021 normalized FFO guidance is $2.38 per share, at the midpoint of our range of $2.33 to $2.43.
Normalized FFO per share at the midpoint represents an estimated 9.7% growth rate compared to 2020.
Core NOI is projected to increase 5.3% at the midpoint of our range of 4.8% to 5.8%.
The core NOI growth rate increase from our prior guidance is mainly the result of our first quarter outperformance.
Our expectation for the second through fourth quarters is consistent with our budget.
As a reminder, our core portfolio changes annually.
Our guidance for the full year and second quarter includes the impact of the acquisition activity we've closed in the first quarter with no assumptions for additional acquisitions during the year.
We've also included the impact of the financing activity we've disclosed, including the recast of our unsecured credit facility, which I'll discuss after highlighting some of our second quarter guidance assumptions.
We expect second quarter normalized FFO at the midpoint of our range of approximately $103.5 million, with a per share range of $0.51 to $0.57.
We expect the second quarter to contribute 22% to 23% of full year normalized FFO.
We project a core NOI growth rate range of 6.9% to 7.5%.
Keep in mind, our second quarter 2020 transient RV business was significantly impacted by COVID-related travel restrictions and shelter-in-place orders.
MH and RV annual rate growth assumptions for the second quarter and full year remain consistent with our prior guidance.
As Marguerite mentioned, we anticipate continued strong demand across our RV platform.
We've built our transient RV revenue assumptions for the second and third quarters using factors, including current reservation pace compared to both 2020 and 2019.
Our guidance for the second quarter assumes a growth rate of approximately 14% compared to 2019.
This represents a core transient RV revenue increase of approximately $8.8 million compared to 2020.
During the quarter, we closed the previously disclosed $270 million 10-year secured loan with a fixed interest rate of 2.4%.
In April, we closed on an amended unsecured credit facility, including a $500 million revolver and a $300 million fully funded term loan.
The term loan proceeds were used to repay an acquisition loan we originated in early February.
The revolver matures in four years and we have two six-month extension options.
The term loan matures in five years and we've executed a fixed rate swap that locks in the interest rate at 1.8% for three years.
Current secured debt terms available for MH and RV assets range from 55% to 75% LTV, with rates from 2.5% to 3% for 10-year maturities.
High quality, age qualified MH assets will command best financing terms.
RV assets with a high percentage of annual occupancy have access to financing from certain life companies as well as CMBS lenders.
Life companies continue to quote competitively on longer term maturities.
We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us.
Our debt to EBITDA is 5.7 times and our interest coverage is 5.2 times.
The weighted average maturity of our outstanding secured debt is almost 13 years. | withdrawing our full year 2020 guidance.
qtrly normalized funds from operations $0.59 per common share. | 0 |
With me on the call is our Chief Executive Officer, Brian Deck; and Chief Financial Officer, Matt Meister.
JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.
These documents are available in the Investor Relations section of our website.
Also our discussion today includes references to certain non-GAAP measures.
Commercially, we are enjoying a strong recovery in demand at FoodTech, with record orders in the period.
Cash flow was outstanding.
We also saw some encouraging signs at AeroTech.
On the other hand, we are experiencing increasing operational challenges created by supply chain constraints, inflationary pressures and COVID related customer access in select geographies, pressures that will likely persist through the remainder of 2021.
That said, I am extremely proud of how well our people from sales to customer care to manufacturing and procurement have managed this environment.
And we continue to expect a meaningful sequential ramp in our performance through the next three quarters.
Matt will walk you through our updated guidance for the full year as well as provide analysis on our first quarter results.
We are pleased with our first quarter performance.
In the quarter, we saw strong quarter growth in FoodTech at 22% year-over-year.
Revenue met our forecast and both earnings per share and free cash flow exceeded our expectations.
On a year-over-year basis, revenue increased 1% at FoodTech, while declining 28% at AeroTech.
FoodTech margins were in line with guidance, with operating margins of 13.3% and adjusted EBITDA margins of 18.7%.
AeroTech margins were ahead of expectations, with operating margins of 9.3% and adjusted EBITDA margins of 10.7%.
The better than forecasted margins were the result of favorable equipment mix, better than expected aftermarket revenue and good cost control.
Earnings in the quarter also benefited from lower interest expense as continued strong cash flow reduced our debt balance.
Additionally, corporate expense, M&A and restructuring costs were slightly favorable to guidance.
As a result, JBT posted adjusted diluted earnings per share from continuing operations of $0.90 or GAAP earnings per share of $0.84.
Free cash flow for the quarter significantly exceeded our expectations at $78 million, driven by continued strong collection of accounts receivable and customer deposits.
The robust cash flow performance improved our bank leverage ratio to 1.9 times and increased overall liquidity to $496 million.
We expect to expand our balance sheet to support an increase in sales in the back half of the year to achieve full year free cash flow conversion just above 100%.
As we look ahead to full year 2021, while we are benefiting from strong commercial activity, challenges in the operating environment are expected to increase further as we work through extended vendor lead times, worldwide constraints on logistics and inflationary pressure specifically on metals as well as COVID travel and access restrictions in Europe and Asia Pacific that increase the cost of doing business.
With that in mind, we have refined our full-year 2021 guidance.
Given the strength of orders and outlook for FoodTech we have raised, topline growth to 9% to 11%, up from our previous guidance of 5% to 8%.
However, while we expect to be able to mostly offset inflationary input costs with sourcing actions and pricing, the operational challenges I mentioned previously are expected to exert downward pressure on margins.
Therefore, we have lowered full year margin guidance by 25 basis points.
Operating margin of 14.25% to 14.75% and adjusted EBITDA margins of 19.25% to 19.75%.
Our guidance for AeroTech is unchanged with projected revenue growth of 0% to 5%.
Operating margins of 10.75% to 11.25% and adjusted EBITDA margins of 12% to 12.5%.
Due to the existing pricing commitments and current market conditions, in the short-term AeroTech is limited in its ability to adjust prices to offset inflationary conditions.
Therefore, although, AeroTech exceeded margins in Q1, we have held our full year margin guidance.
We are holding our forecast for corporate cost at 2.7% of sales, while lowering interest expense to about $11 million.
Altogether, this increases the full year adjusted earnings per share range to $4.40 to $4.60.
Our GAAP earnings per share guidance is now $4.20 to $4.40, with M&A and restructuring costs of $8 million to $10 million.
Now in terms of Q2.
We expect revenue of $325 million to $340 million at FoodTech and $105 million to $115 million at AeroTech.
Our second quarter guidance for operating margins are 13.75% to 14.25% at FoodTech, with adjusted EBITDA margins of 19% to 19.5%.
For AeroTech, operating margins are forecasted at 8.75% to 9.25%, the adjusted EBITDA margins of 10% to 10.5%.
For the quarter, we expect corporate costs of $12 million to $13 million, M&A and restructuring costs of $4 million, interest expense of about $3 million.
Factoring second quarter's adjusted earnings per share guidance to $0.90 to $1 and $0.80 to $0.90 on a GAAP basis.
I'd like to start by talking about order trends and what we hear about the market from our customers' perspective.
In the first quarter of 2021, FoodTech orders had a record $386 million.
The pandemic driven boost to need at home, retail and quick service restaurant demand continued into the quarter, filling orders from food processors requiring additional capacity [Technical Issues] to serve these markets.
From a geographic perspective, North America and the Asia Pacific region continued to be strong.
South America improved meaningfully while demand in Europe remained volatile as the region was [Technical Issues] the challenges of the pandemic.
Our research and customer engagement confirms our expectations of double-digit expansion in capital expenditures along our FoodTech customers in 2021.
This is consistent with our forecast for FoodTech equipment growth, which is expected to outpace our more stable recurring revenue.
Beyond the current strength on the retail side, we believe progress controlling COVID particularly in the US will spur new projects in the foodservice side.
Inquiries and conversations with customers serving the foodservice market has picked up.
At the same time, the pandemic has accelerated customer investment in permanent [Phonetic] design changes, production flexibility, so producers can respond quickly to shifts in demand is increasingly important.
Moreover, the pandemic serves to make automation, which was always a priority and imperative for food processors.
Automation not only gets labor shortages and enhances productivity, but it is necessary to reduce worker density.
At AeroTech, although orders were down 35% compared to pre-pandemic levels a year ago, we've met our expectations and there are some encouraging signs.
We continue to see stability and infrastructure side with our services and passenger boarding business.
So with some construction related push out of bridge deliveries from Q2 to Q3, this is reflected in our guidance.
And as we've discussed over the past few quarters, we're excited about the outlook for Cargo in 2021 and military demand longer term.
Additionally, our engagement with commercial airlines improved in the quarter, resulting in a few equipment orders, something we have not seen since the collapse in passenger air travel in 2020.
However, we believe prudently [Phonetic] in commercial airline capex spending will be gradual over the next two years.
Let me switch gears and talk about M&A.
As we said last quarter, we're looking to deploy capital in 2021 and beyond as we evaluate strategic acquisitions that advance FoodTech's competitive position as an innovative comprehensive solution provider.
Our M&A pipeline is active and includes opportunities to leverage JBT's capabilities and scale.
We continue to look at equivalent providers to provide -- that enhance our ability to provide [Indecipherable] solutions as well as those that expand our penetration to attract the food categories.
Additionally, with the company's of unique service, digital and process enhancing capabilities that enhance JBT's strategy to be a more meaningful solutions partner to our customers.
Overall we are reassured by the robust commercial activity of FoodTech and indications that AeroTech is on the upswing.
While we have challenges ahead this year, caused by inventory supply chain imbalances, JBT and our people look forward to delivering in 2021. | compname posts q3 gaap earnings per share $1.12.
q3 non-gaap core earnings per share $1.30.
q3 gaap earnings per share $1.12.
q3 revenue $7.2 billion versus refinitiv ibes estimate of $6.95 billion.
sees q4 revenue $7.3 billion to $7.9 billion.
sees q4 gaap earnings per share $1.00 to $1.20.
sees q4 core earnings per share $1.25 to $1.45.
compname says now expects fy21 revenue to be in neighborhood of $29.5 billion, with core earnings per share of about $5.50. | 0 |
Our call today will include remarks from our CEO, Roger Hochschild; and John Greene, our Chief Financial Officer.
After we conclude our formal comments, there will be time for question-and-answer session.
During the Q&A session, you will be permitted to ask one question, followed by one follow-up question, after your follow-up question, please return to the queue.
We had a very good quarter that highlighted the strength of our digital business model and solid execution on our strategic priorities against the backdrop of continued economic improvement.
This quarter was characterized by three important events.
First, our card receivables grew sequentially in May and June, causing our period-end receivables to be up quarter-over-quarter.
This outcome, combined with the strength in consumer spending and our account acquisition, increased our confidence for moderate receivables growth this year and stronger growth in 2022.
Second, we benefited from a gain in our Payment Services segment.
This gain is an outgrowth of a long [Technical Issues] commercial relationship and underscores our payments ability to forge innovative and lasting partnerships.
Lastly, we achieved a historic low in delinquencies, which resulted from consumers' strong liquidity position, our conservative stance on underwriting, and the proactive measures we took into the downturn to protect our credit quality.
This outcome also supported our reserve release this quarter.
Turning to the quarter's results.
We earned $1.7 billion after tax or $5.55 per share.
These results include a $729 million one-time gain.
But even excluding this gain, our results were very strong at $3.73 per share.
The drivers of the quarter's strong results reflect the combination of our solid execution and supportive macro conditions.
Total sales were, up 48% from a year ago, and 24% from the second quarter of 2019.
Retail sales remained very strong, and there was significant improvement in T&E categories, which were hardest hit by the pandemic.
Even travel returned to growth in June, compared to [Technical Issues] levels.
And sales volumes are accelerating.
The 24% growth I cited is an increase from 15% in the first quarter relative to the same period in 2019.
We also see an attractive environment for account acquisition even in the face of heightened competition.
We have removed nearly all of our pandemic credit tightening and have increased our marketing investment to align with these actions.
These decisions supported new account growth of 26% over 2019 levels with strong growth among prime consumers as our differentiated brand and integrated networks support our strong value proposition, which centers on transparent and useful rewards, outstanding customer service and no annual fees.
While the current operating environment is broadly constructive, there are also some challenges.
As we have highlighted before, the counterpoint of sustained strong credit performance is high payment rates, which in the second quarter were over 500 basis points above 2019 levels.
We may be seeing evidence that payment rates are plateauing, and while we expect some moderation later this year, we believe payment rates will remain above historical levels for some time.
Even so, we expect to strengthen our sales figures and the contribution from new accounts to drive loan growth through the back half of this year and accelerate in 2022.
As we have said in the past, we will invest when we see attractive opportunities and the actions we took this quarter with increased marketing expenses in investments and technology and analytics were an example of that approach.
These investments are consistent with our commitment to long-term positive operating leverage and an improving efficiency ratio as they drive loan growth and enable a more efficient operating platform.
In our Payments business, we benefited from a gain on our equity investment in Marqeta.
This gain was the result of a relationship that began a decade ago, and we continue to see opportunities [Technical Issues] and innovative partnerships.
I'm very excited about our investment in CECL that was [Technical Issues] week, as we look to expand our partnership with a leading buy now, pay later provider.
We also continue to grow our global acceptance presence and announced new partnerships in Bahrain and Portugal, adding to the two network alliances that we announced earlier this year.
Our debit business continued to build on its recent strength.
PULSE volume increased 19% year-over-year and was up 33% from 2019 levels.
In addition to the influence of economic recovery, this performance reflects the greater relevance of debit to many consumers through the pandemic period.
Volume at Diners has also recovered to some extent and was, up 41% from the prior year's lows.
However, volume is still below pre-pandemic levels and may remain so for a period of time.
The strong fundamental performance of our digital banking model drove significant capital generation, which this quarter was also aided by our equity gain.
We accelerated our share repurchases to $553 million of common stock, a level near the maximum permitted under the Federal Reserve's four quarter rolling net income test.
We remain committed to returning capital to our shareholders.
And going forward, our approach will be governed by the stress capital buffer framework.
On our call last quarter, we indicated that we hope to revisit our capital return for the second half of this year.
And I'm very pleased that our Board of Directors authorized the new $2.4 billion share repurchase program that expires next March.
We also increased our quarterly dividend from $0.44 to $0.50 per share.
With the current strength of the US economy, I'm increasingly optimistic about our growth opportunities this year and beyond.
Our value proposition continues to resonate with consumers.
Our Payment segment is expanding its partnerships and acceptance and our capital generative model positions us for strong returns over the long-term.
I'll now ask John to discuss key aspects of our financial results in more detail.
I'll begin with our summary financial results on Slide four.
As Roger noted, our results this quarter highlighted the strength of our digital model, solid execution on our priorities and continued improvement in the macroeconomic environment.
Revenue, net of interest expense, increased 34% from the prior year.
Excluding one-time items, revenue was up 9%.
Net interest income was up 5% as we continue to benefit from lower funding costs and reduced interest charge-offs, reflecting strong credit performance.
This was partially offset by a 4% decline in average receivables from the prior year levels.
Excluding one-time items, non-interest income increased 29%, driven by the higher -- by higher net debt count and interchange revenue, due to strong sales volume.
The provision for credit losses decreased $2 billion from the prior year, mainly due to a $321 million reserve release in the current quarter, compared to a $1.3 billion reserve build in the prior year, an improvement in the economic [Technical Issues] and ongoing credit strength were the primary drivers of the release.
Net charge-offs decreased 41% or $311 million from the prior year.
Operating expenses were, up 13%, primarily reflecting additional investments in marketing, which was up 36% and employee compensation, which was up 10%, a software write-off and a non-recurring impairment at Diners Club also contributed to the increase.
Moving to loan growth on Slide five.
Ending loans increased 2% sequentially and were down just 1% from the prior year.
This was driven by card loans, which increased 2% from the prior quarter and were down 2% year-over-year.
Lower year-over-year card receivables reflect two primary factors.
First, the payment rate remains high as households continue to have a strong cash flow position, due to several rounds of government stimulus.
Second, promotional balances were approximately 250 basis points lower than the prior year quarter.
While card receivables declined year-over-year, we considered a sequential increase to be an important data point reflecting continued momentum in account acquisition and very strong sales volume.
The high payment rate remains a headwind to receivable growth, although we expect to see modest decreases in late 2021.
Looking at our other lending products.
Organic student loans increased 4% from the prior year.
We are well positioned as we enter the peak origination season.
Personal loans were down 6%, driven by credit tightening last year and high payment rates.
We are encouraged by continued strong credit performance in the portfolio and have expanded credit for new originations.
Moving to Slide six.
Net interest margin was 10.68%, up 87 basis points from the prior year and down 7 basis points sequentially.
Compared to the prior quarter, the net interest margin decrease was mainly driven by a nearly 200 basis points reduction in the card revolve rate.
Loan yields decreased 17 basis points from the prior quarter, mainly due to the lower revolve rate.
This decline reflects the impact of increased payments, as well as seasonal trends.
Yield on personal loans declined 7 basis points sequentially, due to lower pricing.
Student loan yield was up 4 basis points.
Margin benefited from lower funding costs, primarily driven by maturities at higher rate CDs.
We cut our online savings rate to 40 basis points in the first quarter and did not make any pricing adjustments during the second quarter.
Average consumer deposits were, up 6% year-over-year and declined 1% from the prior quarter.
The entire sequential decline was from consumer CDs, which were down 9%, while savings and money market deposits increased 2% from the prior quarter.
Consumer deposits are now 66% of total funding, up from 65% in the prior period.
Looking at Slide 7.
Excluding the equity investment gains, total non-interest income was up $123 million or 29% year-over-year.
Net discount and interchange revenue increased $102 million or 43% as revenue from strong sales volume was partially offset by higher rewards costs.
Loan fee income increased $20 million or 24%, mainly driven by higher cash advance fees with demand increasing as the economy reopens.
Looking at Slide eight.
Total operating expenses were, up $145 million or 13% from the prior year.
Employee compensation increased $46 million, primarily due to a higher bonus accrual in the current [Technical Issues] versus 2020 when we reduced the accrual.
Excluding this item, employee compensation was down from the prior year as we've managed headcount across the organization.
Marketing expense increased $46 million from the prior year as we accelerated our growth investments.
We still see significant opportunities for growth and we plan to accelerate our marketing spend through [Technical Issues] to drive account acquisition and brand awareness.
Information processing was up due to a $32 million software write-off, the increase in other expense reflects a $92 million charge and the remainder of the Diners intangible asset.
Partially offsetting this was lower fraud expense, reflecting some of the benefits from our investments in data analytics.
Moving to Slide nine.
We had another quarter of improved credit performance.
Total net charge-offs were 2.1%, down 132 basis points year-over-year and 36 basis points sequentially.
The [Technical Issues] net charge-off rate was 2.45%, 145 basis points lower than the prior year quarter and down 35 basis points sequentially.
The net charge-off dollars were down $276 million versus last year's second quarter and $62 million sequentially.
The card 30-plus delinquency rate was 1.43%, down 74 basis points from the prior year and 42 basis points lower sequentially.
Credit in our private student loans and personal loans also remained very strong through the quarter.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $321 million from the reserves, due to three key factors: continued improvement in the macroeconomic environment; sustained strong credit performance with improving delinquency trends and lower losses; these were partially offset by a 2% sequential increase in loans.
Our current economic assumptions include an unemployment rate of approximately 5.5% by year-end and GDP growth of 7%.
Embedded within these assumptions are the expanded child care tax credits and the benefit from the infrastructure physical package beginning in late 2021.
Looking at Slide 11.
Our common equity Tier 1 ratio increased 80 basis points sequentially to 15.7%, a level well above our internal target of 10.5%.
As Roger noted, we are committed to returning capital.
The recent Board approval increasing our buyback and dividend payouts reflect that.
On funding, we continue to make progress toward our goal of having deposits [Technical Issues] 70% to 80% of our mix.
Moving to Slide 12.
Our perspective on 2021 continue to evolve as we see additional opportunities to drive profitable growth.
We have increasing confidence in our outlook for modest loan growth in 2021 as strong sales and our new account growth should offset the higher payment rates.
We expect NIM will remain in a relatively narrow range, compared to the first quarter levels of 75%, with some quarterly variability similar to what we experienced this quarter.
We anticipate a slight benefit from higher coupon deposit maturities and an optimized funding mix with yields affected by variability in the revolve rate.
Our commitment to disciplined expense management has not changed, and we remain focused on generating positive operating leverage and an improving efficiency ratio.
For this year, we now expect non-marketing expenses to be up slightly over the prior year, reflecting the higher compensation accruals and recovery fees.
The increase in the use expense categories is closely tied to the economic recovery.
For example, the high level of consumer liquidity is supporting elevated recoveries.
These recoveries have some costs associated with them, but are more than offset by lower credit losses.
Regarding marketing expenses, we expect this will step up more significantly in the second half of 2021 as we further deploy resources into account acquisition and brand marketing.
With the continued improvement in credit performance, our current expectation is that credit losses will be down this year, compared to 2020.
Naturally, a material change in the economic environment could shift the timing and magnitude of losses.
Lastly, as evidenced by our dividend increase and new share repurchase authorization, we remain committed to returning capital to shareholders.
In summary, we had another very strong quarter.
We are well positioned for a positive top line trajectory given our sales trends and new account growth.
Credit remains extraordinarily strong, and the economic outlook continues to improve.
We maintained our discipline on operating expenses, while investing [Technical Issues] returning organic growth opportunities.
And finally, we continue to deliver high returns, allowing for enhanced buybacks and dividends. | compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
q1 earnings per share $5.04.
net interest income for quarter decreased $68 million, or 3%, from prior year period.
q1 of 2021 included an $879 million reserve release, compared to a reserve build of $1.1 billion in q1 of 2020. | 0 |
I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call.
This document will remain there following our call.
Our call will be led by David Maura, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis, Chief Operating Officer.
Turning to slides three and four.
Actual results may differ materially.
Before I get started, I want to take a moment and speak directly to our employees and our partners around the world.
While our work is far from complete, our financial results reflect another quarter of strong top and bottom line growth and further confirm that we are structuring for growth and efficiency to serve our consumers, customers and stakeholders.
I'm also very proud of the progress we've made these past three years.
Our teams have embraced both our new global operating model and the spirit of our servant leadership culture.
They've also persevered through a global pandemic to deliver excellent and consistent financial performance for our stakeholders.
Because of you, our employees, the new Spectrum Brands has emerged a more efficient, focused, productive and consistent operating company.
We will continue to be driven by our values of trust, accountability and collaboration to serve our mission as we make living better at home.
Our latest financial results for the second quarter reflect another excellent quarter of top line growth and operating leverage.
Our investments in marketing and advertising for our trusted brands were higher in each of our business units, and this continued to drive strong demand this quarter.
Our second quarter revenue grew 22.6% as we achieved double-digit growth across all of our business units.
And our e-commerce sales grew nearly 43%.
Turning to the bottom line.
Second quarter adjusted EBITDA increased 28.8% driven by higher volumes and improved efficiencies from our Global Productivity Improvement Program.
Our operating leverage also improved despite higher inflation and incremental investments that we're making in marketing and advertising.
As we outlined during our prior earnings calls, our reinvestments continue to reignite the flywheel of new product launches, improving our top line growth, expanding our margins and driving greater profitability and cash flow generation.
If I could have everyone turn now to slide seven.
As has been well-documented, transportation and commodity-related inflation continue to negatively impact our industry.
Consistent with our highlights last quarter, we expect these headwinds to more heavily impact the second half of the year.
But despite these headwinds, our stellar first half performance and our continued organic growth give us confidence in again raising our earnings framework to reflect mid-teens net sales and adjusted EBITDA growth, adjusted free cash flow of $260 million to $280 million.
We are well positioned going into the third quarter.
And while we recognize tough comparisons as we lap last year's fourth quarter performance, we will continue to focus on disciplined execution of our winning playbook, leveraging our stable manufacturing and distribution footprint and investing behind our strong brands.
We remain laser-focused on capturing gross GPIP savings.
And in fact, our teams are targeting incremental savings for 2022.
Randy will highlight that in more detail later on.
Our new operating model and deliberate investments behind our business units over the last few years have built a stronger and much more resilient company, and we continue to expect long-term growth.
Now moving to slide eight.
Our balance sheet this quarter improved sequentially, ending the quarter with net leverage of 3.2 times and over -- and maintaining over $860 million in total liquidity.
Our actions earlier this quarter to refinance our debt are expected to reduce our annual interest expense by $18 million a year.
As a reminder, we issued $900 million of total debt with a mix of Term Loan B and a new 10-year three 7/8 senior notes, which will lower our cost of capital.
As announced in April, we are very excited to add the recent acquisition of Rejuvenate to our portfolio.
Rejuvenate is a leading developer and marketer of household cleaning products, maintenance and restoration products with an incredible loyal following.
We expect the transaction to close in the third quarter.
And this fits perfectly with our company's strategy to make living better at home, and it adds a fourth category to our Home & Garden business unit.
I'm confident in our ability to create tremendous value together.
Turning to slide nine.
Going forward, our capital allocation priorities continue to focus on: One, allocating capital internally to our highest-return opportunities, and this includes strengthening our brands through consumer insights, research and development, innovation and advertising and marketing to drive vitality and profitable organic growth; two, we plan to return cash to our shareholders via dividends and opportunistic share repurchases; third, disciplined M&A with tuck-in strategic acquisitions that are synergistic and help drive value creation.
We will continue to target a net leverage ratio in the three to 4 times range.
Now you'll hear more from Jeremy on the financials, and Randy will give you an update and additional business insights.
Over to you, Jeremy.
Turning to slide 11 and a review of Q2 results from continuing operations.
I'll begin with net sales.
Net sales increased 22.6%.
Excluding the impact of $18 million of favorable foreign exchange and acquisition sales of $26.8 million, organic net sales increased 18% with double-digit growth across all four business units.
Gross profit increased $75.1 million, and gross margin of 35.1% was in line with the year ago driven by higher volumes in all business units, improved efficiencies from our Global Productivity Improvement Program and favorable mix, offset by higher freight and input cost inflation and last year's retrospective tariff excluding benefits.
SG&A expense of $262.2 million increased 13.1% at 22.8% of net sales, with the dollar increase driven by improved volumes, higher advertising and marketing investments and incentive and distribution costs.
Operating income of $116.8 million was driven by improved volumes, improved productivity and lower restructuring costs partially offset by input cost inflation, marketing and advertising investments and incentive costs.
Net income and diluted earnings per share were primarily driven by the operating income growth and favorability from Energizer investments, offset by higher debt refinance costs.
Adjusted diluted earnings per share improved to $1.76 driven by operating income growth along with lower shares outstanding.
Adjusted EBITDA increased 28.8% from the prior year primarily driven by growth across all business units.
Turning to slide 12.
Q2 interest expense from continuing operations of $65.5 million increased $30 million due to the debt refinancing costs.
Cash taxes during the quarter of $11.9 million were $4.4 million lower than last year.
Depreciation and amortization from continuing operations of $38.7 million was $2.3 million higher than the prior year.
Separately, share- and incentive-based compensation decreased from $14.6 million last year to $8.5 million this year driven by the change to incentive compensation payout methodology we talked about last year.
Cash payments for transactions were $3.1 million, down from $6 million last year.
And restructuring and related payments were $7.6 million versus $12.8 million last year.
Moving to the balance sheet.
The company had a cash balance of $290 million and approximately $577 million available on its $600 million cash flow revolver.
At the end of the quarter, total debt outstanding was approximately $2.6 billion, consisting of approximately $2.1 billion of senior unsecured notes, $400 million of term loans and approximately $159 million of finance leases and other obligations.
Additionally, net leverage improved sequentially and was approximately 3.2 times.
During the quarter, we sold off our remaining Energizer shares for proceeds of $12.6 million.
Capital expenditures were $16.2 million in Q2 versus $13 million last year.
Turning to slide 13 and our updated earnings framework for 2021.
We now expect mid-teens reported net sales growth in 2021, with foreign exchange expected to have a positive impact based on current rates.
Adjusted EBITDA is also expected to grow mid-teens.
This includes benefits from higher volumes; our GPIP program; approximately 11 months of results from the recent Armitage transaction in Global Pet Care, offset by net tariff headwind of about $30 million to $35 million driven by the expiration of previously disclosed retrospective tariff exclusions in 2020.
In addition, as David mentioned, we have also now factored in $120 million to $130 million of input cost inflation compared to a year ago.
Fiscal 2021 adjusted free cash flow for continuing operations is now expected to be between $260 million and $280 million, up from the previous range of $250 million to $270 million.
This includes plans for incremental investments and inventory levels as well as the expected input cost inflation.
Depreciation and amortization is expected to be between $180 million and $190 million, including stock-based compensation of approximately $30 million to $35 million.
Full year interest expense is now expected to be between $130 million and $135 million.
This meaningful step-down compared to our prior range of last year is driven by our successful $900 million refinancing in February of our senior notes due 2024 and partial refinancing of our senior notes due 2025.
On a full run rate basis, as David mentioned, we expect annualized savings of approximately $18 million.
Restructuring and transaction-related cash spending is now expected to be between $70 million and $80 million.
Capital expenditures are expected to be between $85 million and $95 million.
And cash taxes are expected to be between $35 million and $40 million, and we do not anticipate being a significant U.S. federal cash taxpayer during fiscal 2021 as we continue to use net operating loss carryforwards.
We ended fiscal 2020 with approximately $800 million of usable federal NOLs.
For adjusted EPS, we use a tax rate of 25%, including state taxes.
Regarding our capital allocation strategy, we continue to target a net leverage range of 3 times to 4 times adjusted EBITDA.
As it relates to our 2021 earnings framework, please keep in mind just a few factors.
First, we continue to plan for incremental advertising investments of over $20 million in fiscal 2021 as we continue to raise awareness, consideration and purchase intent with consumers.
Second, recall the Q4 results this fiscal year will have six fewer selling days compared to the prior year.
It's important to recognize this modeling nuance.
Third, we continue to manage through inflationary pressures, which are currently expected to be $120 million to $130 million higher than the prior year.
And fourth, adjusted EBITDA is also expected to be negatively impacted by the absence of Energizer dividend income.
Now to Randy for a more detailed look at our operations.
My comments today will focus on reviewing each business unit to provide detail on the underlying performance drivers of our operating results.
And I will also update you on the current overall cost environment, progress on our GPIP program and results from our commercial operations team in e-commerce and marketing.
Overall, we continue to see significant benefits from our operating model transformation as well as the addition of new talent in many key strategic roles.
Q2 reflected another quarter of exceptional financial results with strong improvements across all four businesses.
With the backdrop of elevated demands, this quarter reflected generally improved supply chain performance and consistent service levels despite continued industry challenges.
These efforts, in addition to our continued commercial investments, helped drive another quarter of double-digit sales and adjusted EBITDA growth.
Now let's dive into the specifics of each business.
Starting with Hardware & Home Improvement on slide 15.
Second quarter reported net sales increased 18.4%, and organic net sales increased 17.4%.
Adjusted EBITDA increased 5.6% primarily driven by positive volumes and productivity improvements that were materially offset by last year's significant benefit from retrospective tariff exclusions as well as higher freight and input cost inflation, distribution costs, COVID-19-related costs and higher marketing investments.
Excluding last year's tariff exclusions, adjusted EBITDA improved 20.1%.
This represents another quarter of strong double-digit growth within HHI.
While inventory levels are improved and have normalized over the last few quarters, demand continues to outpace supply with continued strong consumer demand for our products.
This bodes well for our third quarter, especially as we are lapping last year's government-mandated shutdowns in three of our manufacturing facilities throughout Mexico and the Philippines.
We expect continued demand increases throughout the balance of 2021 driven by our new product introductions and incremental advertising investments.
Fundamentals across both the repair and remodel segment as well as the new build channels continue to be strong.
In our Kwikset business, we are focused on driving demand for Microban, which incorporates antimicrobial technology on the surface of our hardware; also SmartKey technology, which allows users to rekey their own locks to any Kwikset key in about 15 seconds; and finally, our exciting Halo Touch Smart Lock product, which includes biometric- and WiFi-enabled technology along with voice-assist capability through Alexa and Google Assistant.
As an example, the Kwikset team recently partnered with long-standing customer, Shea Homes, to begin installing Halo Touch locks on every new build as a standard home feature.
This and other similar wins with Halo platform are encouraging as we believe home automation trends will continue to drive sales for our electronics and smart connected locks.
Additionally, our Baldwin brand, which is a leader in luxury security products, launched a new quick-ship program this quarter with a wide array of SKUs shipping within five business days, dramatically improved the customer experience.
Finally, I'm also pleased to announce that Tim Goff accepted the role of President of HHI in March.
Tim is one of our top strategic leaders and most recently served as the Head of our Commercial Operations Group.
He captained the transformational benefits that, that team has had on the new SPB operating model and business results.
Tim knows the HHI business very well, having previously served as the Chief Marketing Officer and holding other supply chain, operational and sales leadership roles over the years.
We look forward to sharing more details over the coming quarters as Tim and the HHI team work to build on our leading market positions in Spectrum Brands' largest business unit.
Now to Home & Personal Care, which is slide 16.
Reported and organic net sales increased 28% and 24.3%, respectively.
Adjusted EBITDA more than doubled to $25.4 million.
Net sales were driven by continued strength in small kitchen appliances and personal care categories as well as growth across all regions.
e-commerce sales both in pure-play and retailer dotcom channels continued to grow at a high rate.
EBITDA was driven by higher volumes and productivity improvements partially offset by increased freight and input cost inflation and continued marketing investments.
Q2 represented the seventh consecutive quarter of year-over-year top line growth as momentum for our home appliances and personal care products continued well past the successful holiday season.
We've seen incremental demand in the U.S. for recent stimulus spending, and our fill rates continue to improve.
This bodes well for our plans to continue to grow sharing and shelf space with our key retailers.
However, when modeling this business, please keep in mind the inflationary headwinds within Home & Personal Care.
We expect our pricing and supplier partner initiatives will only partially offset the second half headwind.
As a result of these factors, we currently expect margin pressure in the second half, and we'll continue working to mitigate the inflation throughout the year and into fiscal 2022.
Our focus on 2021 and beyond will remain on consumer-led, insights-driven new products.
We will continue to drive those investments in our brands across more markets than ever before.
Moving to Global Pet Care, which is slide 17.
Q2 represented another strong quarter of financial performance with reported net and organic sales growth of 23.9% and 10%, respectively.
Adjusted EBITDA grew 39%.
Top line growth was driven by both our aquatics and companion animal categories with broad-based demand across subcategories and channel partners.
Higher EBITDA was driven by volume growth and productivity improvements partially offset by higher inflation and distribution expenses as well as advertising and marketing investments.
Q2 was also the tenth consecutive quarter of year-over-year top line growth and eighth consecutive quarter of bottom line growth as our existing legacy brands and recently acquired brands all performed well in their categories.
Our global pet team continues to build its worldwide market leadership position in the core categories of Aquatics, Dog Chews, Pet Grooming and Pet Stain & Odor.
You'll recall that we added Omega Sea as an acquisition last year to advance our premium aquatics offerings, and our addition of the Armitage Pet Care came earlier this year.
This is an excellent platform for international expansion, not only our dog chews business but also cat chews, treats and toys.
As we've said before, our Global Pet Care team remains confident that 2021 and beyond will benefit from the continued execution of our global strategies coupled with the very strong category growth fundamentals.
In particular, we anticipate sustained demand for our high-margin consumables given all of the new pet parents in companion animal and all the new hobbyists who have recently entered the aquatics and reptile categories.
These are long-term commitments and bode well for the future demand of our products.
And finally, Home & Garden, which is slide 18.
Second quarter reported net sales increased 21.4%, and adjusted EBITDA increased 22.7%.
The top line again grew across controls, household insecticides and repellants with strong early season orders across all channels.
EBITDA increase was driven by volume growth, favorable mix, productivity improvements partially offset by advertisement and marketing investments and higher distribution expenses.
We believe both Spectrum Brands and our key retailers are very well positioned as we enter Q3, which is historically our largest quarter for sales and profitability.
Q2 reflected another quarter of improved production capabilities to meet continued high levels of demand, which results in heavier inventory positions at retail compared to prior year.
Spring is just starting in much of the U.S., which kicks off our selling season for controls and repellants.
We are seeing good early quarter POS performance.
The weather, and thus the resulting POS performance in our peak season, remains an unknown variable.
We are very well positioned to maximize our results this year despite ongoing challenges from input and freight markets.
We're also very excited about the anticipated acquisition of Rejuvenate, a leading household cleaning, maintenance and restoration product company.
Rejuvenate has a loyal customer following and has generated impressive top and bottom line growth.
Product categories centered around floor care as well as disinfectants and kitchen and bath.
Last year's net sales were over $60 million with growing sales and margins over the past three years.
We are confident in our ability to capture operational and revenue synergies with a business that has strong EBITDA margins and customer alignment with our existing channels.
The transaction is planned to close during the third quarter, but we look forward to applying our strengths in manufacturing, marketing and sales to further strengthen the Rejuvenate brand, particularly within underpenetrated retailers.
Our continued A&P investments this quarter are consistent with our strategy to invest more resources to tell our story around brands such as Spectracide, Cutter, Hot Shot and EcoLogic, along with incremental research dollars to deliver even more new and innovative products.
We believe these actions will further enhance our mission to be a recognized market leader in providing consumers the best solutions to conquer nature's challenges and enjoy life.
This is possible with our distinctive combination of brands, formulations, registrations, supported by efficient manufacturing and strong customer relationships.
The fundamentals in this business remain very strong.
With solid profitability and high barriers to entry, we're confident that our strong brand equities and increased investments in product development and marketing will accelerate long-term growth rates.
Now let's turn to our internal growth and efficiency efforts with our Global Productivity Improvement Program, which is on slide 19.
As David mentioned, we remain laser-focused on the execution of our key initiatives in this program as Q2 delivered productivity enhancements across all business units.
We remain resolute on using the savings to reinvest back into the business to deliver long-term sustainable organic growth.
This program continues to be our most important strategic initiative as we transform to our new global operating model.
Our F '21 savings are running ahead of previous projections, and we are now raising our total gross savings target of $150 million to at least $200 million by the end of fiscal 2022.
Our confidence in raising this target is driven by strong performance from our teams and expanded scope of our existing program initiatives.
As Dave and Jeremy noted earlier, inflationary headwinds, while second-half-weighted, did begin to impact our business in this quarter.
During our call last quarter, we indicated these headwinds were $70 million to $80 million higher than we had originally planned for the year or in other words, $100 million to $110 million higher than fiscal 2020 levels.
Based on current rates as well as our improved expectations for top line growth for the year, these inflationary headwinds are now expected to be $120 million to $130 million higher in fiscal 2020 levels.
During the quarter, we actively addressed these headwinds with a coordinated and consistent strategy utilizing many of the tools developed through our GPIP program.
We are working in concert with our supplier partners to offset this inflation and have additional mitigation actions in many areas such as ocean freight and supplier management.
The agreed-upon price increases with our retail partners are going into effect now during Q3 and are expected to continue to step up during Q4.
And additionally, we anticipate further pricing discussions being necessary in the back half of the calendar year.
We believe at this point that some of these inflationary pressures are likely temporary in nature and may begin to moderate in fiscal 2022.
As Jeremy alluded to earlier, these headwinds are currently included in our earnings framework for the year, and we will remain vigilant with our operating discipline to maximize the long-term performance of our brands as a result of this.
And finally, our commercial operations team continues to drive impressive results.
This quarter, e-commerce grew by nearly 43% and represented more than 16% of our total net sales.
Additionally, our digital teams continue to leverage data for the early identification of consumer trends to seed new product and sales opportunities and create promotional content that appeals to those consumers.
Now back to David.
Earlier this year at CAGNY, at the investor conference, we shared our Spectrum Brands mission, which is we make living better at home.
And as I shared earlier, we are a more efficient, focused, productive and consistent operating company.
Given that we've covered a lot on the call, let's conclude with a few takeaways on slide 21.
First of all, our second quarter financials reflect another excellent quarter of top line growth.
Investments in marketing and advertising for our trusted brands were higher in each division, which helped drive double-digit top line growth across all of our business units.
Second, our second quarter financials reflect another quarter of operating leverage, with adjusted EBITDA increasing 28.8% from the prior year with growth across all businesses.
Thirdly, our balance sheet improved sequentially, ending the quarter with net leverage of 3.2 times with over $860 million in total liquidity.
Additionally, our successful debt refinancing actions this quarter are expected to drive a material step-down in our interest expense.
I'm extremely grateful for all the sacrifices you have made to navigate our company successfully through these challenging times.
Francis, let's just dive right into Q&A. | southern co quarterly basic earnings per share, excluding items $0.98. | 0 |
This is Debbie Young.
With that out of the way, I'll now pass it on to Tom Ryan, our chairman and CEO.
As a broad overall comment, let me just say that 2021 has certainly exceeded our expectations.
What we have been able to accomplish in the last two years has been remarkable.
Our services and care for our communities has been needed more than ever.
And in these unprecedented times, our team has risen to the challenge with grace and unwavering commitment.
I am so proud of our team and continue to be amazed by their dedication and support.
Now for an overview of the third quarter.
Let's start by taking you back to our mindset the last time we spoke in mid-July.
We were seeing a declining trend of COVID deaths that began during the second quarter.
This downward trend, coupled with the IHME's outlook, was reflected in our earnings guidance for the back half of 2021.
Shortly thereafter came the impact of the Delta variant, and we saw an unexpected surge in COVID and non-COVID mortality that began in August and has continued into October.
Therefore, we have seen funeral volumes and cemetery revenues that have exceeded our previous expectations.
Now diving into the highlights of the third quarter.
We generated adjusted earnings per share of $1.16, a 47% increase over the prior-year quarter.
The primary driver of the earnings-per-share growth was high funeral results driven by increases in both volume and sales average.
The cemetery segment also delivered strong revenue growth, which was generated by both atneed cemetery revenue growth and continued strength in preneed cemetery property sales production.
At a high level, adjusted operating income grew $74 million and contributed over 85% of the increase in adjusted earnings per share.
The remaining increase was primarily the result of fewer shares outstanding.
Now let's take a deeper look into the funeral results for the quarter.
Overall, the funeral segment performed better than we expected.
Total comparable funeral revenues grew $70 million or 14%, primarily due to improvements in the sales average as well as continued strong volumes from the Delta variant COVID impact and from excess non-COVID deaths, which tended to skew younger and more pronounced in smaller markets.
Recall that third quarter 2020 volumes were up about 19% year over year, and we grew another of 3% on top of that this third quarter, which we had not anticipated in our guidance from the second quarter call.
Core funeral revenues grew by $48 million led by an impressive 8% increase in the funeral sales average and a 3% increase in funeral volume.
The sales average continued to climb sequentially and is up about 4% over the 2019 pre-COVID third quarter.
Our percentage of family selecting services has essentially returned to pre-COVID levels.
And the funeral sales average is also being positively impacted by an uptick in ancillary revenues such as flowers, catering, and by a lower discount rate.
The favorable impact of these positive trends has been slightly reduced by a modest 60-basis-point increase in the core cremation rate.
Preneed funeral sales production for the third quarter grew $50 million or nearly 22%, which exceeded our expectations.
Both our core funeral home and SCI Direct businesses posted strong production increases against an easier comparison quarter in 2020.
The higher insurance production component also generated a $7.5 million increase in general agency revenue.
We continued to see growth in marketing leads from both digital and seminars that have not only very successfully generated preneed sales production, but have done it at a lower cost.
On the core funeral home sales production front, we saw average revenue per contract increase by almost 8% to over $6,000 as an increasing percentage of our preneed customers are choosing some form of service.
From a profit perspective, funeral gross profit increased $40 million and the gross profit percentage grew 400 basis points to 28%.
The incremental margin percentage generated from the core revenue increase was slightly reduced by an increase in lower-margin ancillary revenues and elevated staffing and service levels as compared to the somewhat more limited service structure we operated under during the third quarter of 2020.
Additionally, we experienced elevated fuel and energy-related costs.
Now shifting to cemetery.
Comparable cemetery revenue increased more than $42 million or 11% in the third quarter.
In terms of the breakdown, atneed cemetery revenue generated $20 million or 47% of the growth, driven primarily this quarter by a higher quality core average sale, an impressive increase in atneed large sales; and by a modest increase in contract velocity.
Recognized preneed revenues generated about $16 million or 37% of the revenue growth, primarily due to higher-than-expected preneed cemetery property sales production as well as higher recognized preneed merchandise and service revenue.
Additionally, we achieved a $7 million increase in perpetual care trust fund income primarily due to the timing of capital gains.
Preneed cemetery sales production grew $25 million or 8% in the third quarter, which exceeded our expectations.
The higher-quality core sales average accounted for the majority of the increase, followed by growth in large sale activity.
Although we expected a tougher comp on the velocity side, the number of training contracts sold actually grew modestly in the quarter, which also contributed to the increase.
As I mentioned in my preneed funeral discussion earlier, we continued to see production growth from our marketing-generated leads program that very successfully generated preneed sales production.
Additionally, we are seeing improvements in key sales metrics such as appointment and close rates.
Cemetery gross profits in the quarter grew by approximately $28 million, and the gross profit percentage increased 300 basis points to 38%.
Similar to the funeral segment, the incremental margin percentage on the revenue increases was slightly reduced by elevated staffing and maintenance costs associated with operating full-service cemeteries as compared to the limited-service structure during the third quarter of 2020.
Now let's talk about our revised outlook for 2021.
Based upon better-than-expected results in the third quarter, we are again raising our guidance to an earnings per share range of $4.15 to $4.45 for the full year 2021.
This increases the midpoint by an additional $0.95 and represents a 33% increase from our 2020 results.
This raise in our guidance is primarily due to the earnings per share outperformance delivered in the third quarter.
Additionally, we have increased our projected earnings per share for the fourth quarter, primarily due to higher than originally anticipated funeral volumes and higher-than-anticipated atneed cemetery revenues, both being impacted by an increase in Delta variant morbidity and non-COVID excess death.
The midpoint of our fourth quarter guidance, $0.89 per share, would still be a decline in earnings per share as compared to the $1.13 earned in the fourth quarter of 2020.
Within our funeral segment, we are anticipating a comparable volume decrease in the high single-digit percentage range in the fourth quarter of this year versus a very strong prior-year quarter, which was up over 17%.
Meanwhile, we expect the average revenue per case to continue to compare favorably, growing at a mid-single-digit percentage range for the last quarter of the year.
Finally, we forecast preneed funeral sales production to grow in the high single-digit percentages for the fourth quarter versus the prior-year quarter.
On the cemetery side of the business, we expect atneed cemetery revenues for the fourth quarter to be relatively flat compared to the prior-year quarter.
This is comparing against a phenomenal 2020 fourth quarter that delivered a 30% increase in 2019.
As far as preneed cemetery sales production goes, we expect a flat to low single-digit percentage increase in the fourth quarter when compared to a very robust fourth quarter 2020, which was up over 16%, culminating in back-to-back years of impressive 20-plus percent growth in 2021 -- I'm sorry, in 2020 and 2021.
When looking out over the next couple of years, we expect COVID to have a negative pull-forward effect on revenues and earnings temporarily.
Like many other companies, we also expect to experience mild wage and supply chain cost pressures in the near term.
Having said all that, this crisis has accelerated the utilization of technologies resulting in enhancements, which improved our effectiveness and resulting cost efficiencies in our field operations, within our sales teams and our support functions.
We compound that with improvements in our capital structure through share buybacks and managing our debt maturity profile, and we expect to generate impressive earnings per share compounded annual growth rate both in the next two years and well beyond.
To emphasize the strength of our post-COVID operating platform and capital structure, I will again give you an example utilizing the $1.90 in earnings per share we reported in 2019 as our pre-COVID base.
In 2022, we expect the impact of COVID to begin to wane, thereby bearing the brunt of the pull-forward effect.
Even with funeral volumes down double-digit percentages and now we're thinking roughly 15,000 funeral cases less than we did in 2019, we believe at the midpoint of our model our 2022 earnings per share can reflect a 14% compounded growth rate over the three-year period, resulting in a $2.80 earnings per share for 2022.
Beyond 2022, we believe that the pull-forward effects should begin to wane and a trend of year-over-year growth should begin as we approach an aging baby boomer cohort with a leaner and more technologically efficient and effective operating model.
We continue to believe that we will see 2023 earnings per share approaching $3.25, which would maintain that 14% earnings per share CAGR over the four-year period.
I wish I'd never heard of COVID-19, but it is the reality of our company, country, and world have had to deal with and are dealing.
I am so very proud of our team, what they have done in helping our communities while finding a way to make our company an even better one in a post-COVID world, all the while generating such impressive earnings-per-share growth for our stakeholders.
I think I'm going to start off the same way Tom just ended with the most important message of the day.
The months of August and September were very busy months for us.
And I continue to personally be amazed, and I have to say also humbled, at how well our teams are able to take care of our client families and our communities when they need it the most.
I want you to know that we appreciate each and every one of you on the Dignity Memorial and SCI team.
And then just like Tom did, I'll briefly discuss our '22 and '23 outlook.
So let's start with the quarter.
Adjusted operating cash flow increased $37 million to $232 million, compared to $195 million in the prior year.
So the drivers for this growth were the impacts from the Delta variant that drove unexpected increase in COVID deaths, but we also did see unexpected increase in non-COVID deaths that were impacting both our funeral and our cemetery operations.
In addition to the strong adjusted EBITDA growth, which amounted to about $60 million, we also benefited by a decrease in cash tax payments of about $28 million.
So remember, in the third quarter of last year, cash taxes were unusually high.
We had to pay approximately $50 million of federal and state income taxes that were deferred from the second quarter of 2020.
So these positive cash flow items were somewhat offset by a net use of working capital in the quarter, which primarily related to an increase in payroll taxes.
And again, we'll have to remember this.
Remember, last year, they were able to defer quarterly payroll taxes under the CARES Act, which totaled approximately $42 million for SCI for the full year of 2020.
So in this current year quarter, we are required to pay half of that amount or about $21 million.
And keep in mind, the remaining half, the other $21 million, will be paid in the fourth quarter of next year of 2022.
So during the quarter, we also deployed about $280 million of capital, which is the second-highest quarterly capital deployment that we've seen really in recent history.
This capital went to reinvest it in our businesses first, then expanding our footprint and ultimately returning capital to our shareholders.
So now in terms of the breakdown.
We invested $65 million in our businesses with $40 million of maintenance capital and $25 million of cemetery development capital.
Our maintenance capital not only reflects improvements made to our facilities, but also investments in more contemporary customer- and noncustomer-facing technology.
For the cemetery development capital spend, we started this quarter making up some ground to our annual target, but continued to experience some construction delays, primarily on the permitting side for some of our larger development projects.
But at this point, I still believe we'll end the year with around $100 million of capital development spend.
From a growth capital perspective, during the quarter, we invested about $20 million consisting of $10 million to funeral home new-build opportunities, $5 million on business acquisitions as well as $5 million on real estate acquisition.
So just touching on that acquisition pipeline for a moment, we're excited as we look at the opportunities we are working on for the remainder of 2021.
And by the way, we remain confident that we'll be able to close several transactions during the fourth quarter that I believe will get us to our $50 million to $100 million annual acquisition target that we've been describing during the year.
Then, finally, we deployed just under $200 million of capital to shareholders through dividends and share repurchases.
The dividend payments in the third quarter totaled just under $40 million and this reflects the 9.5% increase to $0.23 per share per quarter that we announced in August.
So shifting to a few comments on our updated outlook.
So the guidance went from $775 million to a newly revised annual guidance range of $850 million to $925 million.
So when we compare back to 2020, this new midpoint of $888 million represents an increase of about 10% or $83 million over last year.
So let's talk about a little color on this $150 million increase.
It is primarily driven by an approximate $210 million increase in cash earnings, and these are associated with the $0.95 increase at the midpoint in today's revised earnings per share guidance.
And as noted earlier, this increase is primarily due to the outperformance in earnings during the third quarter on increased mortality as well as expected cash flow increases in the fourth quarter on higher funeral volume and atneed cemetery expectations.
The increase in cash earnings was partially offset by about $50 million increase in cash taxes and other working capital uses that are expected.
So we're now expecting closer to $260 million of cash tax payments in '21 or an additional $50 million over the $210 million that we talked about in August, again, because of these higher expected earnings.
So looking forward to 2022 next year, while there's still a lot of variables to try to predict, you should expect our cash flow to decrease in 2022, in line with the earnings expectations that Tom just described as the impact of COVID wanes.
However, our expected cash flow decline should be buffered by lower cash taxes on these lower cash earnings.
And then looking forward to 2023, we expect to be on an increasing growth trajectory as we approach an aging baby boomer cohort utilizing our services, and again, along with a leaner, more technologically efficient, and effective operating model.
So the underlying stability of our cash flows as well as the strong financial position we have gives us the confidence and flexibility to continue being opportunistic in deploying capital to the highest relative return opportunities for many years, at least for the next several years.
In closing, we continue to have a solid balance sheet bolstered by a tremendous amount of liquidity, consisting of about $400 million of cash on hand plus about $1 billion available on our long-term bank credit facility.
Early in the year, we completed a debt refinancing transaction that not only refinanced the notes that would have been done later this year in '21, but also allowed us to repay the outstanding balance on our revolver, which will provide us with plenty of flexibility to fund a future pipeline of acquisitions or other capital deployment for several years.
Additionally, this transaction reduced our interest rate risk as we increased our proportion of fixed rate debt now to just over 80%.
On the continued growth in EBITDA, our leverage ratio at the end of the quarter remains below three times.
It's actually about 2.4 times.
As we have noted in the past, looking beyond the impacts of this pandemic, we continue to expect to naturally lever back up to our targeted leverage range of three and a half to four times net debt-to-EBITDA, and I think this will happen toward the end of 2022.
We intend to finish the year strongly and we believe we are very well-positioned for future growth. | q3 adjusted earnings per share $1.16.
sees 2021 diluted earnings per share excluding special items $4.15 - $4.45. | 1 |
We will also present certain non-U.S. GAAP financial information.
A reconciliation of those figures to U.S. GAAP financial measures is available on our website.
Relative to the Ilim joint venture and Graphic Packaging investment, Slide two provides context around the financial information and measures presented on those entities.
We will begin our discussion on Slide three.
International Paper delivered solid earnings and strong cash generation in the first quarter.
Our mill and converting system performed well to mitigate the significant impact of the winter storm and support a strong customer demand across all of our packaging channels.
We see momentum building, continuing to build across our three businesses with very strong demand for corrugated packaging and containerboard and solid demand for absorbent pulp.
And in papers, we're seeing an improved supply demand backdrop in all of our key geographies.
Our capital allocation in the first quarter, we repaid $108 million of debt and we returned $331 million to shareholders, including $129 million of share repurchases.
Our performance again demonstrates the agility and resilience of International Paper to perform well across many different circumstances.
We're passing the 1-year mark of the global pandemic, and I could not be any prouder of the commitment of our employees to take care of each other and take care of our customers.
The vast majority of our 48,000 team members work in our mills and conversion plants each and every day, and their health and safety remains our most important responsibility.
We also made solid progress on the spin-off of our Printing Papers business, which we expect to complete late in the third quarter this year.
Our team is also making strong progress to develop and deliver multiple streams of earnings initiatives to achieve the $350 million to $400 million in incremental earnings and accelerated growth by the end of 2023.
As we work to build a better IP, we remain laser-focused on delivering superior solutions to our customers, executing well and meeting our commitments to our shareowners and our other stakeholders.
Turning now to Slide four, which shows our first quarter results.
We delivered EBITDA of $730 million and free cash flow of $423 million despite the $80 million pre-tax earnings impact from the winter storm in the Southern U.S. Revenue increased by more than $100 million sequentially, primarily driven by price realization in our Packaging and Global Cellulose Fibers businesses.
And again, free cash flow is strong with a continued focus on running our businesses well, controlling our cost and actively managing our working capital.
I'll start with the quarter-over-quarter earnings bridge on Slide five.
First quarter operating earnings were $0.76.
The winter storm impacted pre-tax earnings by $80 million or a $0.15 impact to operating EPS.
We're still in the very early stages of the insurance process and do not have a recovery estimate at this time.
Looking at the bridge, price/mix was strong driven by prior period price flow-through and packaging and cellulose fibers.
Volume was essentially flat with continued strong demand for corrugated packaging and absorbent pulp.
Overall papers volume continues to recover even though we saw the expected seasonal decline for papers in Brazil in the first quarter.
Operations and costs were favorable.
Mill and box system performance was solid and helped mitigate the impact of the winter storm, which was a cost headwind of $55 million to operations.
Maintenance costs increased sequentially, and we expect to complete about 65% of our maintenance outages in the first half of the year.
Input costs were unfavorable, which included a $20 million cost impact from the storm, mostly for energy and raw materials such as starch and adhesives.
Overall, we're seeing higher costs for recovered fiber, energy, chemicals and distribution, which we expect to continue in the second quarter.
Transportation conditions are challenging, and we're experiencing significant rail, truck and ocean transportation congestion.
Higher corporate expenses were driven by a noncash foreign exchange loss on intercompany loans, and lower equity earnings are partly attributed to the reduced ownership position in GPK.
Turning to the segments, and starting with Industrial Packaging on Slide six.
We continue to see strong demand across all of our channels, including box, sheets and containerboard.
For the quarter, volume was essentially flat.
We lost 145,000 tons of containerboard production due to the winter storm.
Although our mills and box plants in the region recovered quickly, the storm did impact sales in the quarter.
We had nearly 30 box plants in Texas, Louisiana and Mississippi affected by the storm, which impacted our box shipments in the quarter.
Price and mix was strong.
Our November increase is essentially implemented fully with the $131 million first quarter realization.
And I would add, this is one of the fastest implementations that we've seen.
Operations and cost includes about $55 million impact from the winter storm, about half of which is due to unabsorbed fixed costs and the balance is related to repairs and higher distribution costs.
Overall, mill and box plant performance was solid, and we leveraged our system to support strong customer demand across all of our channels.
Maintenance outage costs increased sequentially.
We did defer about $30 million of maintenance outages from the first to the second quarter due to the significant production loss resulting from the winter storm.
We expect to complete about 75% of our planned maintenance outages for packaging in the first half of the year.
Input costs were a significant headwind in the quarter, including about $20 million related to the winter storm due to higher energy, distribution and raw materials in our mill system and box plants.
Higher recovered fiber costs were another significant headwind in the quarter.
We expect continued cost pressure for recovered fiber, energy distribution in the second quarter, and we're still seeing the lingering effects in certain chemicals produced in Texas and Louisiana as suppliers recover from the winter storm.
Turning to Slide eight.
As we enter the second quarter, we're seeing continued strong demand across all of our channels.
U.S. and export containerboard demand is strong with low inventories in all regions.
Our first quarter shipments were impacted by the significant production loss resulting from the storm.
We're working with our customers to recover from extensive backlogs.
In our U.S. box system demand remains robust as more states start lifting restrictions.
E-commerce, again grew at a strong double-digit pace in the first quarter, and we believe the majority of the accelerated consumer adoption in this channel is permanent.
With states starting to reopen, we're also seeing improved demand in segments with greater exposure to restaurant and foodservice channels, such as produce and protein, although we're still not back to pre-COVID levels.
Nondurables, excluding food and beverage, represents about 30% of U.S. box demand across a wide range of consumer and industrial products.
This segment is benefiting from strong consumer demand in the broad manufacturing sector recovery.
And lastly, demand for durable goods, which had the immediate pullback due to COVID is benefiting from a healthy housing market.
We're well positioned and have the scale and footprint to serve just about every corrugated segment in a meaningful way, and our packaging team continues to focus on delivering superior packaging solutions to help our customers succeed.
Turning to Slide eight.
I'll provide an update on the progress we're making in our EMEA packaging business.
Our objective is to bring this business back to sustainable mid-teen margins and generate returns above our cost of capital.
We're well on our way to achieving our goal.
In the first quarter, we improved adjusted EBITDA by nearly $20 million compared with last year.
The Madrid mill is fully ramped, and we have more integration and cost opportunities available.
We're integrating our world-class lightweight recycled containerboard with our box network in Southern Europe to provide customers with a broader array of packaging solutions.
We've improved our footprint in the Iberian Peninsula through selective acquisitions, including two box plants in Spain acquired at the end of the first quarter.
These acquisitions provide additional integration opportunities with the Madrid mill.
And more importantly, they enhance our commercial capabilities in the region.
We continue to make progress with our box system performance and have more opportunity ahead.
All our plants have clear commercial and operational plans, and we're leveraging the skills and resources from across the company to deliver on our commitments.
The map on the slide shows our packaging footprint in Europe after the sale of our Turkey packaging business, which we expect to close in the second quarter.
After the sale, the EMEA packaging business will have two recycled containerboard mills, 21 box plants and two sheet plants.
And again, our commitment is to bring this business to sustainable returns above our cost of capital.
Moving to Global Cellulose Fibers on Slide nine.
Price and mix was favorable with price realization accelerating across all pulp segments in the first quarter.
Volume was moderately lower due to the shipping delays related to port congestion.
Demand for fluff is solid and we have healthy backlogs.
Operations and costs improved sequentially, driven by the nonrepeat of the $20 million write-off in the fourth quarter as well as solid operations and good cost management.
These improvements were partially offset by about $10 million of higher seasonal energy consumption and an FX loss at our mill in Canada.
Maintenance outage costs decreased as expected, and input costs increased due to higher wood costs in the Mid-Atlantic region as well as higher energy costs.
Demand improved as we entered the year and the end-use demand signals for absorbent hygiene products is healthy.
Turning to Printing Papers on Slide 10.
Our business -- our papers business has demonstrated outstanding resilience throughout the past year.
Our performance reflects the talent and commitment of our team, the scale and capabilities of our global footprint and the strength of our highly valued brands.
We continue to see steady recovery in demand across all regions, which we expect will accelerate with broader return to office and return-to-school activity.
I'd also add that we've seen significant improvement in supply demand dynamics both within the U.S. and outside the U.S. Looking at our first quarter performance, price and mix was stable across the segment.
Volume decreased sequentially due to the lower seasonal demand in Brazil and Russia as expected.
It also meant that the export supply chains are stretched in most regions.
Operations and costs improved on solid operations and good cost management, as well as a favorable FX in Brazil of about $10 million.
Fixed cost absorption improved with economic downtime decreasing by 40,000 tons sequentially across the system.
Maintenance outages increased modestly, as expected, and input costs increased primarily due to higher wood and energy costs in North America.
Looking at Ilim on Slide 11.
The joint venture delivered $49 million in equity earnings in the first quarter with an EBITDA margin of nearly 35%, driven by higher average pricing.
Volume decreased sequentially, primarily due to fewer shipping days because of the Chinese New Year, as well as the impact of tight shipping capacity in China.
Underlying demand remained strong as we enter the second quarter.
And lastly, in April, we saved a $144 million dividend payment from Ilim, which is $44 million higher than the estimate we provided last quarter.
Now we can turn to the outlook on Slide 12, and starting with Industrial Packaging.
We expect price and mix to improve by $75 million on realization of our March 2021 price increase.
Volume is expected to decrease by $10 million on lower seasonal demand in Spain and Morocco as the citrus season winds down.
Operations and costs are expected to improve by $15 million, with the full recovery of the winter storm impact partially offset by higher incentive compensation accruals related to a stronger outlook.
Staying with Industrial Packaging, maintenance outage expense is expected to increase by $77 million.
And input costs are expected to increase by $20 million due to higher OCC, energy, raw materials and distribution costs.
In Global Cellulose Fibers, we expect price and mix to increase by $100 million on realization of prior price movements.
Volume is expected to increase by $5 million.
Operations and costs are expected to decrease earnings by $10 million.
Maintenance outage expense is expected to decrease by $10 million, and input costs are expected to be stable.
Turning to Printing Papers.
We expect price and mix to increase by $25 million.
Volume is expected to increase by $5 million.
Operations and costs are expected to decrease earnings by $10 million due to the nonrepeat of foreign currency gain in Brazil during the first quarter.
Maintenance outage expense is expected to increase by $22 million, and input costs are expected to increase by $5 million.
And under equity earnings, you'll see the outlook for our Ilim joint venture.
Turning to Slide 13.
I want to take a moment to update you on our capital allocation actions in the first quarter.
We're committed to maintaining a strong balance sheet.
We have no significant near-term maturities.
And in the first quarter, we reduced debt by $108 million.
We also returned $331 million to shareholders, including $129 million of share repurchases, which represented about 2.6 million shares at an average price of $50.28.
We acquired two box plants in Spain at the end of the first quarter.
You can expect M&A to continue to focus primarily on bolt-on opportunities in North America and Europe.
And lastly, in the first quarter, we monetized about $400 million of our stake in Graphic Packaging.
After that transaction, we now hold about 7.4% ownership in the partnership.
Turning to Slide 14.
As we enter the second quarter, I'm mindful that we're still in the midst of a global pandemic, and there is still significant uncertainty in the geographies and markets that we operate.
Having said that, we see momentum building in our three businesses.
We continue to see very strong demand for corrugated packaging and containerboard in North America and Europe.
We're also seeing solid demand for absorbent pulp with more favorable supply and demand dynamics as paper-grade pulp demand recovers.
In Printing Papers, we're seeing a steady recovery in demand.
And in areas where schools and offices have reopened, we're seeing a step change improvement.
Overall, we're seeing a much better supply/demand backdrop.
We expect price flow-through from prior price increases across our three businesses.
We expect margins to improve, even as we manage through the impact of higher input costs for recovered fiber, energy and transportation.
In addition, we expect productivity and other cost initiatives to offset general inflation.
All of this contributes to a more favorable outlook for 2021.
I just want to take a moment to reflect on what has now been a full year of living and working in a global pandemic environment.
When we shared our first quarter performance last year, we talked about all the protocols we quickly put in place to keep our employees and contractors safe so that we could continue taking care of our customers.
We stayed diligent about adhering to those protocols, and we will remain steadfast for as long as it takes to get fully and safely past the pandemic.
We continue to operate in this environment with a view toward the short-term and long-term success and sustainability of International Paper for all of our stakeholders, with an unwavering commitment to the health and safety of our employees and contractors, to understanding and taking care of our customers' needs as they also adapt to rapid change, to supporting the critical needs in our communities and to building a better IP for all of our stakeholders.
Since the pandemic began, not a day goes by that I don't think about the commitment of our employees, and especially our frontline teams for their ability to adapt well and perform at a high level across circumstances and geographies. | q1 adjusted non-gaap operating earnings per share $0.76. | 1 |
I am joined today by Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan Hansen and Executive Vice President and Chief Financial Officer Jon Stanner.
The third quarter was, again, challenging for our industry, as leisure travel continued to serve as the primary demand source.
However, we were encouraged by the continued sequential demand improvements, which led to operating results that were considerably better than the second quarter.
RevPAR improved each month of the quarter across our portfolio.
And importantly, this trend continued into October, which provided us with some level of reassurance of the sustainability of demand in the weeks following Labor Day, a period of significant uncertainty heading into the quarter.
Occupancy increased each month of the quarter peaking at 47% in September, which led to third quarter RevPAR of $47, a 63.5% decline year-over-year, but that was a significant improvement from the second quarter RevPAR of $23.
Market share gains were substantial, once again, in the third quarter as we finished with 151% RevPAR index, an increase of approximately 39 percentage points compared to the third quarter of last year and an 8 percentage point increase relative to last quarter.
These gains reflected tremendous work done by our in-house asset and revenue management teams, along with the tireless efforts of our management company partners to capture the limited demand that currently exist in the market.
We have clearly been successful capturing our fair share of very short term leisure demand, but our results have been further aided by capitalizing on certain unique piece of the business and small groups that booked during the quarter, some of which were related to the damaging wildfires on the West Coast and the storms in the Gulf of Mexico.
Preliminary October results reflect a modest continuation of the improvements we experienced throughout the third quarter as October RevPAR is expected to finish at $50, with the highest ADR of any month since the onset of the crisis, running nearly $10 higher than the rates achieved in the second quarter.
Occupancy in October was over 47% across the total portfolio, more than 24 percentage points higher than the second quarter occupancy and flat to September, despite the strong Labor Day weekend results.
Excluding the five hotels that were either closed or consolidated into adjacent operations at various times during the quarter, occupancy was more than 50% in October.
The trend of weekend occupancy and RevPAR outperformance continued in the third quarter as leisure travel, particularly in drive-to and non-CBD markets continued to provide the vast majority of demand across the industry.
Weekend occupancy was 56% during the third quarter as the relative outperformance compared to week day results accelerated each month during the quarter.
This led to weekend RevPAR that was 40% higher than our weekday RevPAR, primarily driven by occupancies that ran nearly 20 percentage points higher by the end of the quarter.
Despite lagging weekends on a nominal basis, weekday rate demand in the quarter increased commensurately with weekends on a percentage increase basis, as occupancy and RevPAR nearly doubled from the second quarter.
Weekend occupancy at our hotels located in markets we consider as drive-to was nearly 64% in the third quarter.
Our extended stay hotels which comprise nearly 25% of our total guest rooms were also relative outperformers again during the third quarter, finishing with occupancy of more than 63% and exceeded 60% in each month of the quarter while achieving a 51% RevPAR premium to our overall portfolio.
This trend continued as our preliminary October results indicate our extended stay hotels achieved 65% occupancy for the month.
Our suburban and airport hotels, which comprise more than a third of our portfolio guest rooms were also outperformance during the quarter, posting occupancies of 58% and 56% respectively, both increases of more than 20 percentage points from the second quarter results.
These hotels achieved RevPAR premiums of 27% and 29% respectively to the total portfolio in the quarter.
Urban hotels have continued to lag the industry recovery though occupancy increases for our portfolio during the quarter were in line with all other location types, finishing the quarter 20 percentage points higher than in the second quarter.
RevPAR growth at our urban hotels led the portfolio on a percentage increase basis relative to the second quarter, posting a nominal RevPAR 2.5 times higher than our urban portfolio's second quarter RevPAR.
Our hotels continue to operate with extremely lean staffing models with labor resources being added back on an asset-by-asset basis strictly based on improved hotel demand.
We are currently averaging less than 14 FTEs per hotel compared to approximately 30 FTEs per hotel prior to the pandemic.
Despite this lean staffing model, our team continues to demonstrate a steadfast commitment to prioritizing the health and safety of our guests.
Ever changing health and safety protocols and local ordinances provide unique challenges to our business and we are grateful to our brand and management partners for their constant awareness of and compliance with these dynamic policies.
Optimizing the guest experience has always been a central tenet of our business model and that has never been more important than it is today.
Finally, to preserve liquidity, we have continued to delay most nonessential capital expenditures for the remainder of 2020, along with common dividend distributions, which combined, preserved approximately $30 million in the third quarter and will preserve $30 million of cash for the balance of the year.
I'll let John speak to the specifics of our balance sheet.
But with approximately $255 million of current liquidity and a manageable monthly cash burn rate that has been further reduced as our portfolio operating metrics have improved, we are well positioned to navigate the recovery.
We've been pleased with the continued efforts of our operations team to diligently manage operating costs at our properties in an effort to maximize hotel level profitability and minimize corporate cash burn rates.
In the third quarter, our hotel EBITDA retention across the portfolio was more than 47%, which resulted in hotel level profitability in each month of the quarter, positive adjusted EBITDA for the quarter, and a reduction of our corporate cash burn rate to an average of just over $5 million per month.
Commensurate with increases in RevPAR, our cash burn rate improved sequentially in each month of the third quarter and finished September at just $4.5 million, the lowest of any month since the onset of the pandemic.
This represents a significant improvement from the second quarter when our cash burn averaged $11 million on a monthly basis.
RevPAR and cash burn rates in October generally tracked in line with September, a level at which, if sustained, provides a liquidity runway of nearly five years.
We currently have $225 million available on our revolving credit facility and approximately $30 million of unrestricted cash on hand which combined gives us $255 million of total liquidity.
Today, our weighted average interest rate is approximately 3.5% and weighted average term to maturity is approximately 3.3 years, with no maturities until November of 2022.
While we've been pleased with the gradual improvements in our results, and particularly October metrics, that on a preliminary basis, finished ahead of our pre-Labor Day expectations, our near-term outlook for the business at January remains uncertain.
We continue to operate in a very challenging and limited demand environment and the prospects for a more robust industry recovery are likely linked to fewer governmental and corporate travel restrictions and significant health advancements or the passage of time to mitigate the effects of the pandemic.
Though we remain confident that headwinds of our industry will ultimately abate, the timeline has continued to be pushed out.
And we now expect a more meaningful increase in corporate and group demand to occur in 2021.
Historically, November and December are slower travel months and we would expect modest declines in absolute RevPAR levels from what we achieved in September and October, though year-over-year declines will likely remain fairly stable given the seasonality of last year's results.
As we said last quarter, despite the many near-term challenges we face as an industry, we remain bullish on the long-term prospects for travel related demand.
The uniqueness of this pandemic has forced us all to challenge the pre-crisis status quo in nearly every facet of life and travel, particularly work related travel, in a time of unmatched at home technology is at the precipice of that discussion.
While it's not unreasonable to conclude that the events of the last seven months will ultimately lead to a systemic decline in travel, history would suggest otherwise, emphasizing that this is one of the most resilient industries in our economy and that people's desire to gather in person and travel is innate.
Prior to the crisis, we were witnessing, and fortunately benefiting from, society's undeniable shift in preference away from the collection of material items in favor of experiences and services.
And while the pandemic has created an impediment to this progress, we believe those long-term trends that were significantly driven by a younger demographic will again reemerge as meaningful themes in the new post-COVID normal that has been so heavily speculated about.
Here at Summit, we are blessed with a terrific portfolio that has been recently renovated, continues to capture significant market share despite the difficult environment and is poised to lead through the recovery.
We have an experienced team and a strong balance sheet with considerable liquidity to manage through the crisis, all of which gives us optimism and positions us well for the brighter days ahead. | anticipates investing a total of approximately $23 million to $25 million in capital improvements on a consolidated basis across its portfolio during 2020. | 1 |
Scott Hall, our President and CEO; and Martie Zakas, our CFO, will be discussing our fourth quarter and full year results, end markets and expectations for fiscal 2022.
Please review slides 2 and 3 in their entirety.
I hope everyone listening to our call continues to stay safe and healthy.
The fourth quarter was a disappointing end to a strong year, which we achieved despite the ongoing pandemic and other challenges.
In addition to the pandemic, we have faced many obstacles over the past year, including significant raw material and other cost inflation, supply chain disruptions and labor availability challenges, which impacted fourth quarter operations and results.
Our consolidated net sales increased 11.4% for the fourth quarter and 15.2% for the full year.
Following record sales growth in the third quarter, we experienced continued strong demand in the fourth quarter, driven by both new residential construction and municipal repair and replacement activity.
Fourth quarter orders remained elevated compared with pre-pandemic levels and we ended the year with record backlog for our infrastructure products.
While our fourth quarter adjusted EBITDA decreased primarily due to the challenging operating environment, we still achieved 6.8% growth for the year.
Although we realized improved pricing in the quarter for the majority of our products, it was not enough to offset the continued higher inflation.
We do expect that our current pricing actions will more than cover anticipated inflation in 2022, assuming material costs do not increase beyond current levels.
Additionally, during the quarter, our specialty valve product portfolio experienced longer delivery time for parts, delaying shipments and our ongoing plant restructuring has been impacted by the supply chain disruptions and labor challenges.
I am especially pleased with our cash flow for the year, where we generated $94 million of free cash flow.
We ended the year with a stronger cash position compared with the prior year after acquiring i2O Water for $19.7 million and allocating $44.8 million to shareholders.
We repurchased $10 million of common stock during the fourth quarter and recently announced a dividend increase of approximately 5.5%.
In summary, while we had a disappointing finish to the year from a conversion margin perspective, we delivered strong top line growth and remain focused on overcoming the operational challenges.
We believe that the record backlog across our short-cycle products, coupled with the expected realization from higher pricing, have positioned us to deliver net sales and adjusted EBITDA growth in 2022.
Additionally, we are nearing the completion of our three large capital projects, which we expect to drive gross margin benefits once they are up and fully running.
I am confident that we are in a great position to accelerate our strategies and improve our culture of execution as we become a world-class water technologies company, bringing solutions to critical water infrastructure.
I hope you and your families continue to be safe and healthy.
I will start with our fourth quarter 2021 consolidated GAAP and non-GAAP financial results, then review our segment performance and finish with a discussion of our cash flow and liquidity.
During the fourth quarter, we generated consolidated net sales of $295.6 million, which increased $30.3 million or 11.4% as compared with fourth quarter last year.
The increase was primarily a result of increased shipment volumes and higher pricing at infrastructure.
We generated a 10.8% increase in consolidated net sales when compared with the fourth quarter of 2019, which preceded the pandemic, reflecting improved end market demand.
Our gross profit this quarter decreased $7.6 million or 8.1% to $86.3 million compared with the fourth quarter of the prior year, yielding a gross margin of 29.2%.
Gross margin decreased 620 basis points compared with the prior year.
Higher pricing at infrastructure and increased shipment volumes were more than offset by continued higher inflation and unfavorable manufacturing performance, which includes the impact of labor challenges, supply chain disruptions and our plant restructurings.
Our total material costs increased 18% year-over-year in the quarter, primarily driven by higher raw materials, which increased sequentially and year-over-year.
Our primary raw materials are scrap steel and brass ingot and prices of both were up over 50% year-over-year.
While our price realization improved sequentially, our price/cost relationship was negative for the third consecutive quarter.
Given the acceleration of raw material pricing in the quarter, the price/cost relationship did not improve as much as anticipated due to the level of inflation.
Scott will discuss the drivers of the decrease in gross margin versus expectations in more detail later in the call.
Selling, general and administrative expenses of $56.6 million in the quarter, increased $4.5 million compared with the prior year.
The increase was primarily as a result of investments, including the i2O Water acquisition, IT-related activities and personnel-related costs, the reversal of temporary T&E savings relating to the pandemic and general inflation.
SG&A as a percent of net sales was 19.1% in the fourth quarter compared with 19.6% in the prior year.
Operating income of $27.8 million, decreased $12.9 million or 31.7% in the fourth quarter compared with $40.7 million in the prior year.
Operating income includes strategic reorganization and other charges of $1.9 million in the quarter, which primarily relate to our previously announced plant restructurings.
Turning now to our consolidated non-GAAP results.
Adjusted operating income of $29.7 million decreased $12.1 million or 28.9% as compared with $41.8 million in the prior-year quarter.
Higher inflation, unfavorable manufacturing performance and higher SG&A expenses more than offset higher pricing and increased volumes in infrastructure.
Adjusted EBITDA of $45.6 million decreased $12 million or 20.8%, leading to an adjusted EBITDA margin of 15.4%, which is 630 basis points lower than the prior year.
For the full year 2021, we generated adjusted EBITDA of $203.6 million, which grew 6.8%, yielding an adjusted EBITDA margin of 18.4%.
Interest expense net for the 2021 fourth quarter declined to $4.4 million as compared with $6 million in the prior-year quarter.
The decrease in net interest expense in the quarter primarily resulted from lower interest expense as a result of the refinancing of our senior 5.5% notes with senior 4% notes.
The effective tax rate this quarter was 24.3% as compared with 24.8% last year.
For the full year, our effective tax rate was 25.8% as compared with 23.5% for the prior year.
For the quarter, we generated adjusted net income per share of $0.12 compared with $0.17 in the prior year.
Turning now to segment performance, starting with infrastructure.
Infrastructure net sales of $271.9 million, increased $29.9 million or 12.4% as compared with the prior year primarily as a result of increased shipment volumes, particularly of our hydrant, iron gate valve, service brass and repair products and higher pricing.
Adjusted operating income of $46.2 million, decreased $10.6 million or 18.7% in the quarter as higher inflation, unfavorable manufacturing performance and higher SG&A expenses were only partially offset by higher pricing and increased volumes.
Adjusted EBITDA of $59.3 million, decreased $10.3 million or 14.8%, leading to an adjusted EBITDA margin of 21.8%.
For the full year, adjusted EBITDA margin was 25.2%.
Moving on to technologies.
Technologies net sales of $23.7 million, increased 1.7% as compared with the prior year primarily as a result of our acquisition of i2O Water.
Organic net sales declined slightly compared with the prior year as higher pricing was more than offset by lower volumes.
Adjusted operating loss was $4.3 million as compared with adjusted operating loss of $2.3 million in the prior year.
This increase was primarily due to unfavorable performance, including inventory adjustments, increased expenses associated with our acquisition of i2O Water and higher inflation, which were partially offset by higher prices.
Technologies adjusted EBITDA was a loss of $2.4 million as compared with adjusted EBITDA loss of $200,000 in the prior year.
Moving on to cash flow.
Net cash provided by operating activities for the year ended September 30, 2021, improved $16.4 million to $156.7 million, primarily as a result of the $22 million Walter Energy tax payment in the prior year.
Our net working capital as of September 30, 2021, decreased $11.3 million to $207.1 million.
Net working capital as a percent of net sales improved to 18.6% compared with 22.7%, primarily as a result of better inventory turns.
We invested $16.6 million in capital expenditures during the fourth quarter, bringing the year-to-date total to $62.7 million as compared with $67.7 million in the prior year.
The decrease in capital expenditures for the year, which was below our updated guidance range was primarily due to the supply chain disruptions that have slowed the pace of some planned expenditures, including spending for our large capital projects.
Free cash flow for the year improved $21.4 million to $94 million and exceeded adjusted net income.
At September 30, 2021, we had total debt of $446.9 million and cash and cash equivalents of $227.5 million.
At the end of the fourth quarter, our net debt leverage ratio improved to 1.1 times from 1.3 times at the end of the prior year.
We did not have any borrowings under our ABL agreement at year-end, nor did we borrow any amounts under our ABL during the year.
As a reminder, we currently have no debt maturities before June 2029.
Our senior 4% notes have no financial maintenance covenants, and our ABL agreement is not subject to any financial maintenance covenant unless we exceed the minimum availability thresholds.
Based on September 30, 2021 data, we had approximately $158.7 million of excess availability under the ABL agreement, which brings our total liquidity to $386.2 million.
In summary, we continue to have a strong, flexible balance sheet with ample liquidity and capacity to support our capital allocation opportunities.
Scott, back to you.
I'll touch on our fourth quarter results, new management structure, end markets and full year 2022 guidance.
As mentioned earlier, there were a number of challenges during the quarter, which impacted our gross margins and led to the disappointing adjusted EBITDA conversion, which was below our expectations.
The gross margin gap was approximately $15 million with the labor challenges making up more than one-third of the gap.
Higher inflation, freight and electricity costs, combined, also accounted for more than one-third of the gap.
Of the other factors, the operational challenges for our specialty valve product portfolio had the largest impact, along with unfavorable inventory adjustments.
The labor challenges have led to an increase in costs associated with overtime, benefits and efficiencies.
We provided additional performance incentives for team members at the plants, recognizing their hard work and dedication throughout this exceptionally challenging operating environment.
Additionally, the pandemic continues to pose labor challenges for us even with the progress made with vaccinations.
Our teams are working closely to continue to improve our relationships with our employees and enhance our efforts around hiring, training and retention.
Raw material inflation continued to be a headwind during the quarter.
We experienced another sequential increase in raw material inflation, resulting in scrap steel and brass ingot prices up over 50% versus the prior year.
Raw material prices didn't start to accelerate higher until the second quarter of 2021.
Therefore, we anticipate that raw material inflation will be most impactful in the first half of the year, if prices do not continue to increase.
In the past, we have been successful in executing price increases as needed to more than cover inflationary expenses over the cycle.
Our pricing actions during this past year, which include free price increases across most product lines, are helping to offset inflation as we saw a notable sequential increase on our price realization during the fourth quarter.
Unfortunately, record backlogs are extending the timing for the realization of continued price benefits.
So we do not expect to be in a positive price/cost position on a quarterly basis until the middle of 2022.
At this time, we expect that our current pricing actions will more than cover anticipated inflation in 2022.
This belief assumes that material costs do not increase beyond current levels.
The strong demand we have experienced has also led to some manufacturing inefficiencies, triggered by the rapid increase in volumes, particularly in the second half of our year.
With the increased demand, we are having to run our foundries during peak periods, leading to much higher energy costs.
The supply chain disruptions have also led to higher freight costs and extended lead times for some third-party purchase parts.
Our supply chain teams have been focused on obtaining needed supplies on a timely basis and working to find alternative sources where possible.
While we believe our actions will put us in a better position to increase shipments to meet demand, we anticipate that supply chain disruptions and labor availability will continue to be headwinds well into next year.
In the fourth quarter, the operational challenges were even greater for our specialty valve product portfolio, which accounts for approximately 15% of annual sales.
These products are typically used in large projects with long lead times.
Due to the longer manufacturing and delivery times, the gap between material cost inflation and pricing improvements can be more than nine months.
Additionally, as a reminder, we announced a major plant restructuring project in the second quarter of 2021.
At that time, we were anticipating a different operating environment.
The strong demand, supply chain disruptions and labor challenges have impacted shipments for these products and increased the transition cost for our plant restructuring.
We remain confident that we will fully complete the transition and ramp up in 2023 with the margin benefits following accordingly.
We recently announced a new management structure beginning with the first quarter of 2022.
The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability.
We believe that the new structure positions us for improved long-term growth and increase margins, while helping to accelerate the commercialization of our technology-enabled products and the Sentryx software platform.
The two newly named business units are Water Flow Solutions and Water Management Solutions.
Water Flow Solutions product portfolio includes iron gate valves, specialty valves and service brass products.
Net sales of products in the Water Flow Solutions business were approximately 60% of 2021 consolidated net sales.
Within the Water Flow Solutions business unit, we will advance manufacturing and assembly efficiencies across valve and brass products, while driving the expected benefits from our three large capital projects.
Additionally, we will look to increase growth in existing product areas and support expansion of valves into adjacent markets.
Water Management Solutions product and service portfolios include fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products.
Net sales of products in the Water Management Solutions business unit were approximately 40% of 2021 consolidated net sales.
Within the Water Management Solutions business unit, we look to leverage our hydrants, which provide a bridge for digital communications throughout the water system with enhanced coordination among products and services.
Also, we plan to reduce product development cycle times with enhanced coordination of digitally enabled products and network management.
Turning to our end markets.
We again experienced strong demand and order growth in our fourth quarter, driven by both new residential construction and municipal repair and replacement activity.
While we expect end markets to remain healthy in 2022, we do anticipate that growth will slow down relative to the strong recovery we experienced during 2021.
State and local budgets appear to be in good shape, especially at the larger municipalities.
The aging water infrastructure will continue to be a driver of repair and replacement activity at water utilities.
We were pleased to see that the federal infrastructure bill was passed over the weekend.
It is an important step forward for the needed investment in our aging water infrastructure.
We have not built any benefits from the bill into our assumptions for our 2022 guidance.
While we expect residential construction activity continue to be healthy relative to pre-pandemic levels, we expect that it will be difficult to achieve significant growth again in 2022.
Residential construction activity was incredibly strong during 2021, highlighted by total housing starts increasing approximately 18% and single-family starts increasing around 23%.
We believe that supply chain disruptions, which are extending overall build cycles for new residential construction, could support a healthy demand environment well beyond 2022.
Moving on to our expectation for 2022.
The record backlog across our short-cycle products and the expected realization from higher pricing position us to deliver net sales growth in 2022, continuing the strong net sales growth achieved in 2021.
We believe the operating environment will remain challenging, especially in the first half of the year, with the potential for gradual improvement during the second half of the year.
We currently anticipate that our full year 2022 consolidated net sales will increase between 4% and 8%, with our adjusted EBITDA also increasing between 4% and 8% as compared with the prior year.
We expect to generate solid free cash flow during the year.
These expectations assume the challenges associated with higher inflation, labor availability and supply chain disruptions and the pandemic's impact will modestly improve relative to 2021, and that material costs do not increase beyond current levels.
Our focus remains on keeping our employees safe, protecting our communities, delivering exceptional products and support to our customers and generating strong cash flow.
During 2022, we will remain focused on executing our strategic initiatives and overcoming the external and internal operational challenges.
We are committed to improving our culture of execution as we become a world-class water technologies company, bringing solutions to critical water infrastructure.
We are excited about the progress we have made in our new product development programs and the growing market acceptance for digitally enabled product offerings such as our Super Centurion Smart Hydrant, Sentryx software platform, and i2O pressure management solutions.
Additionally, we are making progress on our sustainability initiatives, and we'll share our strategic goals and progress in our second ESG report to be published in January of 2022.
With a strong balance sheet, liquidity and cash flow, we are very well positioned to accelerate growth and efficiencies through capital investments and acquisitions.
We will continue to maintain a balanced approach to capital allocation, investing in our business and returning cash to shareholders.
We recently announced another increase to our quarterly dividend, marking the fifth increase since the end of 2016.
Additionally, we repurchased $10 million of common stock during the fourth quarter after resuming our share repurchases earlier this year.
We currently have $135 million remaining authorization on our share repurchase program.
That concludes my comments. | q4 adjusted loss per share $0.09 excluding items.
q4 loss per share $1.11.
q4 production averaged 149 thousand barrels of oil equivalent per day (mboepd) with 55 percent oil and 62 percent liquids.
planning 2021 capital expenditures to be in range of $675 to $725 million.
sees fy 2021 production to be in range of 155 to 165 mboepd, comprised of about 52 percent oil & 59 percent total liquids volumes.
production for q1 2021 is estimated to be in range of 149 to 157 mboepd. | 0 |
My name is Kevin Maczka.
I'm Belden's Vice President of Investor Relations and Treasurer.
Roel will provide a strategic overview of our business, and then Jeremy will provide a detailed review of our financial and operating results, followed by Q&A.
Additionally, during today's call, management will reference adjusted or non-GAAP financial information.
As a reminder, I'll be referring to adjusted results today.
We performed well again this quarter, and I'm pleased to report total revenues and earnings per share that exceeded the high end of our guidance ranges.
Our end markets continue to recover, and our global teams are meeting the robust demand levels and successfully navigating the inflationary environment.
This resulted in meaningful growth and margin expansion during the quarter.
Second quarter revenues increased 42% year-over-year to $603 million compared to our guidance range of $535 million to $550 million.
Organic growth is a key priority, and revenues increased 28% year-over-year on an organic basis.
The upside relative to our expectations was broad-based, with contributions from both the Industrial Solutions and Enterprise Solutions segments.
Incoming order rates were strong during the quarter, increasing 74% year-over-year and 18% sequentially.
This resulted in a healthy book-to-bill ratio of 1.19 times.
EBITDA increased 90% year-over-year to $93 million.
EBITDA margins expanded 390 basis points from 11.6% in the year-ago period to 15.5%.
EPS increased 163% year-over-year to $1.21 compared to $0.46 in the year-ago period and our guidance range of $0.88 to $0.98.
We are increasing our full year guidance to reflect the better-than-expected performance in the second quarter and an improved outlook for the second half of the year.
For the full year 2021, we are increasing the high end of our revenue and earnings per share guidance ranges by 170 and $0.77 respectively.
Turning now to our key strategic markets.
We had another great quarter in industrial.
Industrial Solutions revenues increased 32% organically with broad-based strength in each of our primary market verticals and regions.
Market conditions are clearly improving, and we continue to see a number of compelling longer-term demand drivers for automation solutions as industrial customers respond to increasing labor costs, increasing capacity requirements, the need to pandemic proof operations, and other factors.
Belden is extremely well positioned and highly differentiated in the marketplace, and we expect to deliver solid growth in this market going forward.
As we shared with you previously, we are making targeted investments throughout the company to support our customers by driving innovation and strengthening our product roadmap.
As just one example of our recent innovations in industrial automation, we launched an expanded suite of advanced connectivity solutions during the second quarter called LioN-X.
The LioN-X solutions provide manufacturers with a faster and more reliable approach to transmitting sensor and actuator data in automated production environments.
This is a state-of-the-art future-ready connectivity solution that is core to providing secure communication from the sensor to the cloud in industrial environments.
These enhanced capabilities reflect our leadership position in this important growth market.
We are also sharpening our commercial excellence in a number of areas such as solution selling.
Beyond individual product sales, Belden is uniquely positioned to offer differentiated solutions to our customers, including cable, connectivity, networking, and software products and services.
I would like to highlight a recent success story in industrial automation that illustrates our capabilities in solution selling and resulted in a significant new business win.
During the second quarter, we received a $6 million award for a project with a large investor-owned utility in the United States for the implementation of a critical communications network.
This is an important strategic win.
Over the course of the project, we will be providing an expanded solution from the combined Belden and OTN Systems, which we acquired in January to a longtime Belden customer that previously purchased our industrial automation and cybersecurity offerings.
It showcases our product and commercial synergies and is a great example of the opportunities we are now positioned to secure in this market.
This is the first phase of the project and significant future expansion is expected beyond this initial award.
Beyond this project, the continued upgrade of grid infrastructure by other utilities throughout the United States is expected to provide many other opportunities to deploy our technologies.
We also continue to make progress involving our portfolio and aligning with growth markets.
During the second quarter, we completed the divestiture of our copper cable product lines serving the oil and gas market in Brazil, which we do not view as a strategic priority.
These products previously contributed approximately $15 million in annual revenue, with an immaterial contribution to EBITDA and cash flow, and we were pleased with the $11 million sales price.
Turning now to Enterprise.
Enterprise Solutions revenues increased 23% year-over-year on an organic basis in the second quarter.
Within the segment, revenues in broadband and 5G increased 13% organically.
We see strong secular trends in this market, driven by the increasing demand for high-speed broadband and the desire to provide access to every household.
Broadband networks will need to be upgraded continuously to support high-definition video streaming, work from home, virtual learning, and many other applications.
We have sustainable competitive advantages in this market, and we are ideally suited to support both MSO and Telco customers as they upgrade and expand their networks.
Broadband fiber revenues increased 28% organically year-to-date in 2021 after similar growth in 2020.
We expect further robust growth going forward as we continue to strengthen our patent-protected fiber R&D capabilities, add engineering resources and reduce our time to market for new offerings.
Revenues in smart buildings increased 36% year-over-year on an organic basis, substantially exceeding our expectations.
We are very encouraged by the improvement we are seeing in this market and the strong execution by our teams.
We entered the year with an expectation that smart buildings revenue will decline in 2021, but we now expect to deliver solid growth in this market.
We are benefiting from commercial focus on growth verticals such as data centers and healthcare facilities.
In addition, our improved operational performance and superior lead times are enabling continued share capture.
To summarize, we had a great second quarter and first half of the year.
We are committed to driving robust organic growth in 2021 and beyond and are encouraged that our strategic initiatives are gaining traction.
I will now ask Jeremy to provide additional insight into our second quarter financial performance.
I will start my comments with results for the quarter, followed by a review of our segment results and a discussion of the balance sheet and cash flow performance.
As a reminder, I will be referencing adjusted results today.
Revenues were $603 million in the quarter, increasing $178 million or 42% from $425 million in the second quarter of 2020.
Revenues increased 28% organically compared to the prior year and 9% sequentially.
Importantly, we have not seen material restocking by our channel partners.
And so we believe this revenue performance is consistent with improving end demand.
Incoming order rates were also very strong during the quarter, increasing 74% year-over-year and 18% sequentially.
This resulted in a book-to-bill ratio of 1.19 times, including 1.22 times in Industrial Solutions and 1.16 times in Enterprise Solutions.
Gross profit margins in the quarter were 35.7%, increasing 30 basis points compared to 35.4% in the year-ago period.
As a reminder, as copper costs increase, we raised selling prices, resulting in higher revenue with minimal impact to gross profit dollars.
As a result, gross profit margins decrease.
In the second quarter, the pass-through of higher copper prices had an unfavorable impact of 320 basis points.
Excluding the impact of this pass-through, gross profit margins would have increased 350 basis points year-over-year.
This exceeded our expectations for the quarter, and we are especially pleased with the performance given the current inflationary environment.
We expect that inflationary pressures will likely persist, and we are proactively addressing this through price recovery and productivity measures to support gross profit margins.
EBITDA was $93 million, increasing $44 million or 90% compared to $49 million in the prior year period.
EBITDA margins were 15.5%, increasing 390 basis points compared to 11.6% in the year ago period.
Excluding the impact of higher copper pass through pricing, EBITDA margins would have increased 510 basis points year-over-year, demonstrating solid operating leverage on higher volumes.
Net interest expense was consistent with the year ago period.
At current foreign exchange rates, we expect interest expense to be approximately $62 million in 2021.
Our effective tax rate was 18.2% in the second quarter as we benefited from incremental discrete tax planning items.
We expect an effective tax rate of approximately 19% in the third quarter and 19.5% for the full year 2021.
Net income in the quarter was $55 million compared to $20 million in the prior year period.
Earnings per share was $1.21 compared to $0.46 in the second quarter of 2020.
We were very pleased to deliver such robust growth and margin expansion in the second quarter.
I will begin with our Industrial Solutions segment.
As a reminder, our Industrial solutions allow customers to transmit and secure audio, video, and data in harsh industrial environments.
Our key markets include discrete manufacturing, process facilities, energy and mass transit.
The Industrial Solutions segment generated revenues of $335 million in the quarter, increasing 51% from $221 million in the second quarter of 2020.
Segment revenues increased 32% organically.
Revenues in industrial automation, our largest market, increased 36% year-over-year on an organic basis, with broad-based strength across each of our primary market verticals.
Revenues for our integrated cybersecurity solutions also increased year-over-year for the second straight quarter.
We are pleased with the progress the team is making in advancing the product roadmap and identifying new commercial opportunities in industrial end markets.
Non-renewal bookings increased 12% year-over-year in the first half of the year.
Industrial Solutions segment EBITDA margins were 16.9% in the quarter, increasing 500 basis points compared to 11.9% in the year-ago period.
The year-over-year increase primarily reflects operating leverage and higher volumes.
Turning now to our Enterprise segment.
Our Enterprise solutions allow customers to transmit and secure audio, video, and data across complex enterprise networks.
Our key markets include broadband, 5G, and smart buildings.
The Enterprise Solutions segment generated revenues of $268 million during the quarter, increasing 32% from $203 million in the second quarter of 2020.
Segment revenues increased 23% organically.
Revenues in broadband and 5G increased 13% year-over-year on an organic basis.
The ever increasing demand for more bandwidth and faster speeds is driving increasing investments in network infrastructure by our customers.
This supports continued robust growth in our fiber optic products, which increased 21% organically in the second quarter.
Revenues in the smart buildings market increased 36% year-over-year on an organic basis, substantially exceeding our expectations.
Market conditions improved significantly in the quarter, and our commercial engagement and strong operational performance are driving notable share capture.
Enterprise Solutions segment EBITDA margins were 13.2% in the quarter, increasing 230 basis points compared to 10.9% in the prior year period.
Our cash and cash equivalent balance at the end of the second quarter was $423 million compared to $371 million in the prior quarter and $360 million in the prior year period.
We are very comfortable with our current liquidity position.
Working capital turns were 7.6 compared to 6.7 in the prior quarter and 5.5 in the prior year period.
Days sales outstanding of 53 days compared to 54 in the prior quarter and 60 in the prior year period.
Inventory turns were 5.1 compared to five in the prior quarter and 4.5 in the prior year, and our financial leverage improved significantly during the quarter.
Net leverage was 3.3 times net debt-to-EBITDA at the end of the second quarter compared to four times in the prior quarter.
We now expect to trend back within the targeted range of two to three times by year-end 2021.
Turning now to slide seven.
I will discuss our pro forma debt maturity schedule.
As a reminder, our debt at the end of the second quarter was entirely fixed at attractive interest rates.
We have no near-term maturities and no maintenance covenants on this debt.
Subsequent to quarter end, we took steps to further strengthen the balance sheet and extend our maturities.
Specifically, in July, we issued EUR300 million in new 10-year notes maturing in 2031.
The interest rate on these notes is 3.375%, which matches the lowest interest rate on 10-year notes in the history of the company.
We were very pleased to complete this transaction.
We intend to use the proceeds during the third quarter to redeem the full EUR300 million outstanding on our 2025 notes, so our total debt principal outstanding will be unchanged at the end of the third quarter.
Following the redemption, our debt maturities will range from 2026 to 2031, with an average interest rate of 3.6%.
This provides significant financial flexibility as we execute our strategic plans.
Cash flow from operations in the second quarter was $68 million compared to $40 million in the prior year period.
Net capital expenditures were $16 million for the quarter compared to $20 million in the prior year period.
And finally, free cash flow in the quarter was $52 million compared to $20 million in the prior year period.
We are pleased with the year-to-date free cash flow generation, which is approximately $50 million better than the first half of 2020.
End market conditions continue to improve, and I'm encouraged by our robust recent order rates and solid execution.
We are increasing our full year 2021 guidance to reflect better-than-expected performance in the second quarter and an improved outlook for the remainder of the year while considering the renewed uncertainty related to the global pandemic.
We anticipate third quarter 2021 revenues of $590 million to $605 million and earnings per share of $1.11 to $1.21.
For the full year 2021, we now expect revenues of $2.32 billion to $2.35 billion compared to prior guidance of $2.13 billion to $2.18 billion.
This $170 million increase to the high end of our guidance range includes approximately $140 million from improved operational performance and $30 million from higher copper prices and current foreign exchange rates.
Our revised full year guidance implies consolidated organic growth of approximately 15% to 17% compared to our prior expectation of 6% to 9%.
We now expect full year 2021 earnings per share to be $4.37 to $4.57 compared to prior guidance of $3.50 to $3.80.
Our revised guidance for the full year 2021 implies total revenue growth of 25% to 26% and earnings per share growth of 59% to 66%.
We expect interest expense of approximately $62 million and an effective tax rate of 19.5% for the full year 2021.
Now before we conclude, I would like to reiterate our investment thesis.
We are taking bold actions to drive substantially improved business performance, and you are seeing that in our much better-than-expected first half performance and increased full year outlook.
This includes aligning around growth markets, developing innovative networking solutions, and enhancing our commercial capabilities.
Our financial leverage improved significantly during the quarter, and we tend to return to our targeted leverage range by year-end 2021.
I am confident that we have the management team, strategy, and business system to successfully execute our strategic plans and drive strong returns for our shareholders.
Stephanie, please open the call to questions. | sees q2 adjusted earnings per share $0.88 to $0.98.
sees fy adjusted earnings per share $3.50 to $3.80.
q1 adjusted earnings per share $0.94.
sees q2 revenue $535 million to $550 million.
sees fy revenue $2.13 billion to $2.18 billion. | 0 |
These results demonstrate the successful execution of our strategic initiatives and progress in continuing to evolve Tanger to drive improved profitability and shareholder value.
We have seen traffic and sales return to pre-pandemic levels as our open-air centers offer an excellent value proposition for both retailers and the shoppers.
Sandeep is currently the CEO at WeWork and previously was CEO of Brookfield Properties retail group and of GGP.
We are privileged to benefit from his experience and wisdom and look forward to his ongoing counsel and guidance.
Our second quarter results demonstrate continued progress in the leasing, operating and marketing of our open-air retail centers.
Tenant sales and domestic traffic are now outpacing pre-pandemic levels.
We've achieved a 130 basis point sequential increase in occupancy and a meaningful rebound in same-center NOI.
We are curating a compelling mix of brands and uses, creating a sense of place for experiential outings, connecting with shoppers in more personalized ways and monetizing the non-store elements of our centers.
Same-center NOI in the second quarter was up 88% compared to the second quarter of 2020 and represents 93% of the same period in 2019.
For the second quarter, traffic to our domestic centers was above the same period of 2019.
This sustained rebound in traffic levels clearly reflects the attraction of our open-air shopping centers, their dominant market location and the value proposition that we offer to both our retailer partners and shoppers.
And in sales, have followed a similar trajectory.
Average tenant sales productivity grew to $424 per square foot for the trailing 12 months of 7.3% from $395 per square foot with the comparable 2019 period.
On a same-center basis, average tenant sales increased 5.5%.
Categories that are performing particularly well include athleisure, youth-oriented brands, jewelry, accessories, beauty and home.
Consolidated portfolio occupancy at quarter end was 93%, a 130 basis point increase from the end of the first quarter.
We have recaptured 80,000 square feet of space due to bankruptcies and retailer restructurings through the end of the second quarter and shortly after we captured an additional 55,000 square feet, which was expected and represents negotiated early terminations for our legacy outlet brands where we collected lease termination fees.
When we were unable to achieve desired rents, our strategic approach to leasing included shortening term to enable us to reprice or repopulate our real estate sooner and preserving variable rent upside by reducing breakpoints and increasing variable rent pay rates.
Some deals that were completed during the height of COVID uncertainty ultimately produced total rents that exceeded the prior contractual fixed rents.
In these cases, our rent spreads don't fully capture variable rent contributions as spreads measure the change in base rent and common area charges only.
Leasing activity continues to accelerate with over 300 new leases and renewals totaling 1.6 million square feet of leasing that commenced during the last 12 months.
As of the ended the quarter, renewals executed or in process represented 54% of the space scheduled to expire during the year.
This pace reflects our strategy to hold on some of our renewal leasing activity, while the market continues to rebound and rental rates improve.
This has proven sound as our sales and traffic, continue to build.
We continue to gain ground on our lease spreads, which represents sequential improvement from those reported as of the end of the first quarter.
Permanent leasing activity is continuing to build and we continue to pursue top-up leases as a near-term strategy.
These transactions contribute to occupancy, higher cash flow, help maintain the variety and vibrancy of our centers and provide us an opportunity to increase the value of our real estate as market conditions continue to improve.
The core tenancy of our portfolio remains apparel and footwear.
However, we are continuing to realize the tremendous appeal our centers offer to new categories and uses.
The addition of new food concepts such as sit-down restaurants, iconic cookie and cupcake brands, local micro breweries and upscale gourmet grocers have added to our place making, experiential activation and entertaining uses which have helped achieve our goal of driving shopper visits, frequency, dwell time and ultimately bigger baskets.
Welcoming these new uses to Tanger's provided the opportunity for our retailer partners to introduce their brands and concepts to a whole new shopper base.
Additionally, as part of our ESG strategy, this year we launched our small business initiative, aimed at supporting up and coming retailers in our local communities.
Through this program, we discovered compelling new retailers and brands, which have enhanced our tenant mix and provide us access to new shoppers.
We are focused on growing our non-store revenue streams, which are delivering promising results.
These initiatives include creating onsite paid sponsorship and media opportunities where brands can promote their business on center, but outside the four walls of their store.
This includes marketing opportunities on bright walls, digital directories and common area activation.
In addition to providing more on-center branding, these programs and activations create fun ways to engage our shoppers during their visits.
This revenue is captured in the other revenues line, which year-to-date is up 88% from last year and 26% over 2019.
As we continue to monetize our real estate and create additional revenue streams, we've stood up a peripheral land team to take advantage of our existing portfolio about parcels and ancillary land.
We presently have peripheral land inventory at over two-thirds of our centers and we'll opportunistically acquire additional parcels and leasing demand for these property types increase.
As an example, we have recently acquired an adjacent parcel to our Glendale, Arizona shopping center to expand our footprint at that center and provide more F&B and entertainment uses, as well as additional PayPort [Phonetic] event parking.
We continue to enhance and expand our digital initiatives as we execute our strategy to meet our customer where they are.
To further develop seamless customer experiences that connect our digital and physical space, we are expanding our online pre-shop capabilities where customers can search and feed products that are available in store in our centers.
Through our virtual shopper program, customers can shop remotely and either pick up in-store or have merchandise shipped directly to them.
We also continue to grow our Tanger flash pop-up sales and live [Phonetic] sales through our website, app and social channels, which we hosted participating retailers as we innovate discovered ways to reach customers.
Through all of our digital channels, we are providing more personalized and relevant content and this quarter we have introduced our Tanger Fashion Director who shops our brands and retailers, curates looks and post them on our social media channels.
This initiative is aimed at our loyal Tanger insiders and Tanger Club members who shop our centers with greater frequency and is designed to reach new and emerging shoppers to the brand.
By providing more enriched in visual content for the center, our goal is to drive higher frequency of shopper visits and more engagement with our virtual shops.
These digital touchpoints complement our on-center experience and help to attract new customers, particularly in younger demographics.
In summary, we continue to execute our strategic plan and focus on our core business.
We are delivering new leasing and actively pursuing new uses, new brands and new categories with a goal of increasing center occupancy.
We continue to grow and build our new revenue streams such as paid media, sponsorship and peripheral land and we are innovating new ways to reach our customer to drive center visits.
We are seeing our traffic, leasing and business development results improving rapidly and we are positioned to use this momentum to increase the value of our real estate, drive cash flow and deliver long-term growth.
We delivered strong second quarter results showing continued positive momentum.
Second quarter core FFO available to common shareholders was $0.43 per share compared to $0.10 per share in the second quarter of 2020.
Core FFO for the second quarter of 2021 includes $0.02 per share dilution from the shares issued to date and excludes a charge of $14 million or $0.13 per share for the early extinguishment of debt since we redeemed $150 million of our 2023 bonds.
Same-center NOI for the consolidated portfolio increased 87.6% for the quarter as the prior year reflects reductions in rental revenues due to the pandemic along with higher variable rents driven by better than expected tenant sales performance this year.
As we discussed last quarter, we have maintained high rent collections.
We have collected approximately 98% of contractual fixed rents build in the first half of 2021.
We have also continued to collect rents build for prior periods including amounts related to 2020 that we allowed our tenants to defer to 2021.
Through July 30, 2021, we had collected 98% of the 2020 deferred rents due to be repaid in the first half of 2021.
During the second quarter, we opportunistically raised capital using our ATM program to further reduce debt and strengthening our balance sheet.
We issued 3.1 million common shares that generated $58 million in net proceeds at a weighted average price of $18.85 per share.
Year-to-date, we sold 10 million shares and raised $187 million of equity at an average price of $18.97 per share.
As previously announced, on April 30, we completed the partial early redemption of $150 million aggregate principal amount of our 3.87% senior notes due December 2023 for $163 million in cash.
This reduction in debt improves our leverage ratio and enhances our balance sheet flexibility.
Subsequent to the redemption, $100 million remains outstanding.
We also paid down our unsecured term loan by an additional $25 million in June, bringing the outstanding balance to $300 million.
Additionally, in July, we amended and extended our unsecured lines of credit, pushing the maturity date to July 2026 including extension options and providing borrowing capacity of $520 million within an accordion feature to increase capacity to $1.2 billion.
The facility includes a sustainability metrics, tying potential interest savings to LEED and ENERGY STAR Certifications.
This further demonstrates our commitment and accountability regarding environmental initiatives.
We have no significant debt maturities until December 2023.
We have always prioritized maintaining a strong financial position.
We will continue our disciplined and prudent approach to capital allocation.
Our Board will continue to evaluate dividend distributions alongside earnings growth and our priority uses of capital include investing in our portfolio to grow NOI, reducing leverage to pre-COVID levels over time, extending debt maturities and evaluating selective growth opportunities.
Our guidance assumes current macro conditions continue through the remainder of the year and that there are no further government mandated retail shutdowns.
For the full year 2021, we expect core FFO to be in the range of $1.52 and $1.59 per share, up from our prior expectations of $1.47 to $1.57.
This guidance reflects continued sequential improvement in our business, offset by the additional dilution of approximately $0.02 per share related to the common shares sold in the second quarter, which is an addition to the $0.4 of dilution from the first quarter issuances included in our prior guidance.
Our guidance also reflects year-over-year comparisons, which get more difficult in the back half of 2021 due to higher occupancy and lower operating expenses last year, as well as lease termination fees and reserve reversals that we recognized in the second half of 2020.
Our guidance includes the 135,000 square feet of space we have recaptured-to-date through the end of July, along with potential for an additional 65,000 square feet related to bankruptcies and brandwide restructuring for the remainder of the year.
For additional details on our key assumptions, please see our release issued last night.
Operator, can we take our first question. | sees 2021 estimated diluted core ffo per share $1.52 - $1.59.
q2 core ffo per share $0.43. | 1 |
I'm joined on the call today with Patrick Kaltenbach, our CEO; and Shawn Vadala, our Chief Financial Officer.
Let me cover just a couple of administrative matters.
For discussions of these risks and uncertainties, please see the discussion in our recent Form 10-K and other reports filed with the SEC from time to time.
Just one other item.
I am pleased to host the call tonight, which we are doing from Switzerland as Shawn and Mary are here with me, too.
I'm excited to report another quarter of excellent results.
Several factors contributed to these results.
First, demand in our markets was very strong and broad-based.
Second, we were able to capture these growth opportunities as a key priority since the onset of the pandemic was to stay close -- in close contact with our customers and be strongly positioned once customer demand recovered.
And finally, the teams around the world have done an excellent job in execution and customer support.
Our supply chain team has had more than the share of challenges due to part availability and logistics complications while our market organizations have executed well to meet increasing customer demands.
Our teams have shown resiliency and agility in an environment where conditions change rapidly.
Now let me turn to our financial results.
Local currency sales growth was 27%, and we had very strong broad-based growth in all regions and most product lines.
With the exception with this exceptional sales growth and combined with focused execution of our margin initiatives, we achieved a 45% growth in adjusted operating income and 53% increase in adjusted EPS.
Cash flow generation was excellent in the quarter.
Demand in our end markets remains positive, although our growth for the remainder of the year will reflect more challenging comparisons than we had in the first half of the year.
We are making incremental investments, which will position us very well for future growth.
We remain confident that we can continue to gain market share and deliver strong results in 2021 and beyond.
Let me now turn it to Shawn to cover the financials and guidance details, and then I will come back with some additional commentary on the business.
Sales were $924.4 million in the quarter, an increase of 27% in local currency.
On a U.S. dollar basis, sales increased 34% as currency benefited sales growth by 7% in the quarter.
The PendoTECH acquisition contributed approximately 1% to sales growth in the quarter.
On Slide number four, we show sales growth by region.
Local currency sales increased 29% in the Americas, 23% in Europe, and 28% in Asia/Rest of World.
Local currency sales increased 35% in China in the quarter.
The next slide shows sales growth by region for the first half of the year.
Local currency sales grew 23% for the first six months with a 22% increase in the Americas, 18% in Europe, and 28% growth in Asia/Rest of World.
On Slide number six, we summarized local currency sales growth by product area.
For the second quarter, laboratory sales increased 35%, industrial increased 20%, with core industrial up 27% and product inspection up 9%.
Food retail increased 9% in the quarter.
The next slide shows local currency sales growth by product area for the first half.
Laboratory sales increased 27% and industrial increased 19% with core industrial up 27% and product inspection up 7%.
Food Retail increased 11% for the first six months.
Let me now move to the rest of the P&L, which is summarized on Slide number eight.
Gross margin in the quarter was 58.1%, a 50 basis point increase over the prior-year level of 57.6%.
We benefited from volume and pricing, which was offset in part by challenges in the global supply chain, namely higher transportation, logistics, and raw material costs.
These items are even more challenging than we had expected the last time we spoke.
One additional factor, as you compare to the prior year, we now have in our cost structure, the impact of the temporary cost actions we undertook in 2020.
R&D amounted to $42.6 million in the quarter, which is a 28% increase in local currency over the prior period.
The impact of the temporary cost reductions undertaken last year as well as the timing of project activity contributed to this increase.
SG&A amounted to $239 million, a 20% increase in local currency over the prior year.
The impact of the temporary cost savings that we undertook last year, higher variable compensation, and increased investments in sales and marketing were the principal factors driving the increase.
Adjusted operating profit amounted to $255.3 million in the quarter, a 45% increase over the prior-year amount of $176.6 million.
Adjusted operating margins increased 200 basis points in the quarter to 27.6%.
We are pleased with this margin growth, which reflects excellent sales growth, combined with focused execution on our margin initiatives.
Currency benefited operating profit growth by approximately 7% but had little impact on operating margins.
A couple of final comments on the P&L.
Operating -- I'm sorry, amortization amounted to $16.2 million in the quarter.
Interest expense was $10.4 million in the quarter and other income in the quarter amounted to $2.7 million primarily reflecting non-service-related pension income.
Our effective tax rate before discrete items and adjusted for the timing of stock option deductions was 19.5%.
Fully diluted shares amounted to $23.5 million in the quarter, which is a 3% decline from the prior year.
Adjusted earnings per share for the quarter was $8.10, a 53% increase over the prior-year amount of $5.29.
Currency benefited adjusted earnings per share growth by approximately 7% in the quarter.
On a reported basis in the quarter, earnings per share was $7.85 as compared to $5.22 in the prior year.
Reported earnings per share in the quarter includes $0.19 of purchased intangible amortization, $0.03 of restructuring, and $0.03 due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises.
The next slide shows our P&L for the first half.
Local currency sales grew 23% for the six months.
Adjusted operating income increased 47% with margins up 330 basis points.
Adjusted earnings per share grew 58% on a year-to-date basis.
That covers the P&L, and let me now comment on cash flow.
In the quarter, adjusted free cash flow amounted to $233.3 million, which is an increase of 41% on a per-share basis as compared to the prior year.
We are very happy with our cash flow generation.
DSO was 36 days, which is four days less than the prior year.
ITO came in at 4.6 times, which is slightly better than last year.
For the first half, adjusted free cash flow amounted to $372.2 million, an increase of 75% on a per-share basis as compared to the prior year.
Let me now turn to guidance.
Forecasting continues to be challenging.
Market conditions are very dynamic and changes to the business environment can happen quickly.
Uncertainty remains surrounding COVID-19, in particular, the impact of the latest variance, the worldwide pace of vaccinations, and related potential shutdowns and/or restrictions.
The ultimate impact on the global economy is also still uncertain.
In addition, we are monitoring our supply chain very closely and recognize we must remain very agile in order to adapt to unexpected material shortages, inflationary pressures, and unforeseen logistic challenges, which can create unexpected volatility.
As we enter the second half of the year, demand in our end markets is positive, although we face more challenging comparisons for the remainder of the year as compared to the first half of this year.
The organization continues to execute well and has demonstrated a high level of resilience and agility and adapting to rapidly changing market conditions.
We are making incremental investments for future growth and continue to feel confident in our ability to gain market share and drive earnings growth in 2021 and beyond.
Now let me cover the specifics.
For the full year 2021, with the benefit of our strong Q2 results and improved outlook for the remainder of the year, we now expect local currency sales growth for the full year to be approximately 15%.
This compares to our previous guidance range of 10% to 12%.
We expect full-year adjusted earnings per share to be in the range of $32.60 to $32.90, which is a growth rate of 27% to 28%.
This compares to previous guidance of adjusted earnings per share in the range of $31.45 to $31.90.
With respect to the third quarter, we would expect local currency sales growth to be in the range of 11% to 13% and expect adjusted earnings per share to be in a range of $8.12 to $8.27, a growth rate of 16% to 18%.
In terms of free cash flow for the year, we now expect it to be in the range of $770 million.
We expect to repurchase in total one billion in shares in 2021, which should put us in the range of a net debt-to-EBITDA leverage ratio of approximately 1.5 times at the end of the year.
Some final details on guidance.
With respect to the impact of currency on sales growth, we expect currency to increase sales growth by approximately 3% in 2021 and 2% in the third quarter.
In terms of adjusted EPS, currency will benefit growth by approximately 3% in the quarter and approximately 3.5% for the full year 2021.
Let me make some comments on our operating businesses, starting with Lab, which had an outstanding growth of 35% in the quarter.
Pipettes had excellent growth.
all other major product categories also had robust sales growth and growth in all regions was very strong.
Biopharma continues to be very favorable and continuing the trend we saw in the first quarter, we see strong customer demand in other segments such as chemical.
We expect demand for our laboratory products to continue to be positive due to favorable biopharma trends, vaccine research, and bioproduction scale-up and production.
While we faced tougher comparisons in the second half of the year, we remain confident we can continue to capture share, given the strength of our product portfolio and continued execution of our Spinnaker sales and marketing initiatives.
In terms of our industrial business, core industrial did very well in the quarter with a 27% increase in sales.
All three regions of the world had robust core industrial growth.
Improving market conditions, including some benefit from pent-up demand, combined with the strength and diversity of our product portfolio and our focus on attractive market segments contributed to the strong results.
Similar to my comments on laboratory, we will face tougher comparisons for the second half of the year, but our outlook and our confidence in gaining market share remains positive for this business.
Product Inspection had increased momentum and solid sales growth of 9% in the quarter.
We saw good growth in all regions.
We expect good growth in product inspection for the remainder of the year as we are gaining better access to our customer facilities and believe we will benefit from some pent-up demand in the business.
Food retailing grew 9% in the quarter.
Let me make some additional comments by geography.
Sales in Europe increased 23% in the quarter with excellent growth in lab, core industrial, and food retail.
Americas increased 29% in the quarter with excellent growth in lab and core industrial.
Product Inspection did well in the Americas, while food retail declined.
Finally, Asia and the rest of the world grew 28% in the quarter with outstanding growth in Laboratory and Industrial.
As you hear from Shawn, China had another quarter of stellar growth.
We would expect another good quarter of growth in Q3 in China, although not at the same level of the first half as China faces more challenging comparisons.
We are strongly positioned in China, and the team is executing very well.
One final comment on the business.
Service and consumables performed very well and were up 23% in the quarter.
We are very happy with the growth in this important and profitable part of the business.
That concludes my comments on the business.
With our better-than-expected sales growth in the first half, we are making incremental investments for future growth.
These investments are centered on innovation and operational excellence.
In product development, in our manufacturing facilities, and in our corporate programs such as Spinnaker sales and marketing.
Let me give you some recent examples, starting with product development, where we have a proven track record of launching market-leading technologies.
It all stems from our deep knowledge of customer processes and what our solutions can do to enhance or improve these processes.
We think of innovation in product development as customer-centric rather than technology-centric.
We are focused on the specific value of our solutions can provide to customers, for example, in terms of productivity, compliance-related matters, safety, or data integrity.
On the website, we have recently launched our newest version of our LabX instrument control and data management software.
This latest vision fully supports the lab digitalization, and with the strong adoption of our customer base, we have doubled the number of instruments that can be networked.
LabX increases our customers' productivity by speeding up daily work through the management of data and development of workflows.
It enhances security and compliance, ensuring data quality and full data traceability.
Finally, LabX helps reduce complexity in asset managers data, assets and workflow centrally and seamlessly integrates into laboratory data management systems such as LIMS. Software is progressively becoming a deciding factor for customers in choosing a supplier for Benchtop lab solutions.
With the increasing importance of software, LabX is helping to position us as a trusted advisor for certain global pharma customers as we meet their demands for instruments, service, and software.
While lab receives the greater share of R&D investments, we also have some great examples of new products on the industrial side, including a best-in-class industrial terminal, which provides fully integrated weighing applications for -- with the industry's fastest processing speed.
Similarly, we launched new load cell technology in our product inspection business, which provides industry-leading check weighing throughputs with maximum precision.
Both of these products provide value by increasing customers' productivity.
New products highlight our deep and great knowledge of our customers' processes and pain points and allow us to lead the market with technology to provide specific value to customers.
We are also investing in our manufacturing facilities to boost productivity.
Last quarter, we rolled out significant automation in our pipette and tip harvesting process, resulting in a meaningful increase in yield per molding machine.
This quarter, we are unveiling a new expanded clean room for our pipette manufacturing as well as inaugurating a new facility for our secondary brand, Biotix, that will expand our pipette and tip manufacturing capacity and efficiency.
We are also launching a project for our Process Analytics business in the U.S. to optimize production and its warehouse layout, which will yield improvements in material flow, in productivity, and production capacity.
We also continue to invest in innovation in our corporate programs.
You have seen over many years for tremendous innovation in our Spinnaker sales and marketing programs.
A current priority area for us is maximizing our cross-selling capabilities.
Because we utilize a specialized sales force, cross-selling techniques are different than what you might hear from companies that have -- that use a more generalist sales force approach.
Our goal is to use data analytics to identify customer sites in which we have low cross-selling penetration.
We then use contacts and references to develop warm and hot leads to other product categories.
It involves data and qualification analytics, and these leads have proven to be very effective in converting to sales.
Another innovative techniques we are using to stay fully engaged with customer is greater use of webinars.
In the past, we would conduct a few hundred webinars annually.
While our goal this year is to launch 2,000 webinars in local languages, which helps to overcome the limitations we face with customer interactions due to the pandemic.
We have professionalized the delivery of the webinars and have expanded our topics to include items such as compliance, productivity, Industry 4.0, and data integrity.
From a customer's perspective, webinars are very cost and time-efficient while still allowing for interactions with experts from various businesses.
Our supply chain team and pricing team are also demonstrating a high level of innovation.
For our supply chain team, agility continues to be a necessity in overcoming the many challenges of the current environment.
At the same time, they also continue to make excellent progress on Stern Drive, our corporate initiative to continuously improve and drive world-class operations and supply chain.
Stern Drive comprises several hundred projects throughout manufacturing and back-office operations focused on material cost reductions, shop floor productivity, and back-office productivity.
Finally, the pricing team also shown great resilience and agility in reacting to inflationary pressures.
They moved quickly earlier this year to implement certain midyear price changes and at the same time, they continue to work strategically on some pricing initiatives to help improve the efficiency and effectiveness of life quotes to customers.
Incorporating data analytics into upfront processes will make quoting more effective and easier and more efficient for our salespeople.
These are just a few of many examples we have internally in which we continue to move our initiatives to another level.
We recently held a virtual leadership meeting with senior leaders from around the world with the theme of doubling down to drive growth.
What we emphasize to our senior leaders and to you today is we have a great strategy in place, and we'll execute on it in an even more determined way than before.
We will continue to invest in innovation to double down on enhancing our initiatives that are the foundation of our future growth.
We remain confident that our strategies are effective in capturing market share and driving sales and operating profit. | q2 adjusted non-gaap earnings per share $8.10.
q2 earnings per share $7.85.
anticipates local currency sales growth in 2021 will be approximately 15%.
sees 2021 adjusted earnings per share to be in range of $32.60 to $32.90.
for q3 company anticipates that local currency sales growth will be in range of 11% to 13%.
sees q3 adjusted earnings per share $8.12 to $8.27.
qtrly net sales $924.4 million versus $690.7 million. | 1 |
These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the third quarter, Hilltop reported net income of $93 million or $1.15 per diluted share.
Return on average assets for the period was 2.1% and return on average equity was 15%.
These favorable operating results again demonstrate the strength of Hilltop's diversified model and our businesses and our people execute on their strategies and capabilities.
PlainsCapital Bank had another strong quarter with pre-tax income of $63 million and a return on average assets of 1.4%.
Income during the period included $4.6 million of PPP loan-related origination fees and a $5.8 million reversal of provision.
We have seen continued improvement in our asset quality, which is a reflection of both the bank's sound lending practices and the healthier economic outlook.
Total average bank loans declined $252 million or 4% versus Q2 2021 as PPP balances ran off.
Excluding PPP loans, average bank loans were stable in the quarter.
Although the lending environment is extremely competitive and many of our clients remain flush with liquidity, we have seen growth in our loan pipeline, which is at its highest level since the pandemic.
The current pipeline is heavily commercial real estate, specifically in residential lot development, industrial and multifamily across the major Texas markets.
Payoffs will remain a challenge though, as our quality real estate clients continue to find attractive opportunities for their projects in the permanent financing markets.
Total average deposits remain stable linked-quarter with average deposits excluding broker deposits increasing by $200 million or 2% from Q2 2021 and $1.9 billion or 16% from prior year.
We continue to see growth in both interest bearing and non-interest-bearing accounts since Q3 2020 we have run off almost $1 billion in broker deposits.
This was another strong quarter for PrimeLending generating $62 million in pre-tax income.
Although a decline from the astonishing levels in 2020 volumes and pricing held on longer than anticipated and as a result we were able to deliver favorable returns during the period.
PrimeLending originated $5.6 billion in volume in the quarter from its continued strength in home purchase volume.
Refinancing volume as a percent of total volume decreased to 29% from 35% during the same period in 2020.
If current mortgage rates remain relatively unchanged through the end of the year, we believe this downward trend of refinancing volumes will continue.
Gain on sale margin of loans sold to third parties declined by 17 basis points linked-quarter to the 359 basis points.
Margins remain pressured as we see competition reacting to the decline in refinancing volume.
And as our product mix has shifted where the relatively higher margin government product is lagging.
Our team at PrimeLending remains acutely focused on monitoring pricing and margins.
PrimeLending continues to recruit productive loan officers and has hired 127 year to date bringing total loan officer headcount to 1,314.
This is a primary focus as we target purchase oriented loan officers to help offset the lower margins we expect in the coming quarters.
We believe our exceptional team purchase orientation, technology investments and focus on customer experience will continue to drive attractive returns from the mortgage business.
During the quarter, HilltopSecurities generated $17.4 million of pre-tax income on net revenues of $127 million or a pre-tax margin of 13.8%.
This was a good quarter for the public finance business in particular with revenues up $12 million from prior year, predominantly from a few larger deals.
We are encouraged by the potential for growth in the municipal finance market with the healthy current pipeline and the anticipation of increased future infrastructure spending.
Revenues within the structured finance business decreased by $26 million from last year as the overall mortgage market has declined from the astonishing levels in 2020.
From a historical average perspective, volumes are still strong and revenues rebounded by $24 million linked quarter.
We continue to build on the structured finance business by solidifying existing relationships and adding new clients.
Within our fixed income business, customer demand weakened given expectations of higher interest rates on the horizon, a trend that has been seen across the industry.
While all product areas were challenged in the quarter HilltopSecurities has made several key additions in the business, including leadership for our middle market sales effort, which has been a strategic priority for several years.
Therefore, we remain focused on growing our market share and profitability in fixed income.
Overall, HilltopSecurities is well-positioned as we have added key infrastructure producers and leadership to broaden our core capabilities and customer penetration as a leading municipal investment bank.
Moving to page 4, as a result of strong and diversified earnings, we continue to grow our tangible book value while returning capital to shareholders.
Our capital levels remain very strong with the common equity Tier 1 capital ratio of 21.3% at quarter end, and we have grown our tangible book value per share by 18% over the last quarter to $27.77.
During the quarter, Hilltop returned $84 million to shareholders through dividends and share repurchases.
The $74 million in shares repurchased are part of the $150 million share authorization the board granted earlier this year.
This week, the Hilltop Board of Directors authorized an additional increase to the stock repurchase program of $50 million, bringing the total authorization to $200 million.
As a result of dividends and share repurchase efforts, Hilltop has returned $153 million in capital to shareholders year-to-date.
Additionally, we paid down $67 million in trust preferred securities during the quarter, which will reduce our annual interest expense by over $2 million going forward.
In conclusion, we are very pleased with the results for the quarter.
All businesses showed solid momentum going into the fourth quarter and are performing well against our strategic objectives.
We feel well-positioned with a team and capital in place to continue growing long-term shareholder value.
I'll start on page 5.
As Jeremy discussed, for the third quarter of 2021, Hilltop recorded consolidated income attributable to common stockholders of $93 million, equating to $1.15 per diluted share.
Included in the third quarter results was a net reversal of provision for credit losses of $5.8 million.
During the third quarter, Hilltop recorded a modest net recovery of charge-offs.
On page 6, we have detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
These were somewhat offset by the increase in specific reserves taken against a small number of credits that experienced deterioration during the quarter.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our third quarter analysis, consistent with our second quarter outlook selection.
This scenario considered lower overall GDP rates, higher inflation and higher ongoing unemployment than other market consensus outlooks.
As said, the S7 scenario did improve from the prior period, and the impact of the improvement resulted in the release of $6 million of credit reserves during the third quarter.
Second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the portfolio experienced positive migration across a number of industries and geographies resulting from improving financial performance and more resilient outlook for future periods.
Further, the portfolio of loans that are currently under active deferral plan build a $17 million from $76 million at the end of the second quarter of '21.
The result of the improvements at the client level equated to a net release of credit reserves of $5 million during the third quarter.
The net impact of these changes resulted in an allowance for credit losses for the period ending September 30 of $109.5 million or 1.45% of total loans.
Further, the coverage ratio of ACL to total loans increases from 1.74% from loans that we believe have lower loss potential, including PPP broker-dealer and mortgage warehouse loans are excluded.
I'm moving to page 7.
Net interest income in the third quarter equated to $105 million, including $8.3 million of PPP-related interest and fee income, as well as purchase accounting accretion.
Net interest margin declined versus the second quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan HFI yields.
Somewhat offsetting these items were higher loans held for sale yield, resulting from higher overall mortgage rates, coupled with lower interest-bearing deposit cost, which have continued to trend lower finishing the quarter down 4 basis points versus the second quarter of '21 at 28 basis points.
We continue to expect that interest-bearing deposit costs will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset to lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on loan yields for new originations, which were 3.8% during the third quarter and is also challenging our ability to maintain current loan flow rates.
Given overall market and competitive conditions, we expect that NIM will remain pressured into the fourth quarter of '21 moving lower to between 240 basis points and 250 basis points by year end.
Turning to page 8, total non-interest income for the third quarter of '21 equated to $368 million.
Third quarter mortgage-related income and fees decreased by $114 million versus the third quarter of 2020 driven by lower origination volumes, declining gain on sale margins, and lower locked volumes.
As it relates to gain on sale margins, we noted in our key driver table in the lower right of the page the gain on sale margins on loans fell 18 basis points versus the prior quarter.
Further, we are providing the impact of gain on sale margin related to those loans that have been retained on the balance sheet, which for the third quarter equated to 13 basis points.
During the third quarter of 2021, the environment in mortgage banking remained resilient and is expected to continue to shift to a more purchase mortgage-centric marketplace with approximately 71% of our origination volumes serving as purchase mortgages.
During the third quarter, purchase mortgage volumes declined modestly to 3.95 billion, while refinance volumes declined 12% or $235 million versus the second quarter origination levels.
We expect this trend to continue for the more purchase-centric mortgage market over the coming quarters, and we continue to expect the gain on sale margins for the third-party sales will fall within a full year average range of 360 basis points to 385 basis points.
In addition, other income declined by $36 million, driven primarily by declines in TBA locked volumes, coupled with lower volumes and market depth in the fixed-income capital markets.
As we've noted in the past, the structured finance and fixed income capital markets businesses can be volatile from period-to-period, as they are impacted by interest rates, market volatility, origination volume trends and overall market liquidity.
Lastly, our public finance and retail brokerage businesses at the broker-dealer drove solid revenue growth as highlighted in the securities-related fee growth of $15 million versus the prior-year period.
This growth highlights the impact of our ongoing investments in enhanced products and service capabilities across HilltopSecurities, which has provided our bankers with additional tools and capabilities to support their clients.
Turning to page 9, non-interest expenses decreased from the same period in the prior year by $44 million to $355 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
The bank continues to deliver improved efficiency, as highlighted in the sub-50% efficiency ratio.
This has been driven by lower overall headcount as well as benefits from strong mortgage production and the acceleration of PPP fees into current period income.
As we've noted in the past, we expect that over the longer term, the efficiency ratio at the bank will fall within a range of 50% to 55%.
Moving to page 10, in the period, HFI loans equated to $7.6 billion, relatively stable with the second quarter levels.
As we've noted previously, we've seen substantial increases in competition for funded loans across the Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheets and consumer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect that full year 2021 average total loan growth excluding PPP loans will be within a range of zero to 3%.
During the third quarter of '21, PrimeLending locked approximately $243 million of loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 2.95% and average FICO and LTV of 776% and 64%, respectively.
Moving to page 11, third quarter credit trends continue to reflect the slow but steady recovery in the Texas economy, which is supporting improved customer cash flows and fewer borrowers on active deferral programs.
As of September 30, we have approximately $17 million of loans on active deferral programs down from $76 million at June 30.
Further, the allowance for credit losses to period end loan ratio for the active deferral loans equates to 22.8% at September 30.
As is show on the graph at the bottom right of the page, the allowance for credit loss coverage including both mortgage warehouse lending as well as PPP loans at the bank ended the third quarter at 1.58%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.74%.
Tuning to page 12, third quarter end-of-period total deposits were approximately $12.1 billion, increasing by $398 million versus the second quarter of 2021.
Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run-off.
At 09/30, Hilltop maintained $243 million of broker deposits that have a blended yield of 33 basis points.
While deposit levels remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and services and focused client acquisition efforts.
Turning to page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we're not providing specific financial guidance, but we are continuing to provide commentary.
This is the most current outlook for the remainder of 2021 with the understanding that the business environment, including the impacts of the pandemic could remain volatile.
That said, we will continue to provide updates during our future quarterly calls. | hilltop holdings inc qtrly income from continuing operations of $1.21 per diluted share. | 0 |
We invite you to read the safe harbor statements on Slide 2.
Actual results may differ.
Before we get into our results for the quarter, I wanted to provide a brief update on the macro environment.
During the fourth quarter, despite the widespread surge in omicron variant cases, gasoline demand held up well.
And on diesel, we're seeing highway trucking volumes continuing to meet or exceed seasonal records.
While jet demand reached post-pandemic highs in the fourth quarter, it's still roughly 15% below 2019 levels as business travel remains suppressed, but we expect to see recovery in that this year as well.
When we spoke with you in November, we were cautious about rising COVID cases this winter and the potential impact.
Based on the trends over the last few months, we've become less concerned about the pace of recovery in transportation fuels demand.
demand continues to recover.
We believe that refining margins will be well-positioned for 2022.
On the aspects of the business that are within our control, this quarter, we made continued progress on our priorities.
Since our last earnings call at the beginning of November, we've repurchased approximately $3 billion of shares.
That puts us at approximately 55% complete on our initial $10 billion share repurchase program.
Further reinforcing our commitment to return capital to shareholders, we obtained board approval for an additional $5 billion in share repurchase authorization.
This brings our total outstanding authorization to approximately $9.5 billion.
Today, we announced our 2022 capital spending outlook.
We expect MPC will have approximately $1.7 billion in capital expenditures, with approximately 50% of the $1.3 billion growth capital for our Martinez refinery conversion.
Total costs for the Martinez refinery conversion is estimated at $1.2 billion.
Approximately $300 million has been spent to date, $700 million for 2022 and $200 million for 2023.
This competitive capital cost is driven by the fact that Martinez' assets are conducive to retrofit, and we can leverage existing infrastructure and logistics.
At Martinez, the project reached another milestone as a 60-day comment period for the Environmental Impact Report concluded on December 17, 2021.
We remain committed to progressing the conversion to a renewable fuels facility, engineering is complete and we're ready to begin construction.
Our plan is to have the first phase start-up in the second half of '22.
We've already sourced some advantaged feedstocks for the Martinez facility and are engaged in negotiations with multiple parties for the balance.
Our strategy is multifaceted, including long-term arrangements, joint ventures, and alliances, all of which are common in this space.
A recent example of our success would be our joint venture with ADM.
We're also leveraging existing capabilities that are currently supporting Dickinson to optimize between the two facilities.
We remain confident in our progress and ability to secure feedstocks for Martinez.
On Kenai, we have been working at sales process since we last communicated.
We'll be back to you when we have additional details that we can share.
In 2021, we progressed all three of our strategic initiatives, and Slide 4 highlights this execution.
On the portfolio, we completed the Speedway sale, receiving $17.2 billion of proceeds from that transaction and securing the 15-year fuel supply agreement with 7-Eleven.
Our Dickinson renewable diesel facility started up, reached capacity, and we've been successfully optimizing the operation.
We made two strategic decisions to idle our Gallup refinery and to convert Martinez to a renewable fuels facility.
And this year, MPLX produced exceptionally strong cash flow, which provided $2.2 billion of contributions to MPC.
As we look at cost reduction, what began as a $1.5 billion cost-reduction initiative is being embraced by the organization and now a low-cost culture is becoming embedded in how we conduct our business.
While I've been reluctant to share too much, I wanted to highlight a few items that have commercial significance in our portfolio.
In March of 2021, we started up the Beatrice pretreatment facility, which processes about 3,000 barrels a day of advantaged feedstock for the Dickinson renewable diesel plan.
In December, we closed on a joint venture with ADM, which will provide approximately 5,000 barrels a day of logistically advantaged feedstock for Dickinson when the new soybean crush plant comes online in 2023.
And in January of this year, we successfully started up our Cincinnati pretreatment facility, which will process about 2,000 barrels per day for our Dickinson renewable diesel plant.
We converted this facility from its original configuration as a biodiesel plant.
Our team's execution on these three strategic priorities builds a foundation for continued value creation and we look forward to sharing updates each quarter as we continue to advance these initiatives.
Shifting to Slide 5.
We remain focused on challenging ourselves to leading in sustainable energy.
We have three companywide targets on GHG, methane and freshwater intensity than many of our investors and stakeholders know well.
In the coming weeks, we look forward to providing an update on our progress against these targets and some of our accomplishments in 2021.
Slide 6 provides a summary of our fourth quarter financial results.
Adjusted earnings exclude $132 million of pre-tax charges related to make-whole premiums for the $2.1 billion in senior notes we redeemed in December.
Additionally, the adjustments include an incremental $112 million of tax expense, which adjusts all results to a 24% tax rate.
Beginning with our first quarter 2022 results, we will be reporting our effective tax rate on an actual basis and will no longer adjust our actual results to a 24% tax rate.
Adjusted EBITDA was $2.8 billion for the quarter, which is approximately $400 million higher from the prior quarter.
Cash from operations, excluding working capital, was $2 billion, which is an increase of almost $300 million from the prior quarter.
Finally, during the quarter, we returned $354 million to shareholders through dividend payments and approximately $2.7 billion in share repurchases.
In the three months since our last earnings call, we have repurchased approximately $3 billion of shares.
Slide 7 illustrates the progress we have made toward lowering our cost structure over the past two years.
As we think about our strategy on cost structure, I want to emphasize a few things.
We will never compromise the safety of employees or the integrity of our assets.
And we are committed to ensure the current cost reductions are sustainable, even during periods of general cost pressures.
Since the beginning of 2020, we have been able to maintain roughly $1.5 billion of cost reductions that have been taken out of the company's total cost.
Refining has been lowered by approximately $1 billion.
Our refining operating costs in 2020 began at $6 per barrel.
While we were able to finish 2021 with a full year operating cost per barrel that was $5.
Additionally, midstream was reduced by $400 million and corporate cost by about $100 million.
However, regardless of the margin environment, our EBITDA is directly improved by this $1.5 billion.
This improvement is expected to make the company more resilient in future downcycles, while having more bottom-line profitability and upcycles.
Turning to Slide 8.
We would like to highlight our financial priorities for 2022.
First, sustaining capital as we remain steadfast in our commitment to safely operate our assets, protect the health and safety of our employees and support the communities in which we operate.
Second, we're committed to the dividend.
As we continue to purchase shares, we will reduce the share count and increase the potential of returnable cash flow.
Third, we continue to believe this is both a return on and return of capital business and we will continue to invest capital where we believe there are attractive returns.
In traditional refining, we're focused on investments that are resilient and reduce cost.
In renewables, current spend is primarily focused on our Martinez renewable fuel conversion.
We believe that share repurchases can be used to meaningfully return capital to shareholders.
In order to successfully execute the strategies guided by these priorities, MPC needs a strong balance sheet as a foundation.
We continue to manage our balance sheet to an investment-grade credit profile.
Moving to another key focus area.
Slide 9 highlights our focus on strict capital discipline.
Today, we announced our 2022 capital outlook for MPC.
MPC's 2022 capital investment plan totals approximately $1.7 billion.
As we continue to focus on strict capital discipline, our overall spend remains approximately 30% below 2019 spending levels.
Sustaining capital is approximately 20% of capital spend, underpinning our commitment to safety and environmental performance.
Of the remaining 80% for growth, approximately 50% of this $1.3 billion supports the conversion of Martinez into a renewable fuels facility.
The remainder of the growth capital is for other projects already underway.
At our refineries, the growth capital is primarily for projects that enhance returns at MPC's large coastal assets with a focus on completing Galveston Bay STAR project, as well as smaller projects at Garyville and Los Angeles.
Going forward, we expect growth capital will continue to have a significant portion for renewables and projects that will help us reduce future operating cost.
Slide 10 shows the reconciliation from net income to adjusted EBITDA, as well as the sequential change in adjusted EBITDA from the third quarter 2021 to fourth quarter 2021.
Adjusted EBITDA was higher quarter over quarter, driven primarily by a $354 million increase from Refining & Marketing.
The adjustment column reflects $132 million of pre-tax charges for make-whole premiums for debt redemption during the quarter, which has also been excluded from the interest column.
Moving to our segment results.
Slide 11 provides an overview of our Refining & Marketing segment.
The business reported continued improvement from last quarter with adjusted EBITDA of $1.5 billion.
Fourth quarter EBITDA increased $354 million when compared to the third quarter of 2021.
The increase was driven primarily by higher refining margins in the U.S. Gulf Coast and West Coast regions.
Gulf Coast production increased by 14%, recovering from storm-related downtime last quarter, and solid margin per barrel increased 31% due to higher export sales and higher sales of light product inventory.
The West Coast margin per barrel increased 40% associated with increased demand and refinery outages.
Utilization was 94% for the quarter, slightly improved from the third quarter.
The higher Gulf Coast throughput was offset by lower throughput in the Mid-Con for planned turnaround activity.
Operating expenses were higher in the fourth quarter, primarily due to higher natural gas prices.
There was also higher routine maintenance and planned project expense.
Additionally, we saw natural gas prices softened during the quarter, coming off highs in the $5 to $6 range and ending in the $3 to $4 range.
Slide 12 shows the change in our midstream EBITDA versus the third quarter of 2021.
Our midstream segment continues to demonstrate earnings resiliency and stability with consistent results from the previous quarter.
Slide 13 presents the elements of change in our consolidated cash position for the fourth quarter.
Operating cash flow was approximately $2 billion in the quarter.
This excludes changes in working capital and also excludes the cash we received for our CARES tax refund in the quarter, which was approximately $1.6 billion source of cash and is included in the income tax part of the chart.
Working capital was an approximate $1.3 billion source of cash this quarter, driven primarily by reduction in crude and product inventory.
As we announced on last quarter's call, MPC redeemed $2.1 billion in senior notes in December.
Under income taxes, we received approximately $1.6 billion of our CARES tax refund in the fourth quarter.
We also used about $300 million to offset against our Speedway tax obligation.
There is about $60 million of the refund remaining, which we expect in the first half of 2022.
We paid approximately $1.2 billion for our Speedway income tax obligation.
All that remains is about $50 million of state and local taxes.
With respect to capital return during the quarter, MPC returned $354 million to shareholders through our dividend and repurchased approximately $2.7 billion worth of shares.
At the end of the quarter, MPC had approximately $10.8 billion in cash and short-term investments.
Slide 14 provides our capital investment plan for 2022 which reflects our continuing focus on strict capital discipline.
MPC's investment plan, excluding MPLX, totals approximately $1.7 billion.
The plan includes $1.6 billion for Refining & Marketing segment, of which approximately $300 million or roughly 20% is related to maintenance and regulatory compliance spending.
Our growth capital plan is approximately $1.3 billion, split between renewables and ongoing projects.
Within renewable spending, the majority is allocated for the Martinez conversion.
Ongoing projects in our Refining & Marketing segment will enhance the capability of our refining assets, particularly in the Gulf Coast, and also support our focus on growing the value recognized from our Marathon and ARCO marketing brands.
Also included is approximately $100 million of corporate spending to support activities we believe will enhance our ability to lower future costs and capture commercial value.
Their plan includes approximately $700 million of growth capital, $140 million of maintenance capital, and $60 million for the repayment of their share of the Bakken Pipeline joint venture's debt due in 2022.
On Slide 15, we review our progress on our return of capital.
Since our last earnings call at the beginning of November, we have repurchased approximately $3 billion of company shares.
This puts us at approximately 55% complete on our initial $10 billion repurchase program commitment, leaving approximately $4.5 billion remaining.
We remain committed to complete the $10 billion program by the end of 2022.
And as we are ahead of pace given our recent repurchases, could foresee completion sooner than initially planned.
As part of our long-term commitment to return capital, we announced an incremental $5 billion share repurchase authorization today, increasing our recent repurchase authorizations to $15 billion.
We plan to continue using open market repurchase programs, although all of the programs we have previously discussed remain available to us to complete our commitment.
We intend to use programs that allow us to buy on an ongoing basis, and we will provide updates on the progress during our earnings call.
As we have said many times, we believe a strong balance sheet is essential to being successful in a competitive commodity business.
It's the foundation allowing us to execute our strategy.
Slide 16 highlights some of the key points about our balance sheet.
MPC ended the year with approximately $10.8 billion of cash and short-term investments.
But longer term, we believe that we will need to maintain about $1 billion of cash on the balance sheet.
Additionally, we will always ensure that we have enough liquidity to endure market fluctuations.
Currently, we have a $5 billion bank revolver that is undrawn.
We continue to manage our balance sheet to an investment-grade profile.
At year end\, MPC's gross debt-to-capital ratio is 21% and our long-term gross debt-to-capital target is approximately 30%.
As we continue to execute our share repurchase program, we will see that ratio increase.
After the recent redemption in December, our current structural debt is approximately $6.5 billion, and we do not have any maturities until 2024.
Slide 17, we provide our first quarterly outlook.
We expect total throughput volumes of roughly 2.9 million barrels per day.
Planned turnaround costs are projected to be approximately $155 million in the first quarter.
The majority of the activity will be in the Gulf Coast region.
Our 2022 planned turnaround activity is back half-weighted this year.
Total operating costs are projected to be $5.10 per barrel for the quarter.
Distribution costs are expected to be approximately $1.3 billion for the quarter.
Corporate costs are expected to be $170 million.
If time permits, we will reprompt for additional questions.
And with that, operator, we'll open it to questions. | r&m segment income from operations was $881 million in q4 2021 versus a loss of $1.6 billion.
on feb 2, company announced that its board approved incremental $5 billion share repurchase authorization.
capital spending outlook for 2022 is $1.7 billion. | 1 |
With me on the call is Ron Kramer, our Chairman and Chief Executive Officer.
Finally, some of today's remarks will adjust for those items that affect comparability between reporting periods.
2021 was a record year for Griffon.
We continued to see strong demand in our businesses, driven by a robust housing market and a leading product portfolio in the US and internationally, while effectively navigating a highly dynamic and challenging operating environment.
Griffon entered 2021 with significant momentum, reflecting more time spent in and around the house and a renewed appreciation for a lifestyle, including the lawn, garden and the outdoors.
During the course of the year, we continued to see healthy demand, but supply challenges across the global economy emerged and then escalated, creating increasing headwinds for us and the entire global economy, particularly in the second half.
Despite these challenges in 2021 inclusive of Telephonics, we generated revenue of $2.5 billion, record segment adjusted EBITDA of $317 million and record adjusted earnings of $1.86 per share.
Our businesses also continued to see unprecedented levels of backlog, which bodes well for continued momentum into 2022.
Our record performance this year is a direct result of our being able to realize the benefits of the strategic actions we've taken to strengthen the Company and position ourselves for future growth and increased profitability.
Our portfolio repositioning and strategic acquisitions along with the critical investments we made in infrastructure at our CornellCookson commercial door facility in Mountain Top Pennsylvania and our ongoing AMES strategic initiative have put us into a position to capitalize on the consistent strength of the housing market and homeowner activity.
Notwithstanding our record levels of performance, we continued to be impacted by an increasingly difficult global operating environment.
COVID is better, but it's not over.
Particularly in the second half of this year, labor, transportation and supply chain disruptions, both domestically and internationally affected our ability to meet market demand and disrupted the steady flow of our operations.
Our customers affected by these same challenges continued to be desperate for product to restock their shelves and replenish their inventory levels, and have begun working more broadly across their supplier and vendor base to secure the product needed to meet the continued demand in the market given these inefficiencies.
This presents both challenges as well as opportunities across the competitive landscape.
We've also taken significant strategic actions this year with the goal of increasing value to our shareholders and enhancing our competitiveness.
In September, we announced the exploration of strategic alternatives, including a sale for Telephonics, our Defense Electronics business.
Telephonics is a terrific company with a long history of impressive achievement and we are evaluating opportunities to realize the value of the business and focus our resources on areas where we believe we can achieve stronger growth.
On the acquisition front, we have an extremely active pipeline of high-quality businesses and we will continue to be optimistic about finding acquisition opportunities that are value enhancing and immediately accretive.
Let's shift to the results for the year and give some more detail around the performance of the segments.
Starting with Consumer and Professional Products, our AMES business.
Revenue increased by 8% year-over-year and adjusted EBITDA increased 11%.
The increase in revenue benefited from increased volume and favorable price, mix and foreign exchange.
AMES saw volume gains in international markets, largely driven by consumer activity catching up after earlier pandemic shutdowns and other demand disruptions.
Domestically, US volumes were lower due to the labor, transportation and supply chain disruptions that have been widely reported and commented upon; despite these disruptions consumer demand appears to continue to be healthy.
In terms of profitability, increased material cost in the US, coupled with continued lag of price catching up with rapidly rising input costs have been and continued to be headwinds on margins.
We expect price and cost to reach parity at the end of our second quarter of 2022.
Turning to Home and Building Products.
Our Clopay business saw a record revenue and EBITDA, which increased by 12% and 18%, respectively.
The increase in revenue benefited from increased favorable price and mix and increased volume.
We saw broad strength across both residential and commercial products throughout the year.
Commercial products, in particular, did well with heightened customer interest in the new products developed by CornellCookson, strong performance of core rolling steel product offerings and successful cross-selling of sectional doors through commercial channels.
And with an infrastructure bill finally signed, the future looks bright for demand.
EBITDA at Clopay benefited from the increased revenue, partially offset by continued price and cost lag, rapidly rising prices for steel, interruptions of supply of raw materials and chemicals, as well as significant shortages in labor continued to create challenges for the business, as evidenced by Clopay's unprecedented levels of backlog.
We announced the exploration of strategic alternatives for the business on September 27, and are now treating the business as a discontinued operation in our reported results.
Lazard, our banker, is actively working on these alternatives, which includes a sale.
We expect this process to conclude by the end of our second fiscal quarter ending March 2022.
Excluding the contribution of the SEC -- SEG business, which we divested in the first quarter of 2021, Telephonics revenue in 2021 decreased by 15% year-over-year and EBITDA decreased by 15%.
Revenue was impacted by reduced volume due to delayed awards in certain programs as well as decreased deliveries.
EBITDA was likewise affected by the lower volume as well as by cost growth in surveillance systems, partially offset by favorable program performance in the radar systems and reduced operating expenses resulting from efficiency actions taken last November.
We expect increased sale and profit, including strong margin improvement, as the Company enters fiscal 2022.
Turning to our dividend and balance sheet.
Our record performance this year reduced our leverage to 2.8 times net debt to EBITDA, which is well below our stated target of 3.5 times and does not include the benefit from the Telephonics strategic process.
This balance sheet strength provides us with substantial flexibility to pursue value enhancing and immediately accretive acquisitions, while making strategic investments in our existing businesses.
We increased our dividend to $0.09 per share, which marks the 41st consecutive quarterly dividend paid to shareholders.
Our dividend has grown at a 17% compound annual growth rate since our dividend program was started.
Separately, each year, we reach out institutional shareholders to discuss their views on a variety of subjects, including our governance practices.
Over the past five years, we've refreshed approximately half of our independent directors, adding diversity and relevant expertise to our Board.
As we evolve, we are continuing this process.
Our Board has adopted two amendments to our Certificate of Incorporation for submission to our shareholders at our 2022 annual meeting.
The first amendment will declassify the Board over a three-year transition period after the amendment becomes effective.
The second will reduce the percentage of voting power necessary to call a special meeting of shareholders.
These amendments will become effective upon the approval of our shareholders at our 2022 annual meeting.
Our Board has also undertaken a commitment to further diversify with an objective that, by 2025, 40% of our independent directors will be women or persons of color.
These enhancements and refinements to our corporate governance practices will further align our interest with those of our long-term shareholders and contributing to maximizing shareholder value.
I'll start by highlighting our fourth quarter consolidated performance on a continuing basis.
Revenue increased by 3% to $570 million.
Segment adjusted EBITDA increased 6% to $67 million, with related margin increasing 30 basis points to 11.7%.
Gross profit on a GAAP basis for the quarter was $156 million, increasing 1% compared to the prior-year quarter.
Excluding restructuring-related charges, gross profit was $159 million, increasing 3% compared to the prior-year quarter, with gross margin decreasing 10 basis points to 27.9%.
Fourth quarter GAAP selling, general and administrative expenses were $123 million compared to $117 million in the prior-year quarter.
Excluding restructuring-related charges, selling, general and administrative expenses were $120 million or 21% of revenue compared to $116 million or 21% in the prior-year quarter, with the increased dollars primarily driven by distribution, transportation and incentive costs.
Fourth quarter GAAP net income, which includes Telephonics, was $16 million or $0.30 per share compared to the prior-year period of $20 million or $0.41 per share.
Excluding items that affect comparability from both periods, current quarter adjusted net income was $21 million or $0.40 per share compared to the prior year of $22 million or $0.44 per share.
Keep in mind, the impact of the August 2020 equity offering on adjusted earnings per share was approximately $0.04.
Fourth quarter GAAP income from continuing operations was $13 million or $0.23 per share compared to the prior-year period of $21 million or $0.43 per share.
Excluding items that affect comparability from both periods, current quarter adjusted net income was $18 million or $0.33 per share compared to the prior year of $17 million or $0.35 per share.
The impact of the August 2020 equity offering on adjusted earnings per share was approximately $0.03.
Corporate and unallocated expenses, excluding depreciation, were $13 million in the quarter compared to $12 million in the prior-year quarter, primarily due to incentive costs.
Our 2021 full-year effective tax rate, excluding items that affect comparability, was 31.7% compared to 33.7% in the prior year.
Capital spending was $12 million in the fourth quarter compared to $11 million in the prior-year quarter.
Depreciation and amortization totaled $13.3 million compared to $12.8 million in the prior-year quarter.
Regarding our balance sheet and liquidity, as of September 30, 2021, we had net debt of $797 million, with leverage of 2.8 times calculated based on our debt covenants.
This is a 0.6 of a turn reduction from our prior-year fourth quarter.
Our cash and equivalents were $249 million and debt outstanding was $1.05 billion.
Borrowing availability under the revolving credit facility was $371 million, subject to certain loan covenants.
Regarding guidance, our standard practice has been to provide a forecast of our performance for the coming year and maintain that guidance.
At the beginning of our fiscal 2021, we provided initial guidance that reflected our view of the ongoing risks associated with the pandemic and the economic recovery.
However, at mid-year, we took the unprecedented step of updating guidance when our performance continued to be well in excess of initial guidance.
We are returning to our standard practice and providing guidance for fiscal '22, reflecting what we consider to be reasonable expectations for the year.
On a continuing operating basis, excluding the contribution of Telephonics, we expect revenue of $2.5 billion and segment adjusted EBITDA of $300 million for fiscal '22.
Excluding both unallocated costs of $49 million and one-time charges of approximately $15 million related to the AMES initiative.
In terms of the phasing of our guidance, we expect significant margin compression in the first half of the year, particularly in the first quarter, as we recover price to offset significantly increased input costs.
Just to dimension [Phonetic] the magnitude of the price increases we have realized and expect to realize, we secured multiple double-digit price increases in '21 and expect to realize additional double-digit price increases in the first half of fiscal '22.
Margins are expected to gradually improve starting in the latter part of our second quarter and will reach more normalized levels by our fourth quarter, reflecting the pass-through of pricing to our customers and expected improvement in labor and transportation availability, along with improving reliability within our supply chain.
Further, our guidance incorporates the sales trends we are seeing as customers are diversifying their supplier base to find available product across a wider array of vendors and suppliers than before.
This diversification is resulting in shifts of market share and shelf space across our product categories.
Likewise, we are diversifying our own supplier base and focusing our resources on those brands, channels, products and customers we had competitive strength and a good product mix and can maintain healthy margins.
This will result in shifts of both sales volume and mix throughout '22 and into '23, as we prioritize our resources to achieve our margin objectives.
Total capital expenditures for fiscal '22 are expected to be $65 million, which includes $25 million supporting the AMES initiative.
Depreciation and amortization is expected to be $56 million, of which $9 million is amortization.
We expect to generate free cash flow in excess of net income, inclusive of the capital investment and other investments we are making at AMES.
As in prior years, we expect a similar pattern of cash flow with significant cash usage in the first half, followed by strong second half cash generation.
As a result of the expected margin compression in the first quarter and the timing of price cost parity expected to be reached in the second half of the year, our first half cash usage, particularly in the first quarter, will exceed historical levels.
We expect net interest expense of approximately $63 million for fiscal '22.
Our expected normalized tax rate will be approximately 32%.
As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters, may impact rates.
Just as a final comment on '22, we continue to believe that supply chain disruptions, inflationary trends and labor shortages will remain challenges, but the strength of our demand gives us a high degree of confidence in the outlook.
We continue to believe in the strength of our diversified holding company investment and operating-centric model.
This year marks the third fiscal year since we repositioned our business through divesting the Plastics business and acquiring ClosetMaid and CornellCookson.
These actions have fundamentally strengthened Griffon over the last three years.
Our revenue, adjusted EBITDA and adjusted earnings per share have increased at a compound annual growth rate of 11%, 23% and 35%, respectively.
Over this period, we generated $224 million in free cash flow, while cutting our leverage in half to 2.8 times.
Our announcement of strategic alternatives for Telephonics marks another fundamental shift in our portfolio.
We'll realize additional value for shareholders, and this will allow Griffon to redeploy capital toward accretive acquisitions.
Our M&A pipeline is active, and we are reviewing exciting opportunities to substantially bolster our existing businesses, as well as considering new opportunities that will further strengthen and diversify us.
We appreciate the importance of their work in order to deliver these excellent results.
We remain excited about our future.
Operator, we're happy to take any questions. | compname reports q4 earnings per share $0.30.
q4 adjusted earnings per share $0.33 from continuing operations.
q4 adjusted earnings per share $0.40.
q4 earnings per share $0.30.
griffon q4 earnings per share from continuing operations $0.23.
q4 earnings per share from continuing operations $0.23 . | 1 |
Yesterday, after the market closed, we issued our quarterly release.
The passcode you will need for both numbers is 2968847.
Today's call is also available through the Investor Information section of www.
renre.com and will be archived on RenaissanceRe's website through midnight on November 28, 2020.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you.
With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.
Once again, we find ourselves at the end of a very active third quarter, which saw numerous name storms making landfall in the U.S., record-breaking wildfires across the West Coast and multiple typhoons in Asia.
We extend our sympathies to all those impacted by these catastrophes.
An important part of our purpose is to support rebuilding and recovery efforts after disaster strike, which we do by providing solutions and protection, sharing our expertise and paying valid claims promptly.
So while our results for the third quarter reflect an elevated level of activity, these are risks that we fully understand and are paid to take.
And I am proud of the role we play helping people when they need it most.
The Q3 2020 large loss events were driven in particular by hurricanes Laura and Sally in the Gulf of Mexico and the wildfires in California, Oregon and Washington.
The fourth quarter has also been active so far with Hurricane Delta making landfall as a category two in nearly the same location as Hurricane Laura and continued wildfire activity.
Last year, during our third quarter call, I discussed our belief that climate change contributes to making extreme events more frequent and more severe.
This year, it is already clear that we are experiencing an especially active season for both wildfire and wind.
On the West Coast, California wildfires have already consumed more than four million acres in 2020, which is more than double either 2017 or 2018, and has resulted in over 90 million metric tons of carbon dioxide being released into the atmosphere.
For perspective, this is 1.5 times more carbon dioxide than is released in powering the entire state for a year.
We continue to believe that there is strong evidence that climate change is increasing wildfire risk in California for two primary reasons.
First, California's climate is hotter and drier now than at any time in the past 120 years.
Higher temperatures and longer dry seasons accelerate the desiccation and death of vegetation creating fuel for larger, more intense wildfires.
Second, climate change extends the length of the dry season into the late autumn, causing it to overlap with the Diablo and Santa Ana winds.
This combination of high and strong winds results in the dramatic spread of damaging fires as we have experienced in 2017 and '18.
Climate change is also influencing hurricane risk.
Due to a globally warmed world, we anticipate a future, where a greater proportion of tropical cyclones reach category four or category five status.
Climate change also drives sea-level rise, which increases the impacts from storm search.
While there have always been natural cycles of variability in sea surface temperatures, we believe recent increases are primarily a product of climate change.
Consequently, sea surface temperatures and associated hurricane activity will not revert to lower levels of prior periods, rather the heightened activity levels of the last two decades are likely the new normal for Atlantic hurricane.
Vendor cat models, however, rely on the long-term historical record to estimate risk.
Unfortunately, due to climate change, this long-term record of past experience may no longer be a reliable guide for what we can expect in the future.
Making the problem worse, human behavior can interact in complex ways with climate change to amplify risk of loss.
For example, we have seen a long-term trend to build on coastlines or in the wildland-urban interface, often with building codes and materials that fail to provide resilience in the face of natural perils.
Recognizing the fact that climate change is increasing the risk of natural disasters is only the first step, however.
To gain a true competitive advantage, this insight must be accurately reflected in the cat models used to price risk.
Our scientists, meteorologists and engineers at RenaissanceRe Sciences have been studying the impact of climate change on natural hazards for decades.
They believe that a physical model, informed by historical observations but calibrated to our best understanding of how the climate has and will continue to change, creates the best basis for categorizing the full distribution of outcomes that should be a new written against.
Applying these insights, RenaissanceRe Risk Sciences works closely with our underwriters and risk managers to build proprietary cat models that capture the physics and future impact of climate change.
Our approach sets us apart from many other underwriters or ILS managers, who often rely on a single vendor model that fails to capture the true impact of a changed climate.
This has obvious implications for ILS investors.
But building proprietary climate change-informed cat models goes beyond investments in cat risk and benefits all of our stakeholders.
Our ILS partners rely on us to accurately model the risks inherent to their investment.
Our clients appreciate the superior customer service that we can provide through deeper insight into the full distribution of their risk profile, which often leads to increased demand for our products.
And our shareholders benefit from the more efficient portfolios of risk we can construct as well as our enhanced sustainability.
Contrary to some perspectives, accurately pricing for climate risk does not put us at a competitive disadvantage to our peers, rather an industry-leading understanding of the influence of climate on risk is a key component of superior risk selection allowing us to shape our portfolios but growing on the best business and shrinking on the worst.
Moving on from climate change.
I want to take a minute to discuss capital deployment opportunities.
As we enter the important January one renewal period, I believe we will have one of the best opportunities in many years to profitably deploy material additional capital.
Our focus on superior risk selection should prove increasingly valuable as the combination of historically low interest rates, the Q3 2020 large loss events and material trapped capital put additional upward pressure on reinsurance rates.
We have legacy positions on the best programs, first call status to capture opportunistic and off-cycle business and significant capital to support growth on new and existing profitable opportunities.
I'll provide more detailed update on the renewal in our segments at the end of the call.
As Kevin discussed, and as you saw in our pre release, our third quarter results were impacted by active wind and wildfire season.
Despite this elevated activity, we reported positive net income and remain in a very strong capital position going into renewals.
Today, I will discuss our consolidated performance and then provide more detail on our three drivers of profit: underwriting income, fee income and investment income.
Starting with our consolidated results, where we reported an annualized return on average common equity of 2.8%, benefiting from mark-to-market gains in our strategic investment portfolio.
Annualized operating return on average common equity was negative 7.7%, with the loss primarily driven by the Q3 2020 large loss events.
We grew our book value per common share by $0.86 or 0.6% and our tangible book value per common share plus accumulated dividends by $1.24 or 1%.
Year-to-date, we have grown tangible book value per common share plus change in accumulated dividends by 14.6%.
Net income for the quarter was $48 million or $0.94 per diluted common share.
We reported an operating loss of $132 million or $2.64 per diluted common share.
This excludes net realized and unrealized gains on investments, the sale of RenaissanceRe (U.K.) Limited, net foreign exchange gains and expenses related to the integration of TMR. Included in this operating loss is $322 million of net negative impact resulting from Q3 2020 large loss events.
Now to clarify, net negative impact is the bottom line impact of events to us after taking into account our best estimate of net incurred losses along with related adjustments for earned and ceded reinstatement premiums, lost profit commissions and redeemable noncontrolling interest.
I will now discuss our three drivers of profit, starting with underwriting income.
On a consolidated basis, we reported underwriting loss of $206 million for the quarter and a combined ratio of 121%.
Our results were driven predominantly by natural catastrophe losses with little impact from COVID-19 losses in the quarter.
Gross premiums written for the quarter were $1.1 billion, up $282 million or 33% from the comparable quarter of last year.
Approximately 60% of this growth came from our Casualty segment and 40% came from Property.
We are pleased with our growth so far this year.
As I've mentioned last year, we anticipate that we will have many opportunities to deploy additional capital in 2021 and beyond.
Moving now to our Property segment, where gross written premiums increased by $113 million or 36% from the comparable quarter.
This was driven by an increase in reinstatement premiums related to the Q3 2020 large loss events, a negative premium adjustment in 2019 and continued expansion of our Lloyd delegated authority insurance book.
The overall combined ratio for the Property segment was 140%, with property catastrophe and other property reporting combined ratios of 159% and 113%, respectively.
We reported a current accident year loss ratio for the Property segment of 122%.
And as we've indicated in the past, our other property class of business is exposed to catastrophe risks with the Q3 2020 large loss events, adding 30 percentage points to its loss ratio.
Favorable development for the Property segment during the quarter was 8%, with property catastrophe experiencing favorable development of 11% and other property experiencing favorable development, up 3%.
The underwriting expense ratio for Property was 26%, which is flat to the comparable quarter.
However, within the underwriting expense ratio, the acquisition expense ratio was up approximately one percentage point due to the unwinding and previously earned profit commissions given the large cat events for the quarter.
This was offset by a one percentage point decline in the operating expense ratio due to improved leverage and slightly lower operating expenses.
Now moving on to our casualty segment, where our gross premiums grew $169 million or 31%.
This growth was a combination of expansion of existing deal share and premium as well as new business opportunities.
Overall, our casualty combined ratio was 99.9%.
The current accident loss year ratio was 76%, which is seven percentage points higher than the comparable quarter.
This increase is driven by three factors, each of which contributed about two percentage points to the loss ratio.
First, $10 million of IBNR related to Hurricane Laura in our marine and energy book; second, increased reserves from our private mortgage insurer book, which did not impact the combined ratio; and third, $15 million in ceded premium for our new Lloyd's adverse development cover.
Now let me walk you through the last two items in more detail.
Starting with our private mortgage insurance book, where we increased our reserves to reflect delinquency notifications.
The primary mortgage insurers are required to report loans as delinquent net 60 days without payment even if the loans are in forbearance or payment holiday and otherwise expected to perform long term.
We reserve for these delinquencies as they are reported to us.
That said, we do not anticipate that all of the notifications will crystallize as paid losses.
While these mortgage delinquencies increased our casualty loss ratio by two points.
Due to the structure of the transaction, these losses were offset by a decrease in profit commissions paid to our cedents.
As a result, there's no impact to the combined ratio.
Now moving to the Lloyd's adverse development cover.
We closed this transaction in August to reinsure the casualty reserves for our Lloyd's syndicate for the 2009 through 2017 underwriting years.
The premium cost of this cover is reflected in the current accident year loss ratio for our casualty segment, contributing about two points.
This transaction is an innovative example of our gross-to-net strategy in action.
It provides capital relief to our syndicate, over time, creating additional capacity to underwrite into an improving market.
This protection is a retroactive reinsurance transaction.
This means that we are protected economically, but given the accounting treatment, you may continue to see reserve volatility in the short to medium-term from an accounting standpoint.
During the third quarter, the casualty segment also experienced favorable development of 3%, driven by a variety of specialty lines.
Now moving to our second driver of profit fee income, where total fee income for the third quarter was $18 million.
Management fees were $30 million, up 23% from the comparable quarter, driven by increases in assets under management at DaVinci, premier and Upsilon.
This was offset by negative $12 million in performance fees due to the impact of catastrophe events on DaVinci and Upsilon.
Year-over-year, total fees are up 8%.
The net noncontrolling interest charge attributable to DaVinci, Medici and Vermeer for the quarter was $19 million.
This reflected an overall loss for DaVinci that was more than offset by income in Medici and Vermeer.
The $19 million is passed on to our partner capital, reducing our operating earnings accordingly.
Now turning to our third driver of profit, investment income.
We reported total investment results for the third quarter of $308 million with realized and unrealized gains of $224 million.
These mark-to-market gains were predominantly in our fixed maturity and equity investment portfolio with equity gains driven by our strategic investment portfolio.
We take a prudent and reasonably conservative approach to our investment portfolio and have not materially increased our allocation to high yield or equities in attempt to stretch for yield.
As I discussed on our previous call, we increased our allocation to investment-grade corporate credit in the second quarter.
In the third quarter, we made more marginal allocations, increasing in higher quality credit sectors such as AAA-rated collateralized loan obligations and commercial mortgage-backed securities.
Our fixed maturity and short-term investment income for the quarter was $70 million, and overall net investment income for the quarter was $84 million, of which we retained $65 million and shared the remainder with partner capital.
Our managed investment portfolio reported yield to maturity of 1% and duration of 2.9 years on assets of $18.6 billion while our retained investment portfolio reported yield to maturity of 1.3% and duration of 3.7 years on assets of $13 billion.
Now before handing over to Kevin, I'd like to provide more information on our expenses and foreign exchange gains for the quarter.
Direct expenses, which are the sum of our operational and corporate expenses, totaled $97 million for the quarter, which is an increase of $30 million from the third quarter of 2019.
This increase is predominantly driven by the sale of RenRe (U.K.) Limited, which I'll discuss momentarily.
The ratio of direct expense to net premiums earned was 10%, an increase of more than two percentage points from the comparable period last year.
This increase was driven by corporate expenses, which increased by $34 million or three percentage points on the corporate expense ratio.
Included in corporate expenses were $32 million related to the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction-related expenses and $5 million of one-off items, including expense related to senior management departures.
RenaissanceRe (U.K.) Limited was acquired as part of the TMR transaction and primarily wrote long-tail commercial auto business.
It was placed into run-up by Tokio Millennium Re in 2015, and our stated intent has always been to divest this entity.
This allows us to focus on our core strategy, simplify our operations and decreased underwriting and foreign exchange volatility.
As a reminder, the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction costs are excluded from the operating loss in the quarter.
Excluding the impact of RenaissanceRe (U.K.) Limited and the one-off items I just described, the ratio of direct expense to net premium earned was 6%.
This is a decrease of one percentage point from the comparable period last year, demonstrating the operating leverage embedded in our business model.
And the operational expense ratio also declined by 1% point due to the reduction in office travel expense related to COVID-19 restrictions.
Finally, we reported a $17 million foreign exchange gain.
Approximately half of this gain is an accounting adjustment for the prior quarter related to the Tokio Millennium Re integration.
The majority of the remaining gain relates to Medici and has no impact on our bottom line as it's backed out through noncontrolling interest.
As usual, I will divide my comments between our Property and Casualty segments.
Overall, I am very optimistic regarding opportunities across our business as we head into the January one renewal.
We anticipate that there will be a supply/demand imbalance in certain areas of our portfolio, particularly for capital-intensive risks driven by continued uncertainty related to COVID-19 and further accelerated by another active year for natural catastrophes.
RenRe is positioned to deploy additional capital and grow, given our market leadership and long-term relationships with brokers and customers.
Beginning with Property cat.
The third quarter was very active for natural catastrophes in the U.S. So it categorize as high-frequency and low-to-medium severity.
The largest and most impactful events for us for Hurricanes Laura and Sally in the Gulf of Mexico, Hurricane Isaias in the Northeast and wildfires on the West Coast.
Because the U.S. had already experienced above-average frequency of events prior to the third quarter, aggregate covers also increasingly came into play.
These events will add additional pressure to the already hardening rate environment from Property cat and should lead to increased demand for Property cat reinsurance throughout 2021.
At the same time, ILS capital is becoming fatigued as investors contemplate a fourth consecutive year of elevated cat losses and additional trapped collateral caused by COVID-19 BI claim uncertainty.
While we are encouraged by the market, we must remember that we are still in a pandemic that is likely to result in losses across the insurance industry.
In the U.S., so far, we have received generally favorable news regarding the court's interpretations of the availability of business interruption protections from the COVID-19-related shutdown.
It's important to recognize, however, that for the most part, these processes remain at an early stage.
I remain concerned that the plaintiffs bar will continue to test new theories for recovery in multiple venues in the hopes of obtaining judgments more favorable to insurers.
Such challenges will result in continued uncertainty regarding BI coverage that could extend for years.
And it's irrational to believe that these processes will not result in material liabilities to the insurance industry.
As with any time there is uncertainty with coverage, insurers will submit claims to protect their rights under their insurance policies.
Ultimately, some of those claims may be presented to reinsurers.
I think we are a long way from understanding the impact of the virus and the shutdowns.
But I expect that we will see an increase in submitted claims, particularly as information is shared during the renewal process.
Internationally, business interruption is a more fluid issue as more affirmative coverage was sold outside the U.S. Additionally, various jurisdictions are approaching the issue of coverage differently, so we are watching this space carefully.
In the fourth quarter, we expect that our renewal conversations will provide us with greater clarity regarding potential customer claims for business interruption-related losses, and we will react appropriately as we assess the validity of such claims.
Turning to other property.
It was also an active quarter.
As I explained to you earlier this year, we have increased the other property books catastrophe exposure as we believe we are being paid sufficiently for it.
Consequently, other property experienced losses from the Q3 2020 large loss events, primarily from hurricanes Laura and Sally and the Midwest derecho.
That said, attritional losses were within our expectations.
Prior year development was favorable this quarter.
And overall, I am satisfied with the performance of the other property book.
Similar to Property cat, we are seeing increased opportunities to profitably deploy material capital in other property.
Rates are up, particularly in the U.S. E&S business.
And the Q3 2020 large loss events will only accelerate the velocity and persistence of these rate increases.
Of course excessive losses and increasing uncertainties aggravating an already dislocated retro market, we are experienced and comfortable managing the level of uncertainty in this market, both as a buyer and seller of retrocessional coverage.
Focusing on selling more in 2021 is yet another opportunity to profitably deploy significant amounts of capital.
Moving now to our Casualty and Specialty business.
As Bob explained, this segment largely performed within our expectations during the third quarter.
We experienced rate increases across all major risk classes, along with acquisition and profit commission ratio improvements, and executed on several key transactions at economics that exemplify both our strategic position with core clients and a continuing hardening of casualty markets.
Our ability to increase lines on targeted deals that were oversubscribed substantiates our strategy to build options with core trading partners.
We have been closely monitoring economic impact of COVID-19-related shutdowns and the development of forbearance measures on our mortgage book.
While the homeowners market has seen significant price appreciation in recent months, it comes on the back of a challenging unemployment picture that could put pressure on homeowners' ability to repay their outstanding mortgages.
Despite this challenging economic backdrop, we believe that the portfolio we have constructed will remain resilient.
The fundamentals of the U.S. housing market were strong heading into the pandemic, supported by tight underwriting standards and banking regulations, high loan quality and growth of homeowner equity.
And although we did not expect it to be pandemic-driven, we have been underwriting and constructing the portfolio in anticipation of an economic downturn and have actively avoided risk from lower credit borrowers for several years.
Forbearance trends are showing improvement as well.
With GCE forbearance speaking at around 6.4% in May, and have been consistently reduced since that time.
Looking forward to the January renewal, we expect ample opportunities to deploy significant additional capital in both of our segments and across our platforms.
Many markets are exhibiting supply/demand imbalances.
And overall, we are seeing strong rate momentum across all lines with stable or improving terms and conditions.
We have focused for many years building strong positions on high-quality programs.
As the market hardens, we believe we are preferentially poised to expand our share on existing programs while being the first call for new opportunities, both at improved economics.
I'm pleased to report debentures team continues to operate effectively.
And overall, our joint venture balance sheets continue to perform well.
With the level of catastrophe losses in the quarter, DaVinci also experienced losses, but year-to-date remains profitable.
Top Layer Re, Upsilon and Vermeer, all had positive quarters.
And Medici, our cat bond fund, had one of its best performances in its history, and we expect it to continue to benefit from the flight to simplicity that cap on market is currently experiencing.
The ILS industry will likely suffer significant amounts of trapped capital yet again in 2020 due to the impact of COVID-19, catastrophe loss events to date and an already-active fourth quarter.
The potential for trapped collateral highlights an important difference between collateralized coverage and traditional reinsurance in a collateralized deal, as cedents enjoy protection for as long as collateral is available.
Consequently, in a year like 2020, cedents would prefer to maintain protection against the heightened uncertainty of losses while providers will want to roll their capital into new deals and new premium.
Business interruption-related COVID-19 claims only intensify this inherent tension.
The industry remains in the early stages of assessing the myriad of factors affecting potential BI losses of process that will play out over years.
Given this, going into 2021, we expect that cedents will increasingly prefer the certainty of rated balance sheets, provide over collateralized vehicles.
If this occurs, we have the flexibility to transact with our customers through their preferred means of risk transfer.
This is likely to result in us deploying more rated paper and shrinking Upsilon.
In conclusion, we find ourselves in a very enviable position heading into the January one renewal cycle.
Market conditions continued to improve as the natural catastrophe activity of the quarter further restricts supply in an already unbalanced market.
As the industry grapples with the uncertainties from climate change and COVID-19, our independent view of risk provides us with an enduring competitive advantage.
I am confident that we can profitably deploy material amounts of capital in this environment and continue creating long-term shareholder value in 2021 and beyond. | net claims and claim expenses incurred associated with covid-19 pandemic were not significant in q2 of 2021. | 0 |
These uncertainties are detailed in documents filed regularly with the SEC.
We use adjusted constant dollar amounts as lead numbers in our discussions 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.
Due to the significant impact of the coronavirus pandemic on our prior year figures, today's call will also contain certain comparisons to the same period in fiscal 2020.
These comparisons are all on a reported dollar basis.
On June 28, 2021, the company completed the sale of its Occupational Workwear business.
Accordingly, the company has reported the related held-for-sale assets and liabilities of this business as assets and liabilities of discontinued operations and included the operating results and cash flows of this business in disc ops for all periods through the date of sale.
Joining me on the call will be VF's Chairman, President and CEO, Steve Rendle; and EVP and CFO, Matt Puckett.
As we move through the halfway point of our fiscal year, I remain encouraged by the underlying momentum across the portfolio and the broad-based nature of this strength gives me confidence that we are driving the right strategy to accelerate growth in the quarters ahead.
Looking through pandemic-related disruption and near term headwinds in China, we continue to see a healthy retail landscape, a strong consumer outlook and accelerating demand signals across our business.
While the recovery has not been as linear as we had anticipated for some parts of our business, I'm proud of how our teams continue to deliver through the volatility.
This is certainly where we excel.
We are focused on what we can control.
And despite a more challenging environment than we had envisioned, we are able to reaffirm our fiscal '22 revenue and earnings outlook; a clear testament to the resiliency and optionality of our model.
We see our business emerging in an even stronger place than before the pandemic.
We've accelerated our strategy to be a more digitally enabled enterprise for driving significant investment behind key capabilities to connect with our consumers.
We are driving organic growth as we elevate direct channels, distort Asia, led by China, and accelerate our consumer-minded, retail-centric, hyper-digital business model transformation.
On top of that, our number one strategic priority to drive and optimize our portfolio has netted us significant benefits.
Over the past five years, we have strategically evolved and simplified our portfolio from 32 brands to 12 brands, each with significant D2C and international opportunity, squarely focused on large, growing addressable markets.
The macro trends around outdoor and active lifestyles, health and wellness, casualization and sustainability have only strengthened over the past 20 months and our current portfolio is well-positioned to benefit from these accelerating tailwinds.
Active portfolio management remains an evergreen process and M&A remains our top capital allocation priority.
This is a differentiator and a competitive advantage for VF as we continue to refine our portfolio mix to maximize exposure to the most attractive parts of the marketplace.
We are confident that we have the right strategy and our continued execution on each of these key strategic pillars positions VF for a stronger emergence.
Now, moving into our Q2 results.
While noisy, our second quarter results highlight ongoing progress against our strategy and reflect a healthy, accelerating underlying business with broad-based strength across our portfolio.
I'll start with Vans, which delivered 7% growth in Q2 despite meaningful wholesale shipments pushed into Q3, representing sequential improvement in underlying demand despite a more challenging than anticipated operating environment.
The EMEA business has accelerated meaningfully during the quarter.
However, in the U.S., encouraging brick and mortar recovery trends, which had been building into July, were impacted by the Delta surge and its implications across our most important markets.
This led to sharp shifts in store traffic trajectory during the peak back-to-school window.
Additionally, the brand faced headwinds in Asia Pacific with virus disruption across the region and a more challenging near term consumer environment in China.
While Vans Americas Q2 recovery did not meet our expectations, I'm pleased with our team's response.
We're focused on what we can control.
Our retail associates are driving best-in-class conversion, up 20% relative to pre-pandemic peaks this quarter in the Americas.
And despite the impact of expedited freight, the Vans Americas team has brought full price DTC gross margins above fiscal 2020 levels, supported by discounting below pre-COVID levels.
At the same time, leveraging our strong inventory position, we've secured additional shelf space at several key wholesale accounts for the second half.
So despite a more challenging operating backdrop than anticipated, we are able to hold on to the low end of our prior outlook for Vans and now expect 7% to 9% growth relative to fiscal 2020.
We're confident in Vans' strategic choices as evidenced by improving demand signals and strong consumer engagement.
The September Vans Horror collection launch supported the fifth highest sales day on record for our Americas DTC digital business achieving a 100% sell-through within days.
We are encouraged by the ongoing strength from Progression Footwear lines, up 15% relative to fiscal 2020 led by UltraRange and MTE and are pleased with the continued growth in Vans Family membership reaching 18.5 million consumers globally.
Our confidence in the long-term runway for Vans remains unchanged.
The brand came into this disruptive period exceptionally strong and consumer engagement has remained healthy.
The active space remains a large and growing TAM and the casualization trend continues to present a long-term tailwind for Vans.
And although Vans remains a very important part of our story, we must remember that VF is not just one brand.
We have a diversified portfolio of global brands, each with exposure to attractive TAMs with enduring tailwinds.
We have significant shared platforms of expertise, highlighted by our international platforms and global supply chain, which are enabling broad-based profitable growth.
And as a result, our model drives ongoing capital allocation optionality to further enhance VF's growth and shareholder return profile.
Matt will build on many of these themes shortly, but I'd like to start with an overview of the broad-based momentum we're seeing across the portfolio.
Starting with The North Face, which delivered 29% growth in Q2 despite significant wholesale shipments pushed into Q3, representing a sharp acceleration of underlying demand alongside meaningful margin improvement.
Our international businesses are gaining share, while the underlying U.S. business has accelerated meaningfully this quarter on tight inventories driving high quality sales.
We remain encouraged by the strength across categories as TNF has been successful at balancing On- and Off-Mountain messaging to its consumers.
On-Mountain platforms like FutureLight, Vectiv and the recently launched Advanced Mountain Kit continue to drive strong sell-through and reinforce TNF's performance credibility.
Off-Mountain lifestyle apparel and equipment are delivering outsized growth as strong 365-day demand persisted led by Logowear, Apex and [Indecipherable].
We also saw strong performance for more versatile athletic-inspired products, highlighted by the Wrangler franchise.
We are raising the outlook for TNF to 27% to 29% growth in fiscal 2022.
We continue to believe this moment for TNF is under-appreciated.
This will be a $3 billion business, delivering high-teen growth relative to fiscal 2020 levels, with strong margin expansion underway.
Looking into next year, The North Face will continue to benefit from broad-based brand momentum, fueled by innovation, extremely clean distribution channels, increasing year-round relevancy and ongoing tailwinds from the outdoor marketplace, supported by growing consumer interest in active outdoor lifestyles.
We therefore expect The North Face to be at least within its long-term plan range of high-single-digit growth in fiscal 2023.
Moving on to Dickies, which continues to build upon its incredible run, delivering 19% growth in the quarter.
The brand is driving their integrated marketplace strategy, supporting growth horizontally across work and work-inspired categories, as well as vertically as they focus on higher tiers of distribution and bring new consumers into the brand.
Sell-through remains elevated and demand signals continue to be strong.
Across the globe, the Dickies team remains focused on the key drivers of their business, expanding core workwear beyond traditional channels and leveraging the brand's authenticity to accelerate the Lifestyle segment.
Icons have been a focus for the marketing and sales teams and the results are compelling, highlighted by the accelerated growth of the 874 Work Pant.
There are several versions of this 50-year-old icon, supported by ongoing innovation, which collectively have delivered over 100% growth year-to-date.
In addition to the strong growth trajectory at Dickies, we remain encouraged by the significant margin expansion runway which accelerated in Q2 on the back of strong full price selling and SG&A leverage.
We're proud of the continued success at Dickies, which we feel is another under-appreciated part of the story.
We are raising the outlook for Dickies to at least 20% growth in fiscal '22, representing at least 30% growth relative to fiscal '20.
We expect the brand will approach $1 billion next year as Dickies celebrates its 100-year anniversary.
Next, Timberland delivered 25% growth in Q2, despite significant wholesale shipments pushed into Q3, representing an acceleration of underlying demand over the quarter.
The PRO business remains a consistent growth driver for the brand, supported by a new campaign celebrating the skilled trades to inspire the next generation of worthy workers.
Despite historically low inventory levels, core boots and outdoor footwear continue to show strength as we head into the holiday, each growing over 40% in Q2.
Timberland continues to create and own boot culture with the September introduction of GreenStride Eco-Innovation in boots for the first time.
The Solar Ridge Hiker launched with much fanfare in New York City and posted 50% sell-through in North America.
Two more GreenStride drops will hit in October, driving further momentum behind its important franchise.
At the same time, the TrueCloud collection, another eco leadership story, drove strong traffic and social engagement across all regions.
We believe the Timberland brand is in a much healthier position today relative to where it was before COVID.
This leadership team has a sharpened focus on the brand's product architecture, getting back to Timberland's core, work and outdoor, sustainability and craftsmanship, while increasing energy and newness.
They have refocused strategic clarity around the target consumer and on executing the right go-to-market set of choices.
The brand is demonstrating strong marketplace discipline, reducing discounts and thoughtfully rebuilding depleted inventory while driving significant improvements in profitability.
The integration of Supreme continues to move according to plan and our teams are learning from this highly productive business, including how they manage product creation, building energy ahead of drops, and optimizing assortments in product flow across regions with great agility.
Looking forward, we remain confident in the significant whitespace opportunity for this brand across geographies with a clear opportunity to leverage VF platforms.
Supreme remains on track to become VF's fifth billion dollar brand in the coming years.
And lastly, when speaking to the broad-based strength across our portfolio, I'd like to briefly shine a light on our three outdoor emerging brands: Smartwool, icebreaker and Altra.
This group collectively represents nearly $550 million in revenue for the mid-to-high-teen growth profile longer term.
While smaller today, these brands are all profitable and are exposed to the attractive tailwinds around health and wellness, active outdoor lifestyles and sustainability.
And we're seeing it in their results.
The Smartwool brand is up nearly 60% [Phonetic] year-to-date, representing high-teens growth relative to fiscal 2020.
We've accelerated investment in brand awareness campaigns, highlighting the high performance and versatility of this product, while targeting an active, younger consumer.
We're seeing it pay off with broad-based strength across categories, led by apparel and outsized growth from new consumers.
Our other natural fiber brand, icebreaker, has successfully relocated the core leadership team from New Zealand to our Stabio headquarters, further integrating into our EMEA platform, which will accelerate the brand's global reach.
The brand has grown nearly 30% year-to-date with balanced growth across its largest markets in Europe and the U.S. Base layers, tees and underwear represent about 70% of icebreaker global revenue confirming the consumer appeal of a 100% natural product in next-to-skin categories.
And lastly, Altra, the fastest growing brand in our portfolio is celebrating its 10th anniversary this year by establishing its legendary Lone Peak franchise as the number one trail running business in the U.S. The brand has continued to build accolades from the running community with awards from Runners World, Self Magazine, Women's Health and Outside Magazine across multiple franchises.
Through the first half of the year, the brand has grown over 60% relative to fiscal 2020 and we expect this to accelerate into the back half of the year as the brand continues to expand its presence in road running with innovative new styles and designs.
We see tremendous opportunity for Altra to expand distribution domestically and internationally, leveraging its differentiated product and continued strong tailwinds for this category.
I see significant potential for each of these brands to deliver outsized growth in the years to come.
We have demonstrated the ability to scale brands in the big businesses and have confidence that, over time, these outdoor emerging brands will become another strong component of VF's financial algorithm.
While we remain in a disrupted environment, I believe VF's long-term prospects are even more attractive today.
We've accelerated our transformation strategy.
We have further optimized our portfolio and importantly, this portfolio today is capable of delivering greater broad-based strength, relative to where we were before the pandemic.
This gives us even greater confidence in our ability to drive high-single-digit topline and low-teens earnings growth at a minimum as we emerge as an even stronger company.
I'm happy to give an update on our progress as we navigate the recovery and importantly, I am encouraged by the resiliency of our business during the first half of fiscal 2022.
The environment has clearly evolved differently than we had planned in May.
However, our teams remain focused on what we can control, and they are delivering.
The underlying topline recovery across the majority of our business has exceeded our plan, offsetting new challenges in the APAC region and ongoing disruptions across the supply chain network.
With thoughtful allocation of investments, we've been able to drive continued strategic investment spending, while leveraging other parts of our SG&A base to protect earnings.
As a result, I'm proud of our ability to hold on to our fiscal 2022 earnings outlook of about $3.20 despite a more challenging than anticipated operating environment, including an incremental headwind of about $0.09 from expedited freight.
This should be a strong signal that this management team is committed to leveraging the significant optionality in our model to deliver on our earnings commitment.
Before unpacking our Q2 results, I want to quickly run through the operating environment across the region and share the latest outlook for our global supply chain.
Starting with the Americas region, product delays and reduced traffic during virus surges impacted the business during the highest volume periods this quarter.
However, the region was able to deliver 22% organic growth in Q2, representing continued sequential underlying improvement.
Retailers remain bullish on the upcoming holiday season and we are focused on delivering products in time to support strong demand signals.
Cancellation rates remain historically low due to tight inventories, conversion remains exceptionally strong, and we see continued reductions in promotions compared to last year, driving strong average selling prices.
Next, the EMEA region delivered mid-teen organic growth in Q2 despite meaningful supply chain disruption, particularly for The North Face.
The underlying business continues to perform above the overall market, supported by strong performance of key Digital Titans.
This region was strong before the pandemic and has shown incredible resiliency throughout this disruptive period.
Stores are showing continuous recapture of volumes despite softer street traffic in large metro areas.
We are encouraged to see the brick-and-mortar DTC business for both The North Face and Vans, and quite meaningfully this quarter, each returning to positive growth relative to fiscal year '20.
Recovery momentum and sustained growth are expected to accelerate throughout the year as vaccine rollouts progress.
Finally, the APAC region delivered low-single-digit organic growth despite a more challenging backdrop than anticipated for parts of our portfolio.
Due to a resurgence of COVID-19 across the region, economic growth and consumer confidence has softened since July.
Parts of our business in China have been further impacted by weaker digital traffic for non-domestic brands.
This has been more impactful for Active brands relative to Outdoor.
Across the portfolio, we believe we are performing better in our respective categories versus other international brands.
And while we remain bullish on the long-term opportunity in the region, these pressures have impacted our near-term outlook.
We now expect low-teen growth in China in fiscal 2022.
Moving on to our global supply chain.
The environment remains challenging and has continued to deteriorate following our Q1 call in late July.
The resurgence of COVID-19 lockdowns in key sourcing countries like Vietnam have resulted in more impactful production delays and the logistics network continues to face unprecedented challenges.
We are experiencing increasing product delays from the supply chain disruption, which is creating meaningful quarter-to-quarter volatility in our results.
Let me unpack all of this in a little more detail.
Due to VF's large and strategically diversified sourcing footprint, our overall production capacity has remained better positioned than most with about 85% of production operational throughout the quarter.
Pressures have generally concentrated in the southern region of Vietnam, which represents about 10% of VF's overall sourcing mix.
We remain confident in our ability to navigate the production environment.
However, the logistics network remains under increasing pressure.
Ports are generally open, but operations remain severely impacted by labor and equipment availability, servicing significantly higher ship volumes.
As a result, our dwell times at points of destination have increased significantly.
In aggregate, supply delays are pervasive and, in some cases, have extended 8 weeks to 10 weeks.
As a result, in the most recent quarter, we had a material shift of revenue from Q2 into Q3 with more than half of this tied to Vietnam.
Despite these delays, cancellation rates have remained below historical levels, signaling strong demand and tight channel inventories.
However, delays ultimately impact product availability across the marketplace.
Virtually all of our brands are experiencing delayed collections, style and, in some cases, insufficient size assortment, limiting their ability to fully meet strong demand.
For example, the Supreme brand has experienced around 30% less inventory around drops.
So despite strong sell-through trends, we are losing volume from limited supply.
This environment is where our world class supply chain differentiates itself, highlighting the significant competitive advantage VF has created with its platform.
We have always maintained a diversified sourcing footprint to provide resiliency against unforeseen changes in the operating or geopolitical environment.
For example, our largest market, Vietnam, only represents about one-fourth of our sourcing mix.
And within Vietnam, we work with multiple partners and have presence in multiple provinces, both between the northern and southern regions of the country, and maintain access to multiple ports.
Our teams are leveraging VF's scale and relationships to navigate the challenging logistics environment in the most cost-effective way.
We continue to utilize expedited freight across the large number of air providers.
We've doubled our network of ocean carriers and significantly expanded the number of ports utilized across the globe.
Our commercial and supply chain teams are working closely with our key wholesale partners, increasingly using direct shipping and our work indicates we're doing better than most of the competitive set at keeping products on the shelves.
Our relationship with these key wholesale partners continues to strengthen with our open, transparent and timely communication throughout this dynamic situation.
So despite the unprecedented level of disruption across the global supply chain, our teams have been able to keep products flowing, supporting our strong holiday growth plan and allowing VF to effectively hold our revenue guide for fiscal 2022.
Moving into some additional highlights on our second quarter.
Total VF revenue increased 21% to $3.2 billion despite a significant amount of orders shifted from Q2 into Q3, implying continued sequential underlying improvement for the portfolio.
For context, we estimate this shift represented a mid-to-high single-digit impact to VF's Q2 growth rate relative to fiscal 2020.
Our adjusted gross margin expanded 300 basis points to 53.9% due to higher full price realization, lower markdowns, favorable mix and around 20 basis points contribution from Supreme.
When compared to prior peak gross margins in fiscal 2020, our current year gross margin was impacted by about 180 basis points headwind from incremental expedited freight and FX.
Excluding these two items, our organic gross margin in Q2 is over 100 basis points above prior peak levels, driven by favorable mix and strong underlying margin rate improvement.
And as a reminder, our Q2 2020 gross margin was very strong.
So our ability to deliver this level of underlying expansion against fiscal year '20 margins is a strong testament to the health of our brands in the marketplace.
Our SG&A ratio improved in Q2, down 100 basis points organically to 37.2% despite elevated distribution spend and continued growth in strategic investments.
This strong underlying leverage was driven by discretionary choices and is a clear reflection of the optionality within our model, supporting organic earnings per share growth of 60%.
I'm proud of our team's ability to deliver earnings of $1.11 in Q2 despite incremental expedited freight expense and significant wholesale shipment timing headwinds in the quarter, reflecting the strong underlying earnings momentum of the portfolio.
Now a few comments on our revised fiscal 2022 outlook.
We are holding our revenue guidance to be about $12 billion despite a weaker China outlook in the near term and a lower than expected back-to-school performance at Vans in the U.S. and ongoing supply chain challenges; all of this, highlighting the broad-based strength across our brands and geographies.
Our gross margin outlook is now about 56%, including 40 basis points of incremental freight cost relative to what we had expected in July, implying an improving underlying gross margin outlook.
And adjusting for incremental freight and FX, our fiscal 2022 outlook implies over 100 basis points of underlying gross margin expansion relative to peak gross margins in fiscal 2020, driven by favorable mix and clean full price sell-through.
We are holding our operating margin outlook to around 13% for fiscal 2022 despite the incremental freight cost covered.
As Steve said, we're focused on what we can control and for me, SG&A control is clearly top of mind.
We are offsetting supply chain and distribution cost headwinds with spend reduction actions, while protecting strategic investments and demand creation.
The business is driving impressive underlying leverage and our confidence is strong that we can continue to accelerate this over time.
Finally, as discussed, we are reaffirming our full year earnings outlook of around $3.20 despite about $0.09 of incremental costs directly attributed to the supply chain disruption; a strong testament of portfolio resiliency and the optionality of our model.
Before the pandemic, VF was more reliant on the Vans brand.
Today, however, we have a much larger portion of our business performing at or above our expectations.
There is broad-based momentum across the portfolio.
VF also has a power -- has powerful enterprise platforms, highlighted by our world-class supply chain, which provides a significant competitive advantage to our business.
And lastly, VF has the capacity to drive meaningful incremental shareholder value through capital allocation optionality.
We've demonstrated this over the course of the pandemic by maintaining our dividend and trading our occupational work business for the Supreme brand.
As we have line of sight to our leverage threshold, we have this additional optionality and we'll be opportunistic in share repurchases moving into the balance of this fiscal year.
VF is not just one brand.
We are a diversified portfolio of strong brands supported by world-class enterprise platforms, which we believe at minimum can drive high-single-digit revenue growth, low-teens earnings growth and provide meaningful capital allocation optionality moving forward. | projects contract sales of $385 million to $405 million in q4 of 2021. | 0 |
Before providing you with an update on our response to COVID-19 and our first quarter financial and operating results, I'm going to spend a few minutes on recent events.
What has happened across the country over the last few weeks has brought into sharp focus that we as a country are still falling well short of our national aspiration of racial equality and equal economic opportunity for all.
It is time for us all to listen, learn, and act.
We can feel heartbroken, fearful or uncomfortable, but we must get busy and take action to change things for the future.
With this in mind, Oxford is making a $1 million commitment of additional support over the next four years to help our local communities address economic and racial inequality through education.
Every child regardless of race or economic circumstance deserves the chance to learn and be successful.
The likelihood of success increases exponentially when a child has access to a quality education.
All too frequently, particularly in economically disadvantaged communities and communities of color that access does not exist.
Our commitment builds on Oxford's long history of supporting education programs that improve access to quality education for economically disadvantaged use and predominantly African-American communities.
Now let's talk about what's going on in our business.
It goes without saying that this year is a very unusual year.
In any other year, our key objective is always delivering the sustained profitable growth that drives long-term shareholder value.
With the shutdown of the economy in response to the COVID pandemic, this is a year that given the nature of our business makes it almost impossible for us to achieve this objective.
That said, we believe this situation is temporary and that by focusing on our people, our brands and our liquidity, we will emerge from this year positioned well to thrive in the new and very different post-COVID marketplace.
With respect to these three objectives, people, brands and liquidity, I am very pleased with what we have accomplished since March and the track we're on for the rest of the year.
With respect to people the COVID pandemic and the resulting shutdown have been incredibly disruptive for people at both personal and professional level.
To navigate through this difficult situation, we have had to take a number of painful but necessary actions that have added to the disruption in people's lives.
These have included layoffs, furloughs, pay reductions and other actions, including work from home that have added to the challenges that people face.
We do not take these actions lightly at all, and I am deeply appreciative of how our teams have rallied.
Their commitment, resourcefulness and focus has far exceeded what I could have possibly hoped for.
As we are beginning to emerge from this shutdown or in the early stages of recovery, I believe our team is stronger than ever and better suited to take on the new challenges facing our industry.
Secondly, with our bricks-and-mortar operations substantially shut down for several months and only now slowly beginning to reopen, we have done a terrific job of protecting and preserving the integrity of our brands and our relationship with our customers to ensure we remain in a strong position for the post-COVID consumer marketplace.
We took actions to help us mitigate an over-inventoried position which would undoubtedly require us to engage in the heavy discounting and promotional activity that could damage the integrity of our brands.
We reduced and canceled existing orders, we reduced the amount of our previously planned forward orders, and we delayed and remerchandised inventory that was already in the pipeline.
Through our digital marketing and e-commerce capabilities, we have also done a great job of keeping our customers engaged with our brands in ways that are relevant during this unusual time.
The key takeaway is that some of the most effective messages were those where we really leaned into our brands and their messages of optimism in the happiness.
Customers really look to our brands as an escape from some of the realities of living in a quarantined, work from home, home-schooled world.
Reemergence from the shutdown has also accelerated our efforts to become truly omni-channel.
We believe that all of these actions put our brands in great shape for the future of the lives ahead.
Finally, and very importantly, we have managed our cash outflows very carefully and as a result have reserved a strong liquidity we had going into the shutdown.
We are confident that we will finish the year with more than adequate liquidity to grow and thrive going forward.
Some of the key steps that we've taken have included painful but necessary reductions in employment expense, including the elimination of cash bonuses and reductions in executive and other employee salaries, reducing the forward inventory commitments, slowing down capital expenditures, negotiating equitable rent arrangements with our landlords and a reduction to our dividend and the Board of Directors' cash compensation.
Many of these actions are ongoing, including our discussions with landlords as we work to resolve the current situation.
To reiterate, our key focus this year is making sure our people, brands and liquidity are in an excellent position for the post shutdown consumer marketplace.
I'm very proud of what we've accomplished and believe we are on the right track toward achieving these critical objectives over the remainder of the year.
Our first quarter of 2020 began strongly.
In February, we were very excited to open two new Tommy Bahama Marlin Bars both in the Fort Lauderdale area.
Our retail and e-commerce businesses were posting positive comps, and we were on track to add to our multi-year positive comp trend.
As we approach mid-March, the spread of COVID-19 started to accelerate and began impacting the retail marketplace.
From March 17, to protect the health of our employees and customers, we temporarily closed all of our North American stores and restaurants.
Our corporate offices successfully adopted work from home strategies and with appropriate safety measures in place, we have been able to keep all of our distribution centers open.
The impact to Oxford from the COVID-19 crisis is exacerbated by the seasonality of our business.
Our Tommy Bahama Lilly Pulitzer and Southern Tide brands are oriented primarily to spring-summer with March through June being four of our strongest months of the year.
Our stores and restaurants, which make up 47% of our overall sales in 2019 just began to reopen in early May, and we expect to have almost all of our locations open by the end of June.
As our stores open, however, they are operating with many restrictions in place and consumer traffic that is rebuilding slowly.
The stores that are open are operating at about half prior-year levels on average, with significant regional variations.
But we don't expect revenue from stores to reach prior year levels at anytime during 2020.
We do anticipate steady improvement as restrictions ease and consumers' comfort level increases around travel and shopping.
Turning to our wholesale channel.
It appears that the pandemic is likely to accelerate the closure of a number of department and specialty stores.
Over the last several years, we have very carefully managed our exposure to these accounts as it become increasingly difficult to find partners with whom we can maintain a mutually beneficial business.
In 2019, wholesale sales at Tommy Bahama decreased to 20% of revenue, and at Lilly Pulitzer 21% of revenue.
Most of our wholesale partners have excess inventory and we believe it will take them a while to work through what they have on hand, but we believe the demand for new product will be soft in 2020 and therefore we expect wholesale revenue to be significantly lower than 2019.
Throughout this challenging period, we were able to successfully use our digital platforms to stay connected with our customers.
E-commerce, which was 23% of our revenue in 2019 grew by 12% in the first quarter and the positive momentum has continued into the second quarter as we reap the benefits of the long-term investments we have made in digital and e-commerce, such as upgrades and redesigns of websites, enhanced search engine optimization and new enterprise order management systems.
In the first quarter, adjusted gross margins declined 220 basis points due to higher inventory markdowns and a modest increase in promotional activities.
We expect to continue to experience pressure on gross margin, as we expect to be modestly more promotional throughout the rest of the year.
We have made significant strides in reducing expenses in the first quarter with the reductions across most spending categories, reducing SG&A by $17 million compared to last year.
Employment costs were reduced by $11 million in the first quarter as we made the difficult decisions affected our employees.
We furloughed substantially all of our retail and restaurant employees, eliminate positions throughout the organization, reduced salaries for certain employees, and we suspended our bonus and 401(k) match programs.
We expect SG&A to be lower year-over-year, with the largest percentage decrease in the second quarter.
Then as we expect all locations to be open for the full third and fourth quarters, the year-over-year percentage decreases in SG&A are expected to narrow.
Managing inventory is a critical component of ensuring the health of our brands, and we have taken meaningful actions to reduce and defer our inventory orders, with approximately a 25% reduction in forward orders.
By repurposing some of Tommy Bahama spring-summer collection, we've taken about $25 million of inventory, moved it out to Tommy Bahama's resort line in December, and we have been working with our vendors to extend payment terms.
We are pleased with our efforts and inventory at quarter end increased only 8% despite the significant sales decline.
While it's incredibly difficult to project results in this uncertain environment, I want to add some color on how we currently view the remainder of the year.
The timing of the COVID-19 pandemic created significant headwinds to our top line and similar to the first quarter, we expect a significant year-over-year decrease in second quarter sales.
However, in the second quarter, we expect a larger percentage year-over-year decrease in SG&A, resulting in a smaller loss than in the first quarter.
The third quarter is always a difficult quarter due to seasonality, and we expect it to be even more difficult this year.
Right now, we are projecting the fourth quarter to be modestly profitable with some recovery in our direct-to-consumer channel, but sales will still be below last year.
As Tom mentioned, preserving a high level liquidity is essential during these uncertain times.
We have ample liquidity to meet our ongoing cash requirements, reflecting the strength of our balance sheet entering the pandemic, as well as the recent actions we have taken to mitigate the COVID-19 impact.
During March 2020, as a proactive measure to oyster cash, and we drew down $200 million of our $325 million asset base revolving credit facility.
At the end of the first quarter, we had $208 million of borrowings outstanding, an additional $114 million of unused availability and $182 million of cash and cash equivalents.
Our cash flow from operations used $46 million in the first quarter compared to a use of $6 million in the prior year period.
As we ended the second quarter, our cash burn rate has decreased and we expect it to continue at lower levels throughout the remainder of fiscal 2020.
In the first quarter of fiscal 2020, net sales in each of our operating groups decreased from prior periods, resulting in significant lower operating results, including operating losses in each group other than Lilly Pulitzer.
As a result this triggered first quarter goodwill and indefinite lot intangible asset impairment assessments in accordance with our accounting policies.
Our assessments included at the fair values of the Southern Tide goodwill indefinite-lived intangible assets as of May 2, 2020 did not exceed their respective carrying values, resulting in a $60 million non-cash impairment charge.
Last quarter, the Board of Directors reduced our quarterly dividend from $0.37 per share to $0.25 per share.
The Board has determined that it's appropriate to keep the dividend payable on July 31 at $0.25 per share.
The Board has also elected to reduce its cash compensation by 50% for the remainder of the fiscal year.
We appreciate your support.
Please stay safe during these challenging times. | oxford industries - q1 e-commerce sales grew 12% over q1 last year & positive momentum has continued into q2.
oxford industries - expect to have almost all locations open by end of june.
oxford industries - confident it has ample liquidity to satisfy ongoing cash requirements in fiscal 2020 & for foreseeable future.
qtrly inventory increased 8% to $169 million compared to $157 million in prior year period.
oxford industries - not providing financial outlook for fiscal 2020. | 1 |
We felt the short-term impacts of omicron in January, particularly in the U.S., causing our Q3 revenue to fall short of our expectations.
The COVID resurgence affected not only procedure volumes but also created acute periods of worker absenteeism with our customers, suppliers, and in our own operations and field teams.
Now that said, COVID infections in the U.S. are declining.
Available hospital ICU capacity is increasing and procedure volumes are picking up.
While some of the impacts from the pandemic, like inflation, supply chain issues, and healthcare worker shortages will linger, we do expect that our markets, our customers, and our industry are on the path to recovery.
Over the last 18 months, we've made significant changes to our operating model, moving to 20 focused operating units as well as making major enhancements to our culture and incentives.
These changes have improved our pace of innovation and our competitiveness, as evidenced by recent product filings and approvals that came faster than expected.
And we're not finished driving change.
We're accelerating improvements to our global supply chain and operations, leveraging our scale to further improve quality, increase product availability, and reduce costs.
In addition, we've enhanced our portfolio management and capital allocation processes.
Our new operating model is giving us line of sight into what is required to compete and win over the long term in each of our businesses.
As a result, we're looking at our portfolio with a more critical eye, with a focus on growth, and creating shareholder value.
I'd be surprised if there weren't changes over the coming fiscal year, but I don't know yet if they will be smaller or more significant.
Now let's look at our third quarter results, starting with our market share performance.
Now market share is an important metric and a reflection of the culture and incentive changes that we're making in the company.
About 60% of our businesses held or won share in the last calendar quarter.
While that's down slightly from last quarter due to some supply constraints and where certain businesses are in their product cycles, it is a significant improvement from where Medtronic was just 18 months ago.
So starting with our cardiovascular portfolio.
In cardiac rhythm management, one of our largest businesses, we continue to build on our category leadership, adding over 1.5 points of share.
We're winning share in both high and low power devices.
And we recently launched our Micra AV leadless pacemaker in Japan and Micra VR in China, resulting in international Micra growth of over 50% in Q3.
In Peripheral Vascular Health, we won about a point of share with strong growth in our Abre deep venous stents and venous seal closure system.
And in Cardiac Surgery, we gained over a point of share on the strength of our extracorporeal life support products.
In our medical surgical portfolio, we estimate we gained share in GI, driven by momentum from the recently launched Emprint HP Generator and our Beacon endoscopic ultrasound franchise.
In Respiratory Interventions, despite the year-over-year headwind as ventilator sales continue to return to pre-pandemic levels, we estimate we gained about 400 basis points of share.
We won share in premium ventilation with our Puritan Bennett 980, in video laryngoscopes with our McGRATH MAC, and in core airways with our Taperguard endotracheal tubes.
In our neuroscience portfolio, we increased our market share in Cranial, Spinal technologies.
We're launching new spine implants that enhance the overall value of our ecosystem of preoperative planning software, imaging, navigation, and robotic systems as well as powered surgical instruments, all of which are transforming care in spine surgery.
In Neuromodulation, we have great momentum from new products in both Pain Stim and Brain Modulation.
In Pain Stim, despite the headwinds from omicron, we estimate we gained over a point of share, driven by both our Intellis with DTM technology and Vanta recharge-free systems.
And in Brain Modulation, while we continue to face headwinds from replacement devices, our business grew 15% on strong adoption of our Percept Neurostimulator with BrainSense technology, paired with our SenSight directional lead.
Medtronic is the only company with sensing capabilities on our deep brain stimulators, which drove about 10 points of new implant share and over a point of overall DBS share in Q3, and we expect this momentum to continue.
Another business with momentum is our Neurovascular business, where we are back to winning share, picking up about two points this quarter.
We're seeing strength from our pipeline family of flow diverters for treating intracranial aneurysms.
Our flow diversion launches in Japan, CE Mark countries, and the United States, coupled with broader portfolio growth in China, propelled neurovascular to 12% growth this quarter.
Now while the majority of our businesses are winning share, we have some businesses that lost share in Q3 where we are focused on improving our performance.
In cardiac diagnostics, despite year-over-year share loss, we gained share sequentially for the first time in many quarters.
We've made good progress increasing our manufacturing capacity for our LINQ II insertable cardiac monitor, and we began our rollout of our Accurythm artificial intelligence algorithms, which were just enabled for all LINQ II patients in the U.S.
We expect ongoing supply improvement and additional AI detection algorithms along with new indications to expand the market and drive growth.
In our structural heart and aortic business, we lost share in Aortic due to supply constraints and continued pressure from our Valiant Navion recall and competitive launches.
At the same time, though, we maintained our TAVR share in Q3, growing in the mid-teens.
In our surgical innovations business, we lost a little over 0.5 points of share overall due to acute resin shortage that impacted our flagship LigaSure vessel sealing portfolio.
This was partially offset by increased share in advanced stapling given strong market adoption of our Tri-Staple reinforced reloads as well as share gains in hernia and sutures.
The good news here is that our teams have improved our resin supply, and we expect to be able to meet demand in Q4.
Inpatient monitoring, we estimate we lost a few points of share due to a difficult comparison from the strength we had last year in pulse oximetry and capnography monitor sales.
However, our share has been relatively consistent for the past four quarters.
In pelvic health, procedures slowed this past quarter and we lost some share.
We expect this market to recover, and we are well-positioned to compete.
In ENT, we lost share for the first time in a long time, given some temporary supply chain disruptions that we expect to have resolved going forward.
And in diabetes, we continue to lose share, predominantly in the U.S. Look, we're extremely focused on resolving our warning letter and bringing new products to the U.S. market although timing is difficult to predict.
In December, CMS expanded coverage for our CGM sensors, including those integrated with our insulin pumps, and we're pleased that this will take effect for Medicare patients at the end of this month.
In the international markets, we launched the 770G in Japan last month, making it the first hybrid closed loop system available in that country.
And in Europe, we continue to see success and strong adoption of our 780G with the Guardian 4 sensor.
Next, let's turn to our product pipeline.
We've launched over 200 products in the U.S., Western Europe, Japan, and China in the last 12 months, and these are having an impact across our businesses.
At the same time, we continue to advance new technologies that are in development with increased investments in R&D.
We're expecting these investments to create new markets, disrupt existing ones, and accelerate the growth profile of Medtronic.
Now starting with our cardiovascular portfolio.
We continue to make progress in cardiac rhythm Management on disrupting the ICD market with our Aurora extravascular ICD.
Our U.S. pivotal study is fully enrolled.
We continue to expect CE Mark approval later this calendar year and U.S. approval next calendar year.
Our EV ICD can both pace and shock without any leads inside the heart and veins.
And it does this in a single device that is the same size as a traditional ICD.
We believe Aurora will accelerate adoption of EV ICDs and make this a $1 billion market by 2030.
In cardiac ablation solutions, we're advancing a number of technologies to become a leader in the $8 billion EP ablation market.
We're rolling out our DiamondTempt RF ablation system as well as our exclusive first-line paroxysmal AF treatment indication using our cryoablation system.
We also continue to make progress with our Anatomical PulseSelect PFA system, which has breakthrough device designation from the FDA.
Our global pivotal trial completed enrollment back in November, and we're very excited about how our PFA system could disrupt the EP ablation market.
Last month, we announced our intent to acquire Affera.
Affera has several development programs underway, including a differentiated mapping and navigation system that closes a competitive gap in our product portfolio and a focal PFA system that is a separate and complementary platform to our anatomical PFA system.
We're looking forward to welcoming the Affera team into Medtronic.
Moving to our Symplicity renal denervation procedure for hypertension.
We continue to enroll our ON MED study and expect to complete the six-month follow-up in the second half of this calendar year.
We'll then submit the data to the FDA as ON MED is the final piece of our submission to seek approval for Symplicity.
Adding to our body of evidence, three-year data from our ON MED pilot study will be presented at the ACC scientific sessions in April.
In structural heart, we now expect to begin the limited U.S. market release of our Evolut FX valve in Q1, followed by a full market release later in fiscal '23.
Evolut FX enhances ease-of-use improvements in deliverability, implant visibility, and deployment stability.
In China, we expect to launch our Evolut PRO valve this quarter, our first entry into this large and underpenetrated TAVR market.
We also continue to advance our transcatheter mitral and tricuspid development programs.
In our APOLLO pivotal trial for TMVR, we just had the first implant using our transfemoral delivery system, and we expect this new system to meaningfully accelerate patient enrollment.
Moving to our medical surgical portfolio and our surgical robotics program, we've made progress improving our supply chain and manufacturing and remain focused on scaling production.
At the same time, we continue to add regulatory approvals and expand our limited market release, most recently in Canada, Australia, and Israel.
And we intend to start our U.S. urology clinical trial soon.
In addition to uro and GYN cases, surgeons in Panama, Chile, and India are now performing general surgery procedures with Hugo, including advanced cases like colorectal and lower anterior resection surgeries.
And we announced earlier this month the first Hugo procedures in Europe.
In diabetes, our MiniMed 780G insulin pump, combined with our Guardian 4 sensor, continue to be under active review with the FDA, with approval subject to our warning letter.
When approved and launched in the U.S., we expect this system to be highly differentiated and accelerate growth in our diabetes business.
We continue to expect submission of our next-generation sensor Simplera to the FDA this quarter.
Simplera is fully disposable, easy to apply and half the size of Guardian 4.
Finally, we're making progress on multiple next-gen sensor and pump programs, including patch pumps, although we haven't disclosed details for competitive reasons.
While it will take time, we expect the technology pipeline investments we're making will result in our diabetes business being accretive to total company growth and eventually grow with this important market.
Now turning to our neuroscience portfolio.
We were pleased to receive FDA approval for our diabetic peripheral neuropathy indication for our Intellis and Vanta spinal cord stimulators last month.
This came following the FDA's rigorous review of our clinical submission and years earlier than we had previously communicated.
The approval represents the beginning of a multiyear market development process which we are uniquely suited to execute given our presence in both the pain stim and the diabetes markets.
We believe that DPN market opportunity will reach $300 million by FY '26, and with an annual TAM of up to $1.8 billion, making DPN for SCS one of the biggest market opportunities in med tech.
In addition to DPN, we also continue to make progress on expanding indications for SCS and to nonsurgical refractory back pain and upper limb and neck chronic pain.
If that was not enough for Pain Stim, we're also excited about our inceptive ECAPs closed-loop spinal cord stimulator which we submitted to the FDA late last year.
We expect inceptives closed-loop therapy that optimizes pain relief for patients to revolutionize the SCS market.
Finally, in pelvic health, we're expecting FDA approval for our next-gen InterStim recharge-free device in the first half of this calendar year.
With its designed best-in-class battery, constant current, and full-body MRI compatibility at both 1.5 and 3 Tesla, we expect this device will extend our category leadership in sacral neuromodulation.
Our third quarter organic revenue increased 2%.
While we were tracking to our quarterly guidance in early January, the impacts from this latest wave of COVID affected our revenue in the last month of the quarter.
Despite the challenging revenue, we controlled expenses and delivered adjusted earnings per share in line with our guidance and $0.01 ahead of consensus.
From a geographic perspective, our U.S. revenue was flat, and non-U.S. developed markets grew 1%, given the impacts of omicron.
Our emerging markets were relatively stronger, growing 7%, with strength in South Asia, Latin America and the Middle East, and Africa.
Converting our earnings into strong free cash flow is a priority.
Our year-to-date free cash flow was $4.3 billion, up 23% from last year, and we continue to target a full year conversion of 80% or greater.
And we remain focused on allocating our capital to generate strong future growth and shareholder returns.
We are increasing our organic R&D investments broadly across the company to fuel the pipeline that Geoff walked through earlier, and we are supplementing this with attractive tuck-in acquisitions.
Since the beginning of last fiscal year, we've announced eight acquisitions totaling over $3.2 billion in total consideration, including last month's acquisition of Affera in our cardiac ablation business.
At the same time, we're increasing our minority investments in companies that could become future acquisitions, as was the case with Affera.
We have a commitment to return more than 50% of our free cash flow to our shareholders, primarily through our attractive and growing dividend.
We are an S&P dividend aristocrat.
And fiscal year to date, we paid over $2.5 billion in dividends to our shareholders.
And finally, particularly in periods where we see share price dislocation, we look to execute opportunistic share repurchases, as was the case this quarter.
Fiscal year to date, we've repurchased over $1.1 billion of our stock.
While procedure volumes are still impacted from omicron in the first few weeks of February, we are beginning to see improvement.
Our outlook assumes continued procedure volume recovery through March and April.
And we expect to be back to pre-COVID levels in most of our markets before the end of the fourth quarter.
Assuming that holds, for the fourth quarter, we're comfortable with current Street consensus for our organic revenue growth of approximately 5.5%.
At recent foreign exchange rates, currency would be a headwind on fourth quarter revenue of approximately $185 million.
By segment, we would model cardiovascular at 7% to 8% growth, neuroscience at 2.5% to 3.5% growth, medical surgical at 7.5% to 8.5% growth, and diabetes down 6% to 7%, all on an organic basis.
On the bottom line, we expect fourth quarter non-GAAP diluted earnings per share in the range of $1.56 to $1.58, in line with current consensus.
And at recent rates, we expect currency to have a flat to slightly positive impact on the bottom line.
I am truly grateful for the perseverance that both healthcare workers and our employees have demonstrated to ensure patients receive our life-changing therapies around the world.
Back to you, Geoff.
For the last few quarters, I've been closing by commenting on the progress the company is making in various areas of ESG, or environmental, social, and governance impacts.
Today, I want to highlight that we recently released our global inclusion, diversity, and equity 2021 annual report entitled Zero Barriers.
The report shares how we are accelerating our efforts to remove barriers to opportunities by creating an inclusive work environment, doubling down or removing bias, and amplifying our impact in our local communities.
Our commitments to ID&E and the UN sustainable development goals compel us to solve health and equities faster.
Systemic socioeconomic, racial, geographic, and even generational factors all contribute to a person's ability or inability to achieve good health and reach their full potential as a contributing member of society.
We're committed to urgently addressing barriers to education, diagnosis, and treatment, as the global crisis of health and equity can be solved by accelerating access to healthcare technologies.
One such inequity is mortality from colorectal cancer.
While colorectal is one of the most preventable cancers, low screening rates make it one of the deadliest, with mortality rates 40% higher for the black population in the United States.
In addition, Hispanic and Latino adults are more likely to be diagnosed in later stages of the disease when it's more difficult to treat.
Today, I'm pleased to announce that Medtronic is collaborating with Amazon Web Services and the American Society for Gastrointestinal Endoscopy to place GI Genius modules at facilities that support low-income and underserved populations across the United States.
Our GI Genius system improves the quality of colonoscopies using AI to assist physicians in detecting both precancerous and cancerous growth.
Increasing access to technology that can improve clinical outcomes through earlier and more accurate detection can provide a significant positive impact for communities most vulnerable to colorectal cancer.
We continue to look for creative solutions like this one to address health inequities.
Now let me close on this note.
While the pandemic and its associated impacts have affected our revenue in the past couple of quarters more than we expected, we haven't lost sight of the big picture.
We've made significant changes in the company, and we're strengthening our operations, supply chain, and global quality systems.
We're also laser-focused on capital deployment and portfolio management processes, with a deep commitment to creating shareholder value.
And we have several exciting growth catalysts in our pipeline.
We expect to benefit as market procedures reaccelerate post omicron and as we lead in high-growth MedTech markets.
While it's been a bumpier ride than I would have liked and we still have challenges to work through.
I'm confident in our organization's ability to accelerate and sustain our growth profile over the long term to grow at or above our markets and, as we do so, create value for our stakeholders.
As a result of your efforts, we can fulfill the Medtronic mission: alleviating pain, restoring health, and extending life for millions of people around the world.
Now let's move to Q&A.
[Operator instructions] With that, Win, can you please give the instructions for asking a question. | q4 earnings per share $2.19.
qtrly home sale revenues increased 10% to $1.18 billion from $1.07 billion.
qtrly average selling price of deliveries up 2% to $461,000.
qtrly dollar value of net new orders increased 92% to $1.32 billion from $684.9 million.
backlog dollar value at december 31, 2020 up 87% year-over-year to $3.26 billion.
sees full year 2021 home deliveries between 10,000 and 11,000.
sees home deliveries for 2021 q1 between 2,200 and 2,400. | 0 |
Today, we will discuss our operational and financial results for the three and 12 months period ended December 31, 2020.
Also I'll discuss the impact of Winter Storm Uri that struck Texas in February, the volatility in Japan's wholesale markets as well as our operational and strategic responses to those of events.
Avi Goldin, our Chief Financial Officer, will follow with a deeper dive into the quarter's and full year's financial results.
We capped an outstanding 2020 with solid fourth quarter results.
Let's start by looking at the most fundamental of our KPIs, our customer base.
Despite the challenges of the global pandemic, we were able to increase our global customer base by 66,000 RCEs during the year to reach 440,000 RCEs at year-end, a 17% increase and a record for our Company.
In the fourth quarter, historically our slowest sales quarter, RCEs decreased slightly from 442,000.
Here in the U.S., GRE's customer acquisition program, specifically face-to-face sales channels, has been constrained since last spring by COVID-19-related restrictions on in-person solicitation.
On the flip side, churn has also been lower because the COVID-related sales restrictions apply equally to our competitors.
Nevertheless, we added 28,000 domestic RCEs during the year to end the year with 337,000 RCEs despite a fourth quarter decline from 350,000 RCEs.
At GRE International, we increased our RCEs served by 58% during 2020 and a 12% during the fourth quarter to reach 103,000 RCEs at year-end.
Our Scandinavian operation was the largest contributor to RCE growth year-over-year and sequentially.
Given the challenges of COVID-19, our team did an outstanding job in 2020 to continue building our customer base.
We are well positioned to build upon that success in 2021.
Now, I'd address the weather and related challenges in Texas and Japan.
As you know, Texas was hit by an extremely powerful series of winter storms in mid-February.
The storms caused an unprecedented surge in electricity demand and at the same time, knocked some sources of supply offline.
That imbalance led the PUC to manipulate spot market prices, moving them from the usual sub-$50 per megawatt hour to $9,000 per megawatt hour, where they were artificially maintained by ERCOT, a Texas grid manager, for five full days around the clock.
Just to give you an idea of how completely unprecedented this was, in the previous 10 years, energy prices only hit $9,000 without government interference for a total of 16 hours.
On top of these absurd prices for supply, Genie and other retail suppliers are being saddled with exorbitant load shedding and ancillary charges.
For reference, in the week before the storm, ancillary charges amounted to approximately $2 per megawatt hour, while during the storm the prices spiked to over $20,000 per megawatt hour.
While we were fully hedged for colder-than-normal seasonal weather having bought power well in excess of what our customers demand on a normal winter day, the unprecedented increase in ancillary charges, the artificially sustained period of $9,000 per megawatt hour supply pricing and the extraordinarily high usage led to significant losses.
Since the storm, our meter data has been updated numerous times and our bills have been reissued and resettled multiple times.
At this moment, the information we received to date from our supplier BP indicates that our costs as a result of the storm stand at approximately $12.8 million.
We believe that we are close to receiving the final information about our total losses.
And when we have a complete accounting, we will provide it to you.
We are hopeful that new information and resettlements that have already been ordered by the PUC but not yet passed due to our bills will bring relief rather than add to the pain.
We will know soon enough.
Let's not forget that what happened in Texas as a result of this natural disaster caused very real suffering to many people throughout the region.
Our hearts go out to them.
But much of the suffering could have been prevented.
The mistakes of ERCOT, the PUC and the generators compounded the storm's damage and I commend Governor Abbott, Lieutenant Governor Patrick, and the many members of the legislature who have come out the call for the PUC to take immediate corrective actions.
We join them in asking the PUC to remove the financial repercussions for the decisions that culminated in epic market failure away from the REP industry and to be fairly distributed to the relevant market participants.
However, to date, the PUC had allowed retailers who are protecting customers from the price increases that the PUC itself instituted to take the financial fall.
The injustice is grave and we intend to fight it using [Indecipherable] necessary to protect our shareholders, and we intend to come out of this stronger than ever.
Unfortunately, Texas is not the only market where we faced unprecedented wholesale price spikes in the first quarter.
Energy suppliers in Japan, including at our subsidiary Genie Japan, were squeezed when generators were unable to meet a spike in demand caused by a recent cold snap.
Prices on the Japan Electric Power Exchange surged to $2,390 per megawatt hour, becoming, for a while, the most expensive market in the world.
With only four of its 33 nuclear power plants operating, the country is heavily relying on LNG to meet short-term burst in demand.
But with less than two weeks of LNG supply and reserve, the country was unable to meet its needs after Korea and China snapped up the available supply.
Once again as a result of the generators' and regulators' mistakes, the retail suppliers are bearing the cost even though many, including Genie, were well hedged going into the season.
We have better information on the cost in Japan and our RCE base is smaller than in Texas, so we can say with some confidence that the hit in Japan will be approximately $2.5 million.
As a result of these two events, our operating results and balance sheet position will take a meaningful hit in the first quarter.
Our management team and Genie's Board have adopted a plan to replenish our cash war chest, prudently grow our core business in the U.S., while maximizing cash generation, take operational steps to lower our risk profile and to reevaluate underperforming assets and reform or shed higher risk longer-term opportunities.
In light of this, we are pausing the dividend on our common stock to maximize our ability to grow the businesses that are generating rather than consuming cash.
We are also using this opportunity to progress our other growth businesses such as the demand for renewables, which leverage our existing strengths and strategic assets to align more fully with the prevalent changes under way as energy market shift to renewables and other cleaner supply sources.
We have already made some material strides in this regard.
We hope to share good accretive news about this in future quarters.
While I'm disappointed in the Texas and Japan results, you can be sure that we will do everything in our power to recoup those losses.
I'm confident that our tightened focus on Genie's best performing assets will yield good results for shareholders.
My remarks today cover our financial results for the three and 12 months ended December 31, 2020.
Throughout my remarks, I will compare fourth quarter 2020 results to the fourth quarter of 2019, and full year 2020 results to full year 2019.
Focusing on the year-over-year and quarterly comparison rather than sequential comparisons removes some consideration of the seasonal factors that are characteristic of our retail energy business.
During the fourth quarter, we acquired the outstanding interest in Orbit Energy, our REP business in the U.K., and began consolidating its results on October 8.
Because we have concluded our exploration activities [Indecipherable], we no longer report Genie Oil as a separate segment.
This costs primarily related to the fourth quarter well test and the shutdown of operations [Indecipherable] are reported within our corporate results.
Turning now to the fourth quarter and full year results.
Genie's fourth quarter was comparable to the year ago quarter and capped off a very strong 2020, highlighted by record levels of consolidated revenue and income from operations, which drove significant top and bottom line improvements over 2019.
Fourth quarter 2020 consolidated revenue increased by $21 million to $103 million, primarily reflecting the consolidation of Orbit Energy in the fourth quarter of this year.
Quarterly revenue at Genie Retail Energy, or GRE, our domestic REP segment, decreased $4 million to $70 million, primarily on decreased gas sales.
Both revenue per therm sold and meters served decreased compared to the year ago quarter, the latter because we have focused our efforts on acquiring more profitable electric meters in recent years.
Electricity sales were relatively flat as increased consumption per meter was offset by decreased revenue per kilowatt hour sold.
At GRE International, the segment that comprises our REP operations outside of the U.S., revenue in the fourth quarter increased by $26 million to $32 million, reflecting the inclusion of Orbit results, following its consolidation and increases in meters served at Lumo Energia, our Scandinavian REP.
Genie Energy Services fourth quarter revenue decreased from $1.2 million to $876,000 as revenue realized in the year ago quarter pursuant to Prism Solar's contract for solar panels with JPMorgan Chase was not repeated.
Prism fulfilled that contract earlier this year.
Full year 2020 consolidated revenue increased $64 million to $379 million, a record for our Company.
GRE contributed $19 million of the consolidated revenue increase, posting revenue of $305 million as the COVID-driven shift to work-from-home drove higher per meter electricity consumption.
The increase in kilowatt hours sold more than compensated for decrease in revenue per kilowatt hour sold.
GRE International revenue increased $33 million to $50 million in 2020, primarily reflecting the consolidation of Orbit results in the fourth quarter.
Genie Energy Services revenue increased $12 million to $24 million in 2020, almost exclusively because of the JPMorgan contract revenues that were recognized in the first half of 2020.
Consolidated gross profit in the fourth quarter, predominantly generated by GRE, was $22 million, unchanged from the year ago quarter.
Gross profit at GRE decreased by $4.3 million to $17.7 million as gross profit per kilowatt hour sold decreased and was only partially offset by increases in per meter electricity consumption.
GRE International contributed $4.4 million in gross profit compared to negative gross profit of $288,000 in the year ago quarter.
The increase was primarily result of the inclusion of Orbit Energy's margin contribution for most of the fourth quarter as well as improved economics at Lumo Energia.
Full year consolidated gross profit increased $14.8 million to $97.7 million.
Gross profit increased $7.6 million at GRE on the strength of increased per meter consumption post-COVID, which was offset by a decrease in gross profit per kilowatt hour.
GRE International's growth and the consolidation of Orbit drove a $6.8 million increase in the segment's full-year margin contribution to $7.2 million.
SG&A spend in the fourth quarter of 2020 increased $3.4 million to $22.7 million and full year 2020 SG&A increased $4.3 million to $77 million.
Both increases resulted primarily from the consolidation of Orbit Energy as well as increases in bad debt expense incurred as a result of our expanded presence in markets without POR programs.
Our fourth quarter consolidated loss from operations was $1.1 million, compared to income from operations of $2.3 million in the year ago quarter, primarily as a result of the decrease in margin per kilowatt hour sold at GRE.
GRE generated income from operations of $5.1 million, a decrease from $8.2 million in the year ago quarter, reflecting the decrease in margin per kilowatt hour sold as well as decreased gas sales.
We continue to invest in building our book overseas.
GRE International's loss from operations was $2.9 million compared to $3.2 million in the year ago quarter.
Full year 2020 income from operations increased $9.5 million and $19.3 million.
The improvement was primarily generated at GRE, where income from operations increased $9.2 million to $36.4 million on increased consumption, partially offset by narrowed margin per kilowatt hour sold.
GRE's loss from operations narrowed to $7.6 million from $8.1 million.
Consolidated adjusted EBITDA in the fourth quarter was $693,000 compared to $815,000 in year ago quarter.
For the full year, the increase in residential electricity consumption in GRE drove an increase in GRE's full-year adjusted EBITDA to $37.3 million, which in turn [Indecipherable] consolidated adjusted EBITDA by $13.9 million to $24 million.
Genie Energy's earnings per diluted share increased to $0.01 from nil in the year ago quarter and for the full year 2020 increased to $0.44 from $0.10 in 2019.
In light of the situation in Texas that Michael highlighted, I'm particularly pleased by continued strength of our balance sheet.
At December 31, we had cash, cash equivalents, restricted cash and short-term investments totaling $48.3 million.
Working capital totaled $38.2 million.
We again have no debt at quarter end and non-current [Phonetic] liabilities totaled just $3.8 million.
To wrap up, results this quarter were generally consistent with year ago while the full year 2020 results were very strong with robust top and bottom line results.
Our domestic business generated record levels of income from operations this year and again demonstrated its cash generation potential.
That concludes my discussion of our financial results.
Now, operator, back to you for Q&A. | compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24. | 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. | sees fy adjusted earnings per share $18.65 to $18.90.
company's full year 2021 outlook for net unfavorable covid-19 earnings effects is consistent with previous expectations.
cash flows from operations in q3 were $7.6 billion. | 0 |
Many of these conditions are beyond our control or influence, any one of which may cause future results to differ materially from the Company's current expectations.
And there can be no assurance that Company's actual future performance will meet management's expectations.
With that out of the way we'd like to turn the time over to Mr. Bob Whitman, our Chairman and Chief Executive Officer.
We appreciate you joining us today.
Really happy to have the opportunity to talk with you.
We're really pleased that our second quarter results were strong and even stronger than expected.
We believe this again emphasizes the strength, quality, and durability of Franklin Covey's value proposition and of our strong subscription business model.
Specifically in the second quarter, as you can see in Slide 3, revenue was strong driven particularly by the strength and growth of All Access Pass and related sales.
Gross margins increased 559 basis points compared to last year's already strong second quarter.
Our operating SG&A declined by $2.4 million.
Adjusted EBITDA increased to $5.1 million, which is the level $1.1 million or 26% higher than the $4 million of adjusted EBITDA achieved in last year's strong pre-pandemic second quarter and so the level significantly higher than our expectation of achieving between $1.5 million and $2 million in adjusted EBITDA for the quarter.
Our cash flow was also strong.
Net cash provided by operating activities year-to-date increased 26% or $4.5 million to $21.9 million, ahead of the $17.4 million achieved in last year's second -- year-to-date second quarter.
And finally, we ended the quarter with approximately $55 million in liquidity, which is up from the $39 million in liquidity we had at the start of the pandemic one year ago.
So we're pleased to be in this position.
Like to discuss these results in more detail in just a moment, but first some context.
This strong and stronger-than-expected performance reflects the continuation and acceleration of four key trends we've discussed in the past three quarters and which continued in this quarter.
Specifically, as indicated in Slide 4, these trends are first that the growth of All Access Pass sales has been very strong.
Second that All Access Pass related services have continued to be strong and are now even higher than the very strong levels we had pre-pandemic.
Third, our international operations have continued to rebound.
And fourth, despite continued uncertainty during the first half of the year trends in our education business are really encouraging.
I'd like to provide a little more detail on each of these trends.
First, as expected, the growth of All Access Pass and related sales which accounts for 83% of our enterprise sales in North America continued to be very strong.
As shown in Chart A in Slide 5, you can see total Company All Access Pass pure subscription sales grew 13% in the second quarter to $17.5 million, have grown 14% year-to-date for the first six months and 15% for the total 12 months, the period which is the entirety of the pandemic to date, to $67 million.
In addition, as shown in Chart B, total Company All Access Pass amounts invoiced have been growing even faster growing 16% in the second quarter to $22.5 million and 30% year-to-date to $38.4 million.
Importantly, much of this 30% year-to-date growth in All Access Pass invoiced amounts has been added to the balance sheet and will establish the foundation for accelerated sales growth in future quarters.
Importantly, to us All Access Pass performance has been strong across all the key elements, which we pay attention to.
The number of All Access Pass sales to new logos increased meaningfully both in the second quarter and in the latest 12 months.
Second, the sale of All Access Pass related services which is delivered primarily live online was also very strong in the second quarter.
Chart A in Slide 6 shows the strong booking trend for All Access Pass add-on services, almost all of which are now being delivered live online.
As you can see in Chart C, with the beginning of the pandemic in March of last year bookings of services delivered live on-site at client locations were necessarily canceled and the year-over-year dollar volume of services declined with delivered engagements down $6.9 million in North America in the third quarter.
However, in the fourth quarter of fiscal 2020 new bookings increased levels nearly equal to those achieved in the fourth quarter of the prior year in '19.
These strong bookings in turn drove an increase in the dollar volume of services actually delivered.
As a result instead of being up $6.9 million as in the third quarter, the dollar volume of services delivered in the fourth quarter was off only $1.1 million.
This same positive trend continued in the first quarter and accelerated in the second quarter with a result that in the second quarter sales were actually higher and year-to-date actually services revenue in North America has exceeded the levels achieved in last year's second quarter and first six months period pre-pandemic.
As shown in Chart B, 92% of our services are now being delivered to clients live online and this is important because with 92% of services now being delivered live online our momentum can continue regardless of when and whether organizations return to their offices.
Third, as shown in Slide 7, performance in our international operations has also strengthened in the second quarter.
Sales in China, Japan, Germany and among other international direct offices and licensee partners continued to improve, continuing the trend established in both the fourth and first quarters.
At the start of the pandemic, we had rescheduled substantially all live on-site training engagements in these countries.
Since these countries were just starting to sell All Access Pass and therefore did not have a strong base of durable subscription revenue to cushion them, sales in these countries declined significantly compared to the third quarter of fiscal '19 and actually the decline started a little earlier in China in the middle of last year's second quarter with the onset of the coronavirus there.
As shown in last year's fourth quarter while still operating well below the levels achieved in the prior year's fourth quarter, sequential sales and sales as a percentage of the prior year in these countries began to improve significantly.
Year-over-year sales improved further in the first quarter.
We expect sales in these operations to continue to strengthen in the second quarter and we're pleased that they did.
As shown in the second quarter, international sales were ahead of our expectations and just 14% lower than in last year's second quarter with most of this decline -- year-over-year decline represented in Japan and UK, which have had a series of ruling shutdowns in their economy, which we expect will strengthen.
Finally, as shown in Slide 8, in the Education Division, despite an educational environment which has continued to be very challenging, we've seen a strengthening in the trends of our education business both in the second quarter and year-to-date.
This strengthening includes, number one, the number of Leader in Me schools which have renewed or are ready to renew their leader in Me membership increased to 1,059 during the second quarter compared to 725 schools at the same time last year.
And second, the number of new Leader in Me schools who have contracted by the end of the first quarter were in the process of contracting and is almost equal to that achieved in last year's second quarter pre-pandemic.
Just note that there are also some positive trends in the education market overall despite the challenges, which we all know about.
We expect these will help our education business during the remainder of this fiscal year and into next fiscal year.
These trends include, one, increasing confidence among those in educational communities that most schools will be opened in the fall of this year, not certain but more confident.
Second, that is shown in Slide 9 and as shown on Slide 9, the three COVID-19 stimulus bills passed by Congress in March last year, December and this March dedicated nearly $200 billion toward stabilizing budgets in K-12 schools with a disproportionate amount of that help coming to Title One schools where Leader in Me is often the strongest.
And three, the third trend is that social-emotional learning for students called SEL which plays to the strength of Leader in Me continues to gain momentum.
Its importance is being talked about everyday in the press.
It's becoming increasingly required by districts.
Just one more note.
To take advantage of the stimulus funding and SEL movement, or social emotional learning, our education team has added to its positioning efforts, helping the schools to take on the issues of learning recovery and the student and teacher mental wellness as these become the pressing topics the education community is trying to address and the Leader in Me is really designed to deliver on.
Early indicators suggest this expanded positioning is working well.
And so we believe these businesses and market trends will work in our favor.
There is still be a difficult environment this year, but we're confident in the future of our education subscription business.
We've been conservative about our expectations this year and feel good about our ability to meet those.
With this context, I'd like ask -- turn the time to Steve Young and ask him to dive a bit deeper into our performance for the second quarter.
I'm pleased to be on the line with you today to talk a little bit more about our second quarter results.
So as shown in Slide 10, our performance for the second quarter was stronger than expected and showed positive momentum in almost every front.
Our adjusted EBITDA for the second quarter was $5.1 million, an increase, as Bob said, of $1.1 million or 26% compared to last year's second quarter, an amount substantially exceeding our expectation of achieving second quarter adjusted EBITDA of between $1.5 million and $2 million.
These results are even more notable given that last year's second quarter was itself very strong.
Our cash flow and liquidity positions also increased significantly.
As shown in Slide 11, our net cash generated for the quarter of $5.2 million was $4.2 million higher than the $1 million of net cash generated in last year's second quarter.
This reflects strong growth in adjusted EBITDA and significant growth in All Access Pass contracts invoiced resulting in our balance of billed and unbilled deferred revenue increasing by almost $13.2 million or 16% to $95.9 million in the second quarter.
As shown in Slide 12, our cash flow from operating activities for the second quarter increased $4.5 million or 26% to $21.9 million compared to the $17.4 million in last year's second quarter.
This strong cash flow reflects that an additional benefit of our subscription model is that we invoice upfront and collect the cash from invoiced amounts faster than we recognize all of the income.
As a result, we ended our fiscal year in August with more than $40 million of total liquidity, comprised of $27 million of cash and $15 million on an undrawn revolving line, which was an amount higher than at the start of the pandemic.
We are pleased that we added further to this liquidity during this year's first half.
We ended the second quarter with $55 million of total liquidity, comprised of $40 million in cash, which means we had no net debt and with our $15 million revolving credit facility still undrawn and available.
So this good performance was driven by, first, strong revenue.
As shown in Slide 13, our second quarter revenue of $48.2 million was driven by very strong performance in our North America operations and the continued outstanding performance of All Access Pass.
Where as shown in Chart A of Slide 14, companywide All Access Pass subscription sales grew 13% in the second quarter, 14% year to date and 16% for the last 12-month pandemic period.
And in addition to the All Access Pass subscription revenue recognized in the quarter, Chart B shows that we also achieved a very strong 16% growth in All Access Pass amounts invoiced to $22.5 million in the second quarter and grew 30% year-to-date to $38.4 million.
Most of the significant growth in All Access Pass amounts invoiced was not recognized in the quarter but was added to the balance sheet as deferred revenue.
This will, of course, be recognized and help accelerate our results in future quarters.
These new invoiced amounts included strong sales of new logos, a continued quarterly and last 12-month revenue retention rate of greater than 90%, as shown in Chart C a large number of All Access Pass expansions and as shown in Chart D a significant volume of multi-year All Access Passes, which increased our unbilled deferred revenue significantly over last year's amount.
Sales of services were also very strong in the second quarter.
Services revenue in North America grew $7.7 million in the second quarter compared to $7.1 million in the prior year.
Second, as shown in Slide 15, the strong All Access Pass sales drove significant growth in our gross margin percentage again in the second quarter.
As shown, our gross margin percentage in the second quarter increased 559 basis points to 77.5% from 71.9% in the second quarter of last year.
As shown also, our gross margin percentage has increased 459 basis points year-to-date and 392 basis points for the last 12 months.
In the Enterprise Division, driven by the significant growth of the All Access Pass and related sales, our gross margin percentage increased to 81.7% compared to 76.1% in last year's second quarter, an increase of 562 basis points.
Third, our operating SG&A in the second quarter was $2.4 million lower than last year's second quarter and $6.8 million lower than the first half of last year.
And finally, the combination of these factors resulted in adjusted EBITDA growing to the $5.1 million, an increase of $1.1 million or 26% compared to the just over $4 million of adjusted EBITDA achieved in last year's strong second quarter and significantly higher than our expected amount.
The strong second quarter also resulted in adjusted EBITDA for the first six months of this year, reaching $8.8 million, a level only $200,000 less than the first half of fiscal 2020 which of course was pre-pandemic.
Importantly, as noted, we also had strong invoiced and multiyear sales in the second quarter because most of these new invoice sales were subscription sales.
These amounts were not recognized in the quarter, but went on to the balance sheet and added to our balance of billed and unbilled deferred revenue which will add to and be recognized in future quarters.
As a result, as shown in Slide 16, our total balance of billed and unbilled deferred revenue increased to $95.9 million, reflecting growth of $13.2 million or 16% to our balance of $82.7 million at the end of last year second quarter.
As noted last year approaching $100 million of billed and unbilled deferred revenue is a big landmark for our subscription business and helps to provide significant stability and visibility into our future performance.
This strong combination of factors continues to drive our expectation that we will generate very high growth in adjusted EBITDA and cash flow in fiscal 2021 and on an ongoing basis.
So we're pleased with the second quarter result and, Bob, turn the time back over to you.
Just continuing, as shown in Slide 17, as reviewed last quarter, we expect to generate adjusted EBITDA of between $20 million and $22 million in fiscal 2021 and we are pleased to be off to a very strong start toward this objective.
Achieving that range in adjusted EBITDA would represent an approximately 50% increase in adjusted EBITDA compared to the $14.4 million of adjusted EBITDA we achieved in fiscal 2020.
And also as we've noted previously, our target is to see adjusted EBITDA now increase by approximately $10 million per year every year thereafter to at least to approximately $30 million in fiscal 2022, to $40 million in 2023 and so on.
And these targets reflect our expectation that we'll be able to achieve at least high single-digit revenue growth each year, which is growth of approximately $20 million per year.
But on an average approximately 50% of that amount of growth in revenue will flow through to increases in adjusted EBITDA and cash flow.
As we also said previously, we fully expect to achieve an adjusted EBITDA to sales margin of approximately 20% over the next few years as adjusted EBITDA approaches $60 million and to become $1 billion market cap company even at the adjusted EBITDA multiple of around 15% that is conservative relative to our adjusted EBITDA growth rate, which is more like 35%.
And this of course doesn't reflect the multiple of -- that we'd ever get a multiple of revenue which is often achieved by companies with similarly successful subscription-based business models.
So looking forward, as we've discussed, substantially all our growth has been and is being driven by growth in All Access Pass and related sales.
This strong growth in All Access Pass and related sales has continued strong through the pandemic you've heard and we expect it to continue to drive significant growth in the future.
Like to just briefly highlight three factors that we expect will continue to drive significant growth in our subscription business and which will drive the very significant growth in sales and profitability in the coming quarters and years.
As shown in Slide 18, these are first driven by growth in All Access Pass.
We expect substantially all of the Company's sales to be subscription and subscription-related within the next three to four years.
Second, we expect that the already significant lifetime customer value of an All Access Pass holder will actually continue to increase.
And third that as we continue to aggressively grow our salesforce and our licensee network, the volume of new high lifetime value All Access Pass logos will accelerate.
Just like to touch on each of these three quickly.
First, as indicated in Slide 19 driven by growth in All Access Pass-related sales we expect that substantially all of the Company's sales will be subscription and subscription-related within three to four years.
As this almost complete conversion to subscription and related revenue occur we expect virtually the entire Company to be able to generate the same kinds of growth in revenue, gross margins, revenue retention and customer impact we've seen in our subscription business over the past five years.
We expect this almost total transition to be driven by the following three things.
One -- first, by the continued strong growth of All Access Pass and related sales in the Enterprise Division in North America where All Access Pass already accounts for 83% of sales.
As shown in Slide 20, All Access Pass and related sales represented only 13% or $13.7 million of total sales in North America in 2016 when we first introduced All Access Pass.
The dramatic, sustained, compounded growth since then has resulted in All Access Pass and related increasing to $94.3 million for the latest 12 months through this year's second quarter.
And with annual All Access Pass-related sales growth expected to continue to grow at more than a double-digit pace and with our historical legacy sales now at very low levels and expect to remain flat or decline a little bit further, we expect All Access Pass and related sales to increase to more than 90% of total North America enterprise sales over the next few years.
The second major driver to becoming almost totally subscription and related is the conversion of the majority of our international operations to All Access Pass and related in the coming years.
In addition to the 83% of North America enterprise sales, which were already All Access Pass, the growth in penetration of All Access Pass has also progressed rapidly in our English-speaking international direct offices.
As you can see in Slide 21 from having almost no subscription sales in these offices just five years ago, All Access Pass and related sales for latest 12 months now account for 74% of total sales in the UK and 69% in Australia for the last 12 months.
Both these offices are well in their way toward the same 90% penetration we expect to achieve in North America.
As you know, our largest international direct offices are in China and Japan, both of which are in the early stages of conversion to All Access Pass but accelerating.
Having made the conversion to All Access Pass in the US and Canada, the UK and Australia, we know what the play is.
We are confident the China and Japan will also convert the vast majority of their revenue to All Access Pass and related in the coming years.
And then the final driver of increased subscription penetration is the other area of the company is our education division, which accounts for 22% of sales.
Slide 22 shows within our K-12 business, 70% of our sales were subscription -- were pure subscription for the latest 12-month period through this year's second quarter.
Slide 22 also shows the significant increase in subscription sales in our K-12 business over the past years and we expect both our K-12 and higher ed businesses to continue to advance toward the same 90% subscription that we are close to in North America, which we're on the way to in the UK and Australia and which we will achieve also in China and Japan.
With this combination of the 82% and everything else moving, we expect virtually the entire business to reflect the higher growth, higher margin, higher retention properties for subscription operations in the coming years as you've seen.
And the impact will be what we've already seen in North America and on the total business.
I'd now like to ask Paul Walker to address the other two elements behind our expected accelerated growth in our subscription business.
For the second factor that we expect will continue to drive significant growth in profitability as shown there in Slide 23, point number two, is that the already significant lifetime customer value of our All Access Pass holders has increased and will continue to increase in the future.
As shown in Slide 24, All Access Pass has, first there at the top, a relatively large and increasing pass size of $38,000, up from $31,000 just a year ago.
Second, the pass has an annual revenue retention rate of greater than 90% which was the case even throughout the pandemic.
Third, a services attachment rate of 44% and I think important to note that that's up from just 17% a few years ago.
The combination of All Access Pass, the pass itself and the related attached services now total approximately $55,000 per pass-holding customer and that numbers continue to increase.
And then fourth as shown here, the blended gross margin on the pass and the related services combined have a gross margin of greater than 85%.
These strong economics are driving a very significant lifetime customer value.
In fact, this customer value is quite a bit higher than we had under our previous legacy pre-subscription model.
For example, as shown in Slide 25 a prior client, an example client, spending $10,000 in a given year under our legacy model, typically spend about twice that or $20,000 over three years and has a gross margin of about 70%.
In contrast, a typical All Access Pass customer today spends approximately $55,000 on a combination of their pass and the related services in their first year, $49,500 in their second year and $44,500 in their third year for a three-year total of $149,000 between the pass and the related services.
Stated a minute ago, whereas the old model was about a 70% gross margin, this new blended margin on All Access Pass and related is greater than 85%.
That's the second reason.
The third reason is indicated here -- as indicated here in Slide 26, the third factor for driving our expectation of significant revenue and profitability growth is that as we continue to aggressively grow our sales force and our licensee network, the volume of new All Access Pass logos will accelerate.
The combination of one, our high and growing lifetime customer value; second, our less than one-to-one cost of acquiring a new customer and third our approximately one-year payback on the investment in hiring a new client partner makes the economics of growing our sales force extremely compelling.
As shown in Slide 27, over the past five years we've added 74 net new client partners in our direct offices.
More than half of these client partners are only midway through their five-year ramp-up to $1.3 million in annual sales volume.
We expect these ramping client partners to generate significant revenue growth over the next few years as they complete their ramp and we also have a lot of headroom to add additional client partners.
As shown in Slide 28, this is just the US and Canada example alone where we currently have 179 client partners across both enterprise and education.
We have room to add at least an additional 435 client partners in the coming years.
We expect that the combination of ramping the existing client partners and hiring at least 30 net new client partners each year will allow us to add a significantly increasing number of new logos, which in turn will generate very significant and increasing lifetime customer value.
And so we believe that the combination of these three factors will continue to drive significant growth in sales and profitability in the quarters and years to come.
And I'll turn it to Steve Young to address our guidance now.
And I'll keep the ball.
So our guidance for FY '21 as discussed in past quarters is we expect to generate adjusted EBITDA between $20 million and $22 million and we affirm that guidance.
This result would be an approximately 50% increase compared to the $14.3 million of adjusted EBITDA achieved last year.
This expected growth reflects everything that Bob and Paul talked about, including the continued strong performance of our North America operations.
Underpinning this guidance for the year are the following expectations that we talked about last quarter and that are still consistent with our year-to-date results.
First, that a significant portion of the deferred revenue on the balance sheet and a portion of the contracted unbilled deferred revenue will clearly flow through to recorded sales as expected.
Second, that the All Access Pass will continue to achieve, one, strong growth in both sales and invoiced sales, high revenue retention rates, strong sales of new logos and continued growth in pass expansion and multi-year contracts.
We also expect that All Access Pass add-on sales will continue to be strong.
Third, that net sales in Japan, China and among our licensees will continue to strengthen.
The increase in the All Access Pass sales which we expect to achieve in these countries will, of course, result in a portion of the new sales to be added to the balance sheet as deferred revenue.
And four, that in education we expect to continue to achieve strong retention of both schools and revenue among existing Leader in Me schools.
And despite the fact that the environment could be challenging and budget-constrained for education in the remainder of FY '21, we still expect to achieve growth in a number of new Leader in Me schools beyond the 320 schools achieved in FY '20.
So that's our overall guidance that we are affirming that guidance.
For the third quarter of fiscal 2021 we expect that adjusted EBITDA will be between $4 million and $4.5 million compared to the adjusted EBITDA loss of $3.6 million in last year's pandemic-impacted third quarter.
Please note that among -- that the amount of adjusted EBITDA expected in Q3 is not only more than $7.5 million higher than last year, it is also higher than the adjusted EBITDA result of $3.1 million achieved in the third quarter of FY '19.
So that's our guidance.
Now our general targets for years beyond 2021.
As we said before, building on the $22 million of adjusted EBITDA that we expect to achieve this year and driven substantially by the expected continued growth of All Access Pass, our target is to have adjusted EBITDA increase by around $10 million per year to around $30 million in FY '22 and to around $40 million in FY '23.
These targets reflect our expectations of being able to grow at least high single-digit revenue growth and approximately 50% of that growth in revenue will flow through to increases in adjusted EBITDA.
While changes in the world's business outlook and many other factors could impact our expectations, we wanted to share these as our current internal targets and assumptions.
So that's our guidance, Bob, and turn the time back over to you.
We're delighted to be where we are and grateful and really excited about what's ahead of us.
At this point, we'll open it to questions. | q1 sales $48.3 million versus refinitiv ibes estimate of $48 million.
affirms its previously announced guidance. | 0 |
The company's annual report on Form 10-K filed with the Securities Exchange Commission on March 16, 2021, and any subsequent filings with the Securities Exchange Commission, all of which are available on gapinc.com.
Joining me on the call today are chief executive officer, Sonia Syngal; and chief financial officer, Katrina O'Connell.
As I reflect on the last 18 months, I'm inspired by the incredible transformation our teams have made in such a short time despite an ongoing pandemic-related disruption to our business and the broader economy.
Coming off record sales performance in Q2, we had accelerated momentum heading into the back half before facing disruption to our supply chain, driven by the two-and-a-half-month closure of our top manufacturing country, Vietnam, as well as port congestion, both of which affected our ability to fully meet strong customer demand.
While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months.
We have been all hands on deck to address these headwinds and the resulting impact on our business, proactively navigating holiday and beyond, ensuring that the customer is at the center of every decision we make.
To secure our supply and meet the needs of our customers, we chose airfreight over ocean vessel for a significant portion of our assortment, taking on extreme transitory cost.
We're disappointed in the short-term impact on earnings, but we made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term.
Katrina will go into greater detail on our mitigation efforts later.
Overall, we continue to believe the scale of our supply chain is the material advantage.
We have deep relationships with our manufacturers across multiple countries of origin optimized for cost, speed, and expertise.
And we have strong transportation partners, offering speed advantage and industry-leading rate.
That said, learnings from this crisis will not go to waste.
We're using them as an opportunity to accelerate digitization efforts that were already underway across our product-to-market process.
There was a sizable increase in the enterprise clock speed on transformative initiative as we combated the current crisis with an eye on a better future faster.
For example, we're adding supply chain capabilities that will allow us to better anticipate the unexpected.
We've made significant progress digitizing core operating processes with a targeted focus on inventory management, loyalty, and personalization.
And we're transforming product creation by using digital tools to unlock speed and efficiency.
All of this work will pay forward in 2022 and beyond.
These near-term pressures have not distracted us from our core strategy.
We have an acute focus on what really matters, our unique, ownable asset.
It's because of the simple, consumable, and executable strategy we shared in October of last year, our Power Plan 2023, the Gap Inc. is in a stronger, more resilient position today than we were entering this fiscal year.
Even in the face of current headwinds, I'm confident this is true.
Our brands are healthy, demand for our product is strong, and we have pricing power with average unit retail contributing to the highest gross margins in over a decade.
We are becoming digitally led.
Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales, and our migration to the cloud has unlocked innovation in our tech portfolio.
We will strategically shed an estimated 1 billion in sales by year-end versus 2019 by closing unproductive stores, divesting smaller brands, and partnering our European business to drive focus and profitability.
Nearly three-quarters of active customers are loyalty shoppers, and they are spending twice as much as nonloyalty customers.
And we have fortified our strong balance sheet by restructuring long-term debt, allowing us to invest for growth while continuing to return cash to shareholders.
I have watched you navigate, persevere, and accelerate through these needs -- near-term challenges while executing a long-term strategy.
Despite the supply chain disruption, comp sales were up 5% on a two-year basis, with three of our four brands delivering positive two-year comps.
Net sales were down 1% to 2019, which includes an estimated 8%-point impact due to supply chain headwinds.
Our strategy is on track and is working.
Let me walk you through how our Power Plan came to life in Q3.
Starting with the power of our brand.
Each of our billion-dollar brands is finding new and relevant ways to expand reach and cut through to the consumer.
This is driving an increase in brand power and a decrease in discounting.
Let me start with Old Navy.
Old Navy delivered 8% sales growth versus 2019, a deceleration from the first half as the brand was disproportionately affected by inventory lateness during the quarter.
Old Navy maintained its No.
1 rank in kids market share according to NPD and sustained its kids and baby growth trend from the first half with strong back-to-school performance.
BODEQUALITY, Old Navy's inclusive sizing integration launched successfully in August.
The brand more than doubled its extended size customer files since launch.
Fifteen percent of customers who shopped extended sizes are new to the brand, and more than a third have shopped Old Navy before but are new to the category.
We are seeing strong extended-sized demand across fashion categories, a clear signal that our customer is craving trend choice lacking in the market.
The momentum continues at Gap brand, particularly North America, with comparable sales up 13% versus 2019, and net sales nearly flat despite the almost 18 percentage points of revenue we shed through strategic store closures.
This marks the third consecutive quarter of positive comparable twp-year sales growth in North America as Gap brand improves the core health of the business from tighter assortments and better quality product to an increase in digital penetration and lighter and brighter stores.
Gap reached a critical milestone in our Power Plan, concluding its strategic review of the European market, driving a more profitable business model by shuttering our U.K. stores and working with local partners to amplify growth.
We have identified strong partners in the U.K., Ireland, France, and Italy, and together, are committed to serving and growing our Gap customers in Europe.
Our newest Yeezy Gap icon, the Perfect Hoodie, delivered the most sales by an item in a single day in gap.com history.
With over 70% of the Yeezy Gap customers shopping with us for the first time, this partnership is unlocking the power of a new audience for Gap, Gen Z plus Gen X men from diverse background.
We've successfully launched new brand positioning focused on acceptable luxury.
Through unique storytelling and experiences, the brand is going back to its roots, igniting the adventure in all of us.
Banana Republic reported a net sales decline of 18% versus 2019, and a negative 10% two-year comp.
Like Gap, we walked away from about 10 percentage points of unprofitable revenue due to strategic store closures.
Product margins expanded during the quarter as luxury products like merino, leather, cashmere, and silk resulted in increased average transaction, drawing higher-value customers willing to pay for great quality.
And finally, Athleta delivered an outstanding quarter with 48% net sales growth versus 2019, using its unique and ownable mission to empower women and girls through the power of she.
The brand is investing in new touchpoints that increased awareness and drove new customer acquisition, which has more than doubled versus Q3 2019.
Athleta grew brand awareness of 33% versus 27% last year, according to YouGov, by embracing celebrity partnerships, Simone Biles and Allyson Felix, who took to the world stage in Tokyo.
The brand expanded into Canada with the launch of its online business and its first company-operated store in Vancouver and Toronto.
And customers are quickly embracing Athleta well, their new immersive digital community rooted in well-being with the active user base growing 50% every month since launch.
We believe this platform has tremendous potential over the coming years to revolutionize how we monetize vulnerable brand experiences.
Next, the power of our platform and portfolio.
We leveraged our size and scale to drive advantage for our four purpose-led, billion-dollar brands.
Our leading omni platform provides customer convenience and engaging experiences, whether in-store, on mobile, or through curbside pickup.
Our online sales grew 48% in the quarter compared to 2019, and we maintained our rank as No.
Our sizable active customer file sits at 64 million, and those customers are spending more on average than they were two years ago.
But the more important is that the health of our customer file is improving.
Compared to 2019, newly acquired customers are spending more with us than our existing customers with increased average transactions, average unit retail, and basket size.
We're pleased with the launch of our innovative rewards program and our ability to build customer lifetime value.
Now, with more than 45 million members, our loyalists are two times more likely to shop across brands, and three times more likely to shop across channels.
We fuel our brands through our scale technology advantage operations.
We are investing capital to drive growth, reduce costs, and increase speed and agility.
To diversify and strengthen our business, we are also seeding new capabilities that will unlock additional value.
For example, we acquired Drapr, which we expect will power new e-commerce tools with 3D fit technology; and we acquired CB4, our machine learning and AI acquisition with broad potential across sales, inventory, and consumer insights.
We have plans to scale these solutions in 2022 to build our core digital capability.
This will help our brands lower return, boost in-stock levels, increase margins, and deliver better customer experiences online and in-stores across all four brands.
The power of our portfolio comes to life through our leadership in key categories.
Our strong active and fleece business and our Denim business are expected to generate revenue of 4 billion and 2 billion, respectively, this year; and our kids and baby business owns 9% market share across Old Navy, Gap, and Athleta.
Even as occasions and wear-to-work categories have strengthened, it's clear comfort and style will sustain.
We're extending our customer reach across every age, body, and occasion from value to premium through category expansion and new addressable markets.
We can test and pilot in one brand and then leverage learnings to scale across the rest.
For example, starting our inclusive sizing rollout in Athleta and scaling at Old Navy with BODEQUALITY, or using Old Navy, Gap, and Banana Republic's strong presence and infrastructure in Canada to enable Athleta's quick and seamless entry into the market.
It's the collective power of our brand that gives us scale advantage.
We continue to innovate in sustainable sourcing with a focus on empowering women, enabling opportunity, and enriching community.
Every industry will be impacted by climate change, and we are doing our part to mitigate this impact, both in our supply chain and on the communities where we operate.
Earlier this month, the USAID, Gap Inc., Women + Water Alliance announced that we have empowered 1 million people to improve their access to clean water and sanitation, already halfway to our goal of reaching 2 million by 2023.
Looking ahead, we anticipate robust apparel and accessory retail sales across the industry for the remainder of the year and into the next.
That said, we are balancing the favorable consumer climate against current supply constraints.
As I mentioned earlier, we are doing everything we can to improve our on-hand inventories versus fall.
And still, we remain cautious given the current environment.
One last thought before I hand it over to Katrina.
While the near-term headwinds and resulting impact on our performance are difficult, we remain focused on executing our strategy for long-term sustainable growth.
We are focused on what matters, demand-generating investments in our billion-dollar brands fueled by cut-through creative, deploying data and science to drive efficiency in the way we work, and restructuring our business to reduce cost.
All of these allow us to emerge from the crisis, growing share, increasing brand health, and delivering profitable growth long term.
As Sonia said, we're deeply proud of the progress we're making to transform Gap Inc. through our Power Plan 2023.
We have strong demand for our brands and our fleet optimization through store closures, international partnerships, and divestitures is progressing well and adding value.
Our operating margin remains on track to hit 10% by 2023, in line with our plan, even as we navigate these near-term disruptions.
Our balance sheet, fortified with our recent debt restructuring, enables us to invest in our business to drive growth while returning cash to shareholders.
The core tenets of our Power Plan 2023 strategy are well underway in delivering value.
While we're confident with our strategy, widely reported worsening global supply chain issues meaningfully impacted our third-quarter performance.
We lost approximately $300 million of revenue or eight percentage points of sales growth on a two-year basis due to longer transit times and lost weeks of production, which led to on-hand inventory shortages in the quarter.
The backlog at U.S. ports deteriorated meaningfully from the first half of the year, resulting in up to three continuous weeks of unanticipated delays to fall product deliveries throughout the quarter.
In addition, while our production capacity is largely globally diversified, approximately 30% of our product is produced in Vietnam, where factory closures extended to over two and half months, significantly longer than initially anticipated.
Our average on-hand inventory in Q3 was 11% below fiscal year 2019.
So despite strong sell-through trends, we lost volume as a result of limited supply.
While our brands all experienced delays in styles and sizes that limited their ability to fully meet strong demand, Old Navy was disproportionately impacted.
We believe these supply chain disruption impacts to our sales and margins are transitory, although will persist in Q4 and potentially into early next year.
With that, we've taken some near-term actions to proactively improve supply for holiday, and we're using the learnings from acute supply crisis to accelerate new capabilities for 2022 that we believe will help to better mitigate logistics challenges and more profitably increase speed to market go forward.
Let me touch on some efforts.
First, in the near term, we've secured incremental air capacity to support holiday inventory.
In addition to an estimated $100 million of air costs incurred in Q3, we've also invested approximately $350 million in Q4 airfreight to further expedite holiday deliveries.
And second, where possible, we have routed a modest portion of our inventory to East Coast ports to bypass the congestion in the L.A. Long Beach port.
While we aspire to improve our on-time deliveries for holiday by adding air capacity and utilizing alternate ports, the supply chain situation continues to be volatile.
Newly opened Vietnam factories are behind on holiday profits production, ramping up slowly.
Ongoing port delays are worsening and air charters are causing new airport congestion.
Our mitigation efforts are driving significant transitory costs, but we're focused on the long-term impact that delighting our customers with the products they love during the holiday season have in preserving market share and maintaining customer loyalty.
We remain cautious in our outlook for the balance of the year and are updating 2021 earnings per share guidance range to $0.45 to $0.60 per share on a reported basis, and $1.25 to $1.40 per share on an adjusted basis.
We are updating our guidance solely based on the acute revenue and margin impact from supply chain disruptions.
This range now reflects the estimated lost sales from supply disruptions in the second half of 2021 to be $550 million to $650 million.
In addition, our updated guidance range reflects approximately 450 million of transitory airfreight costs we have chosen to incur as we seek to meet as much customer demand as possible.
And we are confident that when adjusting for these substantial disruptive impacts to 2021, our underlying business is ahead of plan, and we will emerge strong in 2022 and beyond.
As we look to 2022, we are adding new capabilities that will enable us to navigate these disruptions with more flexibility and significantly less airfreight.
Beginning with summer 2022, our teams have added the expected longer port delay times into product booking deadlines, which we believe will enable us to ship goods largely by ocean for on-time deliveries.
In addition, Old Navy has now accelerated its use of digital product creation for the majority of its fall orders with vendors.
This has added speed to the pipeline as the breakthrough and efficiency for the brand.
Also, to increase geographic diversification and flexibility, we expect to leverage more multinational vendors.
And we will begin to deploy AI from our recent CB4 acquisition to better drive inventory in-stock in our stores.
AI, combined with ongoing inventory management transformation efforts and the leverage of our new loyalty program, gives us confidence in the sustainability of strong average unit retails in 2022.
Now turning to third-quarter financials.
Before I get into specific results, I'd like to note that there are select charges we incurred in the quarter that are excluded from our adjusted financials, specifically costs related to restructuring our long-term debt and the transition of our European market to a partnership model.
I'll provide more details on these as I talk through the results.
Net sales of 3.9 billion for the quarter were down 1% to 2019 with our Q3 sales deceleration from the first half of the year due to supply chain issues.
Comp sales improved 5% on a two-year basis.
We're particularly pleased that three of our four brands delivered strong two-year comp growth with Old Navy up 6%, Gap Global up 3%, and North America up 13%, and Athleta up 41%, all while navigating acute supply issues.
And while Banana Republic's two-year comp was down 10%, the brand made progress in the quarter through its product and customer experience relaunch.
Our strong e-commerce channel continues to be an advantage as online sales were up 48% compared to 2019, contributing 38% of sales in the quarter, up from 25% of total sales in Q3 2019.
Moving to gross margin.
Third-quarter reported gross margin was 42.1%, an increase of 310 basis points versus 2019.
Excluding impacts related to the transition of our European business to a partnership model, adjusted gross margin of 41.9% for the quarter represent the highest Q3 gross margin rate in over 10 years, expanding 290 basis points versus 2019 gross margin.
This is primarily driven by 300 basis points in ROD leverage from higher online sales and lower rent occupancy and depreciation as a result of strategic store closures and renegotiated rents.
Merchandise margins were down just 10 basis points, despite nearly 200 basis points of higher online shipping costs and about 250 basis points in short-term headwinds related to airfreight.
Product acceptance was strong across all brands with our overall Q3 discount rate at the lowest level in five years.
Reported SG&A, which includes 26 million in charges related to the transition of our European operating model was 38.3% of sales, deleveraging 470 basis points compared to Q3 2019.
On an adjusted basis, SG&A was 37.6% of sales, 610 basis points above 2019 adjusted SG&A.
We continue to execute our strategy of driving down fixed costs while investing a portion of those costs into demand generation in the form of marketing and technology.
Fixed costs have been significantly reduced as we successfully closed stores in North America, divested of two brands earlier this year, and reached partnership agreements for our European markets.
Marketing, up 360 basis points versus 2019, supported the rollout of our new initiatives, particularly loyalty, inclusive sizing at Old Navy, and the brand relaunch at Banana Republic, and is a major contributor to our low discount rates.
The balance of Q3 investments were primarily focused on technology to build out our digital and supply chain capabilities, as well as on higher bonus accruals versus a low 2019 baseline as no meaningful incentive payouts were granted in that year based on performance.
The investments we're making today are long-term differentiators, and we're committed to our strategy while remaining prudent even in the face of near-term supply headwinds.
Regarding operating margin, operating margin for the quarter was 3.9% on a reported basis.
Excluding $17 million in charges related to our European market transition, adjusted operating margin was 4.3%, which as I noted earlier, includes the impact of an estimated 300 million in lost sales due to constrained inventory in addition to approximately 100 million in nonstructural airfreight costs.
Moving on to interest and tax.
During the quarter, we restructured our long-term debt by retiring all of our 2.25 billion senior secured notes and issuing 1.5 billion of lower coupon unsecured senior notes.
Through this debt restructuring, we were able to reduce our overall debt balance, achieve material interest savings, approximately $140 million on an annual basis beginning in 2022, and unencumber our real estate assets previously pledged as collateral.
We incurred a 325 million nonrecurring charge related to debt extinguishment in the quarter.
Q3 net interest was $43 million.
Full-year net interest is now expected to be $163 million.
Looking beyond 2021, we expect annual net interest expense of around $70 million.
The effective tax rate was 29% for the third quarter.
Excluding the impact from fees related to debt extinguishment and the charge changes to our European operating model, the adjusted effective tax rate was 20%.
We expect the full-year effective tax rate to be about 23% on a reported basis and about 26% on an adjusted basis.
Regarding earnings on the quarter, Q3 reported earnings reflect a loss of $0.40 per share.
Excluding fees associated with our long-term debt restructuring and the transition of our European markets to a partnership model, adjusted earnings per share for the quarter were $0.27.
Inventory delays worsened throughout the quarter, and our Q3 sales down 1% versus 2019 outpaced average on-hand inventory of down 11% to 2019.
Third-quarter inventory ended flat to 2019 and down 1% versus 2020, with average on-hand inventory down 7% and in-transit up 16% versus last year.
On-hand inventory at the end of the quarter remained seasonally relevant with markdowns below Q3 fiscal '19 quarter-end levels.
We expect Q4 ending inventory to be up high single digits versus last year, although this point-in-time outlook may change given continued volatility in the supply chain.
Regarding the balance sheet and cash flow, we ended Q3 with $1.1 billion in cash, cash equivalents, and short-term investments.
During the quarter, we continue to earn -- to return cash to shareholders, paying a Q3 dividend of $0.12 per share and repurchasing $73 million in shares as part of our current plan to offset dilution.
And earlier this month, we announced a Q4 dividend of $0.12 per share.
Looking at our global store fleet, we are planning to close 350 Gap and Banana Republic.
North America stores is expected to be approximately 75% complete by the end of the year.
And with the recent announcement of our agreement to transition to a partner model in Italy, we've now concluded an important phase of the restructure of our European market.
All markets are expected to be transferred to our new partners in early 2022.
Now, I'd like to provide an update on our full-year financial outlook, which we are downwardly revising solely based on the acute impact of sales and margin of the supply chain disruptions.
Full-year 2021 reported earnings per share are now expected to be in the range of $0.45 to $0.60, which includes net charges of 445 million, comprised of 325 million in fees related to the restructuring of our long-term debt, and approximately 120 million related to divestitures and the transition of our European business model to a part -- European business to a partnership model.
Excluding these charges and associated tax impacts, full-year 2021 adjusted earnings per share is expected to be in the range of $1.25 to $1.40.
This updated guidance now includes the following assumptions.
First, we expect 2021 full-year revenue growth of about 20% versus 2020.
This range now reflects the expected lost sales from supply disruptions in the second half of 2021 of approximately 550 million to 650 million, including an estimated 300 million from Q3 and an estimated 250 million to 350 million in Q4.
Second, we expect full-year nonstructural airfreight to be approximately $450 million.
We consciously chose to air approximately 35% of our holiday product given the two-and-a-half-month delays from Vietnam closures in Q3 and the over three-week West Coast port delays so that we can give our customers as much holiday product as we can to deliver on their expectations.
While this is material to our profitability, we believe it is necessary to further mitigate sales losses and retain customers for the long term.
With the added air cost and the meaningful sales impact from supply constraints, we now expect full-year 2021 reported operating margin to be about 4.5%, with adjusted operating margin at about 5% for fiscal 2021.
This is inclusive of short-term air costs in the back half, impacting operating margin by about 270 basis points.
Full-year capital spend is still expected to be approximately $800 million.
In summary, when adjusting for the acute impact of supply chain disruptions, we are still expecting the year to end at or above our original plan for 2021, demonstrating that our underlying business trends are quite strong and providing real momentum.
The progress we've made on our Power Plan 2023 strategy in the face of these challenges highlights the strength of our core business and the health of our brands, and we remain confident in our path as we move toward a 10% operating margin in 2023.
With that, we'll open it up for Q&A. | qtrly loss per share $0.40; qtrly non-gaap earnings per share $0.27.
qtrly online sales grew 48% versus q3 2019 and represented 38% of the total busines.
sees fy earnings per share in the range of $0.45 to $0.60.
sees fy adjusted earnings per share in the range of $1.25 to $1.40.
now expects fy revenue growth to be about 20% versus fiscal year 2020.
qtrly old navy net sales were up 8% versus 2019; qtrly gap net sales declined 10% versus 2019.
qtrly comparable sales were up 5% versus 2019.
global supply chain disruption, including covid-related factory closures, continued port congestion, caused significant product delays in q3.
meaningfully reduced inventory positions throughout quarter negatively impacted sales as brands were unable to fully meet strong consumer demand.
leveraging increased air freight, port diversification to navigate ongoing delivery challenges for holiday.
qtrly banana republic net sales declined 18% versus 2019; qtrly athleta net sales were up 48% versus 2019. | 1 |
PMT produced another strong quarter of financial results with net income attributable to common shareholders of $65.4 million or diluted earnings per share of $0.67.
These strong results were driven by strong correspondent production results and the continued improvement in the fair value of its GSE credit risk transfer investments.
Additionally, PMT's CRT investments continued to benefit from the elevated prepayment speeds we are seeing across the industry.
MSR fair value gains were more than offset by fair value declines on Agency MBS and interest rate hedges due to significant prepayment activity and elevated hedge costs driven by market volatility.
PMT paid a common dividend of $0.47 per share.
Book value per share increased 3% to $20.90 from $20.30 at the end of the prior quarter, partially due to strong earnings and partially due to the issuance of senior exchangeable notes.
In the current and evolving market environment, PMT is uniquely positioned as the largest correspondent lender in the country to continue to create organic investments in MSRs sourced from the high-quality conventional production of loans it delivers to the GSEs.
In addition to benefiting from the historically large origination market we are currently in, PMT also benefits from the investments in technology and fulfillment capacity made by its manager and services provider, PennyMac Financial.
Further, PMT's investments in MSR and CRT benefit from PFSI's expertise in managing credit risk utilizing a variety of loss mitigation strategies.
Our high-quality loan production in the quarter resulted in the creation of more than $400 million in new, low‐rate mortgage servicing rights, and PMT ended the quarter with approximately $2.4 billion in fair value of MSRs, which we expect will perform well in a rising rate environment.
Also, this quarter, we further strengthened PMT's balance sheet, issuing senior exchangeable notes and term asset‐backed financing to replace less favorable short‐term securities repurchase agreements.
We issued $659 million of three‐year term notes associated with PMT's sixth CRT transaction and the entirety of PMT's CRT investments is now financed with term notes that do not contain margin call provisions, providing stable financing throughout much of the expected life of the asset.
We also issued $350 million in five-year Fannie Mae MSR term notes to support the growing MSR portfolio.
This term financing also more closely aligns to the expected life of the asset.
And finally, we issued $345 million of five‐year senior exchangeable notes, upsized from an initial $200 million offered with strong support from institutional investors.
This issuance with an initial conversion price of $21.69 represents an attractive premium to PMT's book value per share at issuance.
In addition, the option value of the conversion premium contributed partially to the increase in PMT's book value during the quarter.
I will discuss the mortgage origination landscape and how we believe we have positioned PMT to continue delivering attractive risk‐adjusted returns to our shareholders.
The origination market continues to be historically strong as mortgage rates remain near record lows despite the increases in the 10‐year treasury yield since the start of the year.
Recent economic forecasts for 2021 originations range from $3.3 trillion to $4 trillion, while average forecasts for 2022 originations remain strong at $2.6 trillion.
It is worth noting that in each of 2021 and 2022, purchase originations are expected to total $1.7 trillion, almost 40% higher than 2019 levels.
So, while refinance origination volumes are expected to decline significantly over time as a result of higher interest rates, we believe PMT is well-positioned to continue organically creating investments, especially as we are one of the largest producers of purchase money loans in the U.S.
We believe favorable dynamics continue to drive significant opportunities for PMT in correspondent production.
Additionally, we expect the $1.5 billion annual limit per client on cash window deliveries into each of the GSEs to drive more volume into the correspondent channel.
Finally, we expect limitations placed on the GSEs' ability to guarantee certain types of loans to create a heightened need for private capital over time, providing opportunities for increased investment from companies like PMT that have established expertise in the mortgage capital markets and private label securitizations.
PMT's capital deployment is currently focused on the large opportunity in conventional correspondent production and the related high‐quality mortgage servicing rights.
As David mentioned, PMT's position as an industry‐leading producer of mortgage loans gives us a unique ability to create attractive, high‐quality organic investments in MSRs at low interest rates.
Furthermore, PennyMac Financial's history in successfully executing loss mitigation strategies in its role as the servicer of the loans underlying these investments creates a strong alignment of interests.
On Slide 9, we illustrate the run‐rate return potential from PMT's investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters.
In total, we expect a quarterly run‐rate return for PMT's strategies of $0.50 per share or a 9.5% annualized return on equity.
This run‐rate potential estimate is down slightly from what we showed last quarter.
In our credit-sensitive strategies, a slight reduction in our expected CRT returns reflects credit spreads that have tightened.
In contrast, the return potential for our interest rate-sensitive strategies has improved modestly, driven by expectations for higher carry-on agency MBS.
The change in PMT's run‐rate expected return is also driven by a shift in equity allocation toward the interest rate-sensitive strategies from the correspondent production segment as a result of expectations for lower origination market volumes over the next year.
Let's begin with highlights in our correspondent production segment.
Total correspondent acquisition volume in the quarter was $51.2 billion in UPB, down 10% from the prior quarter and up 72% year over year.
Sixty-six percent of PMT's acquisition volumes were conventional loans, essentially unchanged from the prior quarter.
We maintained our leadership position in the channel as a result of our consistency, competitive pricing, and the operational excellence we continue to provide to our correspondent partners.
PMT ended the quarter with 727 correspondent seller relationships, up from 714 at December 31.
Conventional lock volume in the quarter was $34 billion in UPB, down 14% from the prior quarter and up 78% year over year.
Margins in the channel have normalized and PMT's correspondent production segment pre-tax income as a percentage of interest rate lock commitments was 10 basis points, down from 13 basis points in the prior quarter.
Acquisition volumes remained strong in April, with $18.5 billion in UPB of total acquisitions and $15.6 billion in UPB of total locks.
PMT's interest rate-sensitive strategies consists of our investments in MSR sourced from our correspondent production, and investments in agency MBS, non‐agency senior MBS, and interest rate hedges with offsetting interest rate exposure.
The fair value of PMT's MSR asset at the end of the first quarter was $2.4 billion, up from $1.8 billion at the end of the prior quarter.
The substantial increase in the fair value of our MSR investments reflects both new MSR investments and fair value gains that resulted from higher interest rates.
Notably, during the quarter PMT sold its remaining investment in ESS back to PFSI at fair value.
The capital that resulted from the sale of this investment is expected to be redeployed into attractive MSR investments.
Now, I would like to discuss the drivers of performance in PMT's credit-sensitive strategies, which primarily consist of investments in CRT.
The total UPB of loans underlying our CRT investments as of March 31 was $48 billion, down significantly quarter over quarter as a result of elevated prepayments.
Fair value of our CRT investments at the end of the quarter was $2.58 billion, down slightly from $2.62 billion at December 31 as fair value gains largely offset the decline in asset value that resulted from prepayments.
The 60-day delinquency rate underlying our CRT investments was essentially unchanged quarter over quarter as the overall number of delinquent loans declined roughly in proportion with prepayments.
PFSI's position as the manager and servicer of loans underlying PMT's CRT investments gives PMT a strategic advantage given we can work directly with borrowers who have loans underlying PMT's investments and have experienced hardships related to COVID‐19.
PFSI uses a variety of loss mitigation strategies to assist delinquent borrowers, and because of the scheduled loss transactions, notably PMTT1‐3 and L Street Securities 2017‐PM1, trigger a loss if a borrower becomes 180 days or more delinquent, we have deployed additional loss mitigation resources and continue to assist those borrowers at risk.
With respect to PMTT1‐3, which comprises 6% of the fair value of PMT's overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $34 million.
Through the end of the quarter, losses to date totaled $7 million.
As a reminder, mortgage obligations underlying PMTT1‐3 become credit events at 180 days or more delinquent regardless of any grant of forbearance.
Moving on to L Street Securities 2017‐PM1, which comprises 18% of the total fair value of PMT's CRT investment, such losses will become reversed credit events if the payment status is reported as current after a forbearance period due to COVID‐19.
PMT recorded $14 million in net losses reversed in the first quarter as $43 million of losses reversed more than offset the $29 million in additional realized losses.
We believe the majority of the remaining losses have the potential to reverse if the payment status of the related loan is reported as current after the conclusion of the CARES Act forbearance.
We estimate that an additional $32 million of these losses were eligible for reversal as of March 31 subject to review by Fannie Mae and we expect this amount to increase as additional borrowers exit forbearance and reperform.
We estimate that only $6 million of the losses outstanding had no potential for reversal.
This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017‐PM1 exceeding its face amount by $46 million at the end of the quarter.
The most common method for borrowers to exit forbearance to date has been a COVID‐19 payment deferral.
This allows the borrower to defer the amount owed of the payment deferral to the end of the loan term and the loan is deemed current after the borrower makes a specified number of mortgage payments.
PMT reports results through four segments: credit-sensitive strategies, which contributed $134.3 million in pre-tax income; interest rate sensitive strategies, which contributed $64.6 million in pre-tax loss; correspondent production, which contributed $35.6 million in pre-tax income; and the corporate segment, which had a pre-tax loss of $14.2 million.
The contribution from PMT's CRT investments totaled $135.7 million.
This amount included $98.1 million in market‐driven value gains, reflecting the impact of credit spread tightening and elevated prepayment speeds.
As a reminder, faster prepayment speeds benefit PMT's CRT investments as payoffs of the associated loans reduce potential for realized losses and return principal at par for investments currently held at a discount.
Net gain on CRT investments also included $42.7 million in realized gains and carry, $13.3 million in net losses reversed, primarily related to L Street Securities 2017‐PM1, which Vandy discussed earlier, $200,000 in interest income on cash deposits, $15.9 million of financing expenses, and $2.5 million of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID‐19 pandemic.
PMT's interest rate sensitive strategies contributed a loss of $64.6 million in the quarter.
MSR fair value increased $338 million during the quarter.
$380 million in fair value gains as a result of lower expectations for prepayment activity in the future driven by higher mortgage rates was partially offset by $42 million in other valuation losses, primarily driven by elevated levels of prepayment activity.
Fair value declines on Agency MBS and interest rate hedges totaled $448 million and included $29 million in hedge costs driven by market volatility that also impacted hedge effectiveness in the quarter.
Valuation-related losses in the quarter were somewhat offset by income excluding market‐driven value changes, as servicing fees increased from the prior quarter primarily due to a larger servicing portfolio and as PMT continues to benefit from increasing recapture income from PFSI.
We believe, over time, our results have demonstrated successful hedging of mortgage servicing rights in volatile markets.
PMT's Correspondent Production segment contributed $35.6 million to pre-tax income for the quarter, down from $52.7 million in the prior quarter as gain on sale margins normalized.
PMT's corporate segment includes interest income from cash and short‐term investments, management fees, and corporate expenses.
The segment's contribution for the quarter was a pre-tax loss of $14.2 million.
Finally, we recognized a provision for tax expense of $19.4 million in the first quarter, compared to a tax benefit of $9 million in the prior quarter.
As we look at the evolving mortgage landscape, we believe PMT remains uniquely positioned to capitalize on the current environment characterized by elevated production volumes.
Additionally, we expect changes to the GSE preferred stock purchase agreements limiting cash window deliveries to make the role of well‐capitalized correspondent lenders like PMT increasingly important to a healthy mortgage market.
Finally, we look forward to further discussing our outlook for the business at our upcoming Investor Day for PennyMac Mortgage Investment Trust and PennyMac Financial. | q1 earnings per share $0.67. | 1 |
With me on the call is our Chief Executive Officer, Brian Deck; and our Chief Financial Officer, Matt Meister.
JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.
These documents are available in the Investor Relations section of our website.
Also, our discussion today includes references to certain non-GAAP measures.
A reconciliation of these measures to the most comparable GAAP measure can be found in the Investor Relations section of our website.
Finally, I encourage you to review the second quarter slide deck, which is also posted in the Investor Relations section of the JBT website.
In it, we show historical trends, our key performance metrics and business opportunities and speak to our growth strategy.
It's great to be here to talk about JBT's strong financial performance and the strategic progress we made in the second quarter.
As we highlighted last quarter, JBT continues to enjoy robust demand at FoodTech and encouraging signs of recovery at AeroTech.
At the same time, we continue to face a challenging macro environment driving increase in cost of doing the business including material cost inflation, supply chain constraints and tight logistics.
Those pressures have intensified and now also include rising labor costs and labor shortages.
Notwithstanding this challenging backdrop, we outperformed expectations on the top and bottom lines in the second quarter.
I'd like to express my appreciation to everyone at JBT who did an excellent job of getting orders out the door to satisfy customer needs in this tough operating environment.
In the second quarter, we also booked record orders and generated excellent cash flow.
Moreover, we advanced our growth strategy with the exciting acquisition of Prevenio which expands our recurring revenue stream and further strengthens JBT's wall in food safety.
I'll hand it over to Matt who will provide a more detailed analysis of the second quarter results, speak to the benefits of the convertible note offering we completed in the quarter and walk you through our updated guidance.
JBT's second quarter performance continued to demonstrate our ability to deliver on growth in a challenging operating environment.
FoodTech revenue was $361 million, an increase of 19% year-over-year and 16% sequentially.
As Brian mentioned, we outperformed in the quarter driven primarily by better than expected shipments as our businesses executed well despite the challenges they faced.
The impact of foreign exchange translation was also a positive factor in the quarter, accounting for approximately 5 percentage points of the year-over-year growth which was 3 percentage points higher than expected.
Adjusted EBITDA margin for the quarter was 19%, operating margins of 14.3% at the low end of our guidance range and negatively impacted by the cost pressures we experienced with the supply chain and labor market.
AeroTech revenue of $115 million which was ahead 6% year-over-year and 8% sequentially was at the high end of our expectations.
Adjusted EBITDA margins of 11.1% and operating margins of 10.5% exceeded guidance due to a favorable mix of higher recurring revenue.
Interest expense came in nearly $1 million less than forecast due to better than expected cash flow.
As a result, JBT reported diluted earnings per share from continuing operations of $0.95 in the second quarter.
Adjusted earnings per share of $1.19 includes an adjustment for a $4.4 million or $0.14 per share non-cash deferred tax remeasurement associated with the tax law change in the UK.
Adjusted EBITDA for the second quarter was $70.1 million up 2.58% year-over-year and 20% sequentially.
Operating profit of $47.3 million declined 1% year-over-year and higher M&A costs also had [Phonetic] 25% sequentially.
Free cash flow for the quarter remained strong at $35 million, representing a conversion rate of 115% with continued goods collections and accounts receivable, customer deposits and a slower than expected investment in inventory due to supply chain constraints.
Going forward, we need to invest in inventory levels to support the increased backlog.
And therefore, with higher forecasted revenue, we anticipate that the balance sheet will expand in the second half of the year.
Additionally, we are increasing our capital expenditure forecast for the year by approximately $5 million from our previous guidance to support further strategic investment in our digital capabilities.
Altogether, we expect free cash flow conversion for the year to remain north of 100%.
As we look ahead to the full year of 2021, we have refined our guidance based on first half results and order trends.
We have again raised top line guidance for FoodTech, forecasting a year-over-year gain of 10% to 12% organically with another 2% increase related to FX translation, that compares with our previous guidance of 9% to 11%.
With the inclusion of Prevenio acquisition, our all-in top line guidance for FoodTech is 14% to 16% growth in the full year.
Considering the continuing supply chain and operational cost pressures, we have updated the margin guidance range for FoodTech with projected operating margins of 14% to 14.75% and adjusted EBITDA margin of 19% to 19.75%.
At AeroTech, we have narrowed our revenue guidance range to 1% to 4% from the previously communicated range of 0% to 5%.
We are holding margin guidance with projected operating margins of 10.75% to 11.25% and adjusted EBITDA margins of 12% to 12.5%.
Additionally, we are adjusting our forecast for corporate costs as a percent of sales down slightly to 2.7% and lowering interest expense guidance to $9 million to $10 million.
Altogether, we have raised our adjusted earnings per share guidance to $4.60 to $4.80 which excludes M&A and restructuring costs of $12 million to $14 million and the previously mentioned UK tax remeasurement in the second quarter.
Our GAAP earnings per share guidance of $4.15 to $4.35 is $0.05 below our previous guidance and primarily due to higher M&A related costs.
We've also raised our full year adjusted EBITDA guidance to $280 million to $290 million up from the previous guidance of $270 million to $285 million.
Now focusing on the third quarter, we expect revenue growth for JBT of 18% to 19%.
This consists of year-over-year growth of 19% to 20% at FoodTech, which includes 3% to 4% from acquisitions.
For the AeroTech business, we are projecting growth of 15% to 16% for the quarter.
At FoodTech, we are projecting third quarter operating margin of 14% to 14.5% with adjusted EBITDA margins of 19% to 19.5%.
For AeroTech, operating margins are forecasted in 11.25% to 11.75% with adjusted EBITDA margin of 12.25% to 12.75%.
Corporate costs for the quarter are expected to be $13 million to $14 million, excluding approximately $4 million in M&A and restructuring costs.
Interest expense should be $2.5 million to $3 million.
That brings third quarter 2021 earnings per share guidance to $1 to $1.10 on a GAAP basis and $1.10 to $1.20 as adjusted.
Finally, I would like to briefly touch on the convertible note offering that we completed in the second quarter.
With net proceeds of more than $350 million, we have locked in a portion of JBT's capital at a historically low fixed interest rate with favorable conversion terms that limit shareholder dilution until the stock exceeds the synthetic strike price of $240 per share.
The notes also afford JBT's additional flexibility in our capital structure to support our organic investments and acquisition strategy.
As I mentioned at the top of the call, JBT generated record orders in the second quarter.
FoodTech orders expanded 3% sequentially from the first quarter's record level.
We continue to enjoy robust demand from customers serving the retail market with improvements on the foodservice side with particular strength in poultry, plant-based foods, pet foods, fresh produce and packaged ready meals.
In addition, our automated guided vehicle business outperformed in the second quarter with several large food customer orders, a reflection of the growing demand for back-end automation among our customer base.
FoodTech's robust order trends are also a direct reflection of the continued investment we've made in product innovation.
JBT's recent product launches featuring advances of hygiene, capacity and automation have gained nice acceptance in the marketplace.
Furthermore, new features that reduce food waste and promote more efficient use of water and energy enabled JBT to help our customers on their sustainability journey.
Geographically, FoodTech commercial activity in North America remained robust.
Europe was essentially flat versus a volatile first quarter, but with progress on vaccine penetration and governmental economic support, its outlook seems to be more promising albeit subject to uncertainty surrounding COVID.
As it relates to Asia and South America, we are experiencing some fresh pandemic-related delays in customer investment decision making.
AeroTech also enjoyed record orders in the second quarter.
This primarily reflected some major orders on the infrastructure side of the business, which will mostly ship in 2022.
AeroTech's second quarter orders also reflected typical seasonal strength including demand for cargo loaders and deicers.
Given the lumpiness of orders, we expect AeroTech order activity in the second half of the year to be normal -- to be more normalized relative to the outstanding second quarter.
At the same time, we are encouraged by the pickup in US passenger traffic and have a few -- have secured a few additional orders from commercial airlines.
However, as we've said, we expect full recovery to take another two years to play out and we're cautiously watching the developments surrounding the Delta variant, which also could impact the pace of recovery in air travel.
Nonetheless, we feel we are clearly beyond the bottom of the investment cycle.
Now to the acquisition of Prevenio which closed in early July.
Prevenio further strengthens JBT's role in food safety, which is a critical and growing concern for our food processing customers.
They offer a unique delivery system for consumption-driven anti-microbial solutions which provide optimal food safety performance on our customers' operations, a safer environment for their employees as well as enhances food integrity.
Financially, Prevenio has demonstrated an impressive growth record with EBITDA margins in the mid-20s.
Moreover, the revenue model is predominantly consumable and contractual adding to the strength of our recurring revenue profile.
And as part of JBT, we foresee significant opportunities to expand Prevenio's applications beyond its core poultry market and its other proteins and fresh food and vegetables where JBT has a strong presence.
Furthermore, over time, we see opportunities to extend its geographic reach.
Switching gears toward internal investments, JBT plans to accelerate investment in our digital strategy in iOPS platform that builds intelligence in our products and services.
Through a focus on digitally enabled customer-centric solutions, we believe we can further entrench JBT as a holistic uptime solutions provider with our customers.
Additionally, I want to speak to the rebranding of what was previously our liquid food business within the FoodTech segment.
Its new name Diversified Food & Health reflects a business that has expanded far beyond its historical focus on juice and canned goods as a result of continued investment, both organically and through acquisition.
Diversified Food & Health now provides a wide portfolio of solutions for customers across the FoodTech segment including processing, preservation and packaging solutions to serve end markets for fresh cut and processed foods and vegetables, convenience foods, prepared and ready to eat meals, pet foods, protein and plant-based beverages, dairy, pharmaceuticals and nutraceuticals.
Together with our protein business, FoodTech has an enviable diverse offering for our food and beverage customers.
Overall, we are very pleased with the robust commercial activity at FoodTech, which has enjoyed broad-based strength on the retail side growing demand for automation solutions and a pickup in the hard hit foodservice side.
At AeroTech, continued strength on the infrastructure side has been accompanied by initial improvement in our business with commercial airlines.
However, we remain concerned by the recent resurgence in COVID and the potential impact of macroeconomic conditions.
We are otherwise mindful of the high cost environment under which we are working.
Lastly, as part of JBT's core values, we continue to prioritize a diverse and inclusive work culture that promotes continued education, enhance development opportunities, mutual respect and teamwork. | compname reports q1 adjusted earnings per share of $0.90.
q1 adjusted earnings per share $0.90.
sees fy adjusted earnings per share $4.40 to $4.60.
sees fy gaap earnings per share $4.20 to $4.40.
q1 earnings per share $0.84 from continuing operations.
q1 revenue fell 9 percent to $417.8 million. | 0 |
Joining today's call are Bob Blue, chairman, president, and chief executive officer; Jim Chapman, executive vice president, chief financial officer, and treasurer; and other members of the executive management team.
Before we provide our business update, I'd like to take a moment to remember our friend, Tom Farrell.
Tom's passing on April 2 was heartbreaking to those of us who loved, admired, and respected him.
We've heard from so many people, including many of you, about Tom's impact on the industry and the people who work in and around it.
It's quite clear that while Tom's list of professional accomplishments was long, the list of people whose lives he touched was much, much longer.
But much more often, we experienced his generosity, his loyalty, his dry sense of humor, and his focus on improving our company, our community, and our industry.
We should all seek to emulate his example, a consistent commitment to ethics and integrity, to excellence, and perhaps most of all, to the safety of our colleagues.
He cherished his friends and family, most of all.
We can't think of a better example of a leader, and we will miss him dearly.
As Bob said, we will very much miss Tom.
Let me now turn to our business update.
We are very focused on overall execution, including extending our track record of meeting or exceeding our quarterly guidance midpoints as we did again this quarter.
I'll start my review on Slide 4, with a reminder of Dominion Energy's compelling total shareholder return proposition.
We expect to grow our earnings per share by 6.5% per year through at least 2025, supported by our updated $32 billion five-year growth capital plan.
Keep in mind that over 80% of that capital investment is emissions reduction enabling and that over 70% is rider eligible.
We offer an attractive dividend yield of approximately 3.2%, reflecting a target payout ratio of 65% and an expected long-term dividend per share growth rate of 6%.
This resulting approximately 10% total shareholder return proposition is combined with an attractive pure-play, state-regulated utility profile characterized by industry-leading ESG credentials and the largest regulated decarbonization investment opportunity in the country, as shown on the next slide.
Our 15-year opportunity is estimated to be over $70 billion, with multiple programs that extend well beyond our five-year plan and skew meaningfully toward rider-style regulated cost of service recovery.
We believe we offer the largest, the broadest in scope, the longest in duration, and the most visible regulated decarbonization opportunity among U.S. utilities.
The successful execution of this plan will benefit our customers, communities, employees, and the environment.
Turning now to earnings.
Our first-quarter 2021 operating earnings, as shown on Slide 6, were $1.09 per share, which included a $0.01 hurt from worse than normal weather in our utility service territories.
This represents our 21st consecutive quarter, so over five years now, of delivering weather-normal quarterly results that meet or exceed the midpoint of our quarterly guidance range.
GAAP earnings for the quarter were $1.23 per share.
The difference between GAAP and operating earnings for the three months ended March 31 was primarily attributable to a net benefit associated with nuclear decommissioning trusts and economic hedging activities, partially offset by other charges.
Turning on to guidance on Slide 7.
As usual, we're providing a quarterly guidance range, which is designed primarily to account for variations from normal weather.
For the second quarter of 2021, we expect operating earnings to be between $0.70 and $0.80 per share.
We are affirming our existing full-year and long-term operating earnings and dividend guidance, as well.
No changes here from prior guidance.
Turning to Slide 8 and briefly on financing.
Since January, we've issued $1.3 billion of long-term debt, consistent with our 2021 financing plan guidance at a weighted average cost of 2.4%.
For avoiding some doubt, there's no change to our prior common equity issuance guidance.
Wrapping up my remarks, let me touch briefly on potential changes to the Federal Tax Code.
Obviously, it's still early days with a lot of unknowns.
But at a high level, we see an increase in the corporate tax rate as being close to neutral on operating earnings based on, as is the case for all regulated entities, the assumed pass-through for cost of service operations, an increase in parent level interest tax shield and the extension and expansion of clean or green tax credits, all of which will be offset by higher taxes on our contracted assets segment earnings.
We also expect modest improvement in credit metrics.
We're monitoring the contemplated minimum tax rules closely and we'd note the administration's support for renewable development suggests the ability to use renewable credits to offset any such minimum tax rule.
More to come over time on that front.
I'll begin with safety.
As shown on Slide 9, through the first three months of 2021, we're tracking closely to the record-setting OSHA rate that we achieved in 2020.
In addition, we're seeing record low levels of lost time and restricted duty cases, which measure more severe incidents.
Of course, the only acceptable number of safety incidents is zero, and we will continue to work toward that critical goal.
Let me provide a few updates around our execution across the strategy.
We're pleased that the 2.6-gigawatt Coastal Virginia offshore wind project has been declared a covered project under Title 41 of the Fixing America's Surface Transportation Act program, also known as FAST 41.
The federal permitting targets now published under that program are consistent with the project schedule that we shared on the fourth-quarter call in February.
Key schedule milestones are shown side by side on Slide 10.
We continue to be encouraged by the current administration's efforts to provide a pathway to timely processing of offshore wind projects.
In the meantime, we're advancing the project as follows: we're processing competitive solicitations for equipment and services to achieve the best possible value for customers and in accordance with the prudency requirements of the VCEA.
Interest in those RFPs has been robust.
We're analyzing performance data from our test turbines, which have been operational for several months now and are, to date, generating at capacity factors that are higher than our initial expectations.
Recall, we had assumed a lifetime capacity factor of around 41% for the full-scale deployment.
Further evaluation of turbine design and wind resource, in addition to the data we're gathering in real time, suggest that our original assumption is too low.
Higher generation would result in lower energy costs for customers.
We're monitoring raw material costs, and it seems to be the case across a number of industries right now, we're observing higher prices.
In the case of steel, for example, the return of pandemic-idled steelmaking capacity hasn't yet caught up to global demand.
We'll continue to monitor raw material cost trends as we move toward procurement later in the project timeline.
We're moving into the detailed design phase for onshore transmission.
As we observed within the industry recently, utility systems are only as good as they are resilient, which is one of the reasons that we made the decision in 2019 to go the extra distance to connect to our 500 kV transmission system to ensure that the project's power will be available when our customers need it most.
We believe that decisions we're making around the onshore engineering configurations will ultimately result in the best value for customers.
And finally, our Jones Act-compliant wind turbine installation vessel is being constructed and is on track for delivery in late 2023.
We expect to announce further details on nonaffiliate vessel charters in the near term.
In summary, lots of very exciting progress, which will continue through the summer, including our expected notice of intent from BOEM in June.
As is typical for a project of this size at this phase of development, there will be some puts and takes as work continues.
Taken as a whole, there's no change to our confidence around the project's expected LCOE range of $80 to $90 per megawatt-hour.
Near the end of the year, we'll file our CPCN and rider applications with the Virginia State Corporation Commission and we'll be in a position at that time to provide additional details around contractor selection and terms, project components, transmission routing, project costs, capacity factors and permitting.
Turning to updates around other select emissions reduction programs.
On solar, on Friday, the Virginia State Corporation Commission approved our most recent clean energy filing, which included 500 megawatts of solar capacity across nine projects, including over 80 megawatts of utility-owned solar, the fourth consecutive such approval.
We also recently issued an RFP for an additional 1,000 megawatts of solar and onshore wind, as well as 100 megawatts of energy storage and 100 megawatts of small-scale solar projects, and eight megawatts of solar to support our community solar program.
Our next clean energy filing, which we expect to include solar and battery storage projects, will take place later this year.
Since our last call, we've continued to derisk our plan to meet the VCEA solar milestone by putting another 30,000 acres of land under option, bringing the total to nearly 100,000 acres of options or exclusive land agreements, which is enough to support the approximately 10 gigawatts of utility-owned solar as called for by the Virginia Clean Economy Act.
The Surry station provides around 15% of the state's total electricity and around 45% of the state's zero-carbon generation.
This authorization is a critical step in ensuring the plant will continue to provide significant environmental and economic benefits for many years to come.
We expect to file with the SEC for rider recovery of relicensing spend late this year for both Surry and North Anna stations.
Our gas distribution business, as we've discussed in the past, our gas utility operations are enhancing sustainability and working to reduce scope on and three emissions, with focused efforts around energy efficiency, renewable natural gas and hydrogen blending, operational modifications, and potential changes around procurement practices.
For example, as part of our recently filed natural gas rate case in North Carolina, we asked the North Carolina Utilities Commission to approve five new sustainability-oriented programs: hydrogen blending pilot, that's part of our goal to be able to blend hydrogen across our entire gas utility footprint by 2030; a new option to allow our customers to purchase RNG attributes; and three new energy efficiency programs.
Finally, in South Carolina.
The South Carolina Office of Regulatory Staff recently filed a report finding that our revised IRP met the requirements of the law and the Public Service Commission's order requiring the modified filing.
As a reminder, the preferred plan and the revised filing calls for the retirement of all coal-fired generation in our South Carolina system by the end of the decade, which helps to drive a projected carbon reduction of nearly 60% by 2030 as compared to 2005.
While the IRP is an informational filing, it does not provide approval or disapproval for any specific capital project.
We look forward to continuing to talk with stakeholders, including the commission, about an increasingly low-carbon future.
An order is expected from the Public Service Commission by June 18.
Turning to the regulatory landscape, let me provide a brief update on our Virginia triennial review filing, which we submitted at the end of March.
As shown on Slide 12, the filing highlights Dominion Energy Virginia's exceptionally reliable and affordable service.
The state's careful and thoughtful approach to utility regulation has resulted in a model that prioritizes long-term planning that protects customers from service disruptions and bill shocks.
Consider these facts, 99.9% average reliability delivered at rates that are between 8% and 35% lower than comparable peer groups.
We're proud of our record and the work we do to serve customers every single day.
Our filing also reflects over $200 million of customer arrears forgiveness as directed by the general assembly, relief that is helping our most vulnerable customers address the financial impacts of COVID-19.
The filing also identifies nearly $5 billion of investment in rate base on behalf of our customers over the four-year review period, including $300 million of capital investment in renewable energy and grid transformation projects that we believe meet the eligibility criteria for reinvestment credits for customers.
The commission's procedural schedule is shown here.
We've included additional details regarding the case as filed in the appendix for your review and look forward to engaging with stakeholders in coming months.
It's clear to us that the existing regulatory model is working exceptionally well for customers, communities, and the environment in Virginia.
We're delivering increasingly clean energy while protecting reliability and safeguarding affordability.
In South Carolina, we continue to engage in settlement discussions with the other parties as highlighted in our monthly filings before the commission.
We aren't able to discuss specifics of that process but can report that all parties appear committed to working toward a mutually agreeable resolution.
Finally, let me highlight noteworthy developments in the legislative landscape for our company.
In Virginia, during the now adjourned session, the Virginia General Assembly passed House Bill 1965, which adopts low and zero-emissions vehicle programs that mirror vehicle emission standards in California.
The law, which has been signed by the governor, ensures that more electric vehicles are manufactured and sold in Virginia.
It will likely take a few years before we see the significant and inevitable ramp-up in electric vehicle adoption in our service territory, but we're taking steps today to be prepared for the incremental electric demand and associated infrastructure.
That includes regional coordination with other utilities to ensure highway corridors that ensure seamless charging networks, support for in-territory EV charging infrastructure, which includes a significant investment in a variety of grid transformation projects, as well as the rollout of time-of-use programs.
At the federal level, we're encouraged by the support we're seeing for our offshore wind project.
We applaud efforts to increase funding for the research and development of technologies that will allow the utility industry to drive further carbon emissions reductions.
We're philosophically aligned with the current administration in wanting to accelerate decarbonization across the utility value chain, while also recognizing that the energy we deliver must remain reliable and affordable.
It's still early, but we're engaging in the process of policy formation and monitoring developments closely and continue to believe we are well-positioned to succeed in an increasingly decarbonized world.
I'll conclude the call with the summary on Slide 13.
Our safety performance year to date is tracking closely to our record-setting achievement from last year.
We reported our 21st consecutive quarterly result that normalized for weather, meets or exceeds the midpoint of our guidance range.
We affirmed our existing long-term earnings and dividend guidance.
We're focused on executing across the largest regulated decarbonization investment opportunity in the nation for the benefit of our customers.
And we're aggressively pursuing our vision to be the most sustainable 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. | 1 |
So with that, I'll hand the call over to Blake.
On the leadership front we have two exciting announcements today.
First, we've hired Scott Genereux as our new Chief Revenue Officer.
Scott built strong executive-level customer relationships and has spent most of his career leading global sales forces and major enterprise software and hardware companies.
These include Oracle and most recently Veritas, and we are thrilled to bring him on board in this newly created role.
Scott will be responsible for all our worldwide sales and marketing efforts, leading our global go-to-market strategies and accelerating Rockwell's growth, including software sales and annual recurring revenue.
The second important announcement is that Brian Shepherd has been hired as the new leader of our Software and Control business segment.
Brian has extensive experience in the industrial software space and joins Scott in bringing proven knowledge about ways to drive faster recurring revenue growth in our business.
Prior to joining us, Brian was President of Production Software and Smart Factory solutions for Hexagon AB and before that was a longtime executive at PTC where he led strategy and operations for their enterprise software segments.
He has strong technical expertise across the design, operate and maintain phases of the customer journey and how industrial software can maximize customer value.
We are excited to have him on board.
Both Scott and Brian begin on February 1st.
Finally, I'm happy to report we are well along in our CFO search and expect to make that announcement shortly.
It's been a busy few months but I'm very pleased with the new talent and fresh perspectives we are adding to our leadership team.
In other news this quarter, we had a very important win on the legal front.
In Q1 Radwell International was found liable for trademark infringement and false advertising relating to its resale of Rockwell products.
This latest legal victory underscores our commitment to protecting our intellectual property as well as our authorized distribution network.
We're using a portion of the gain that resulted from this ruling to make additional investments this year.
This includes investments to pull forward software product launches that will increase recurring revenue in fiscal '22 and beyond as well sustainability-related investments to drive our ESG goals.
With that, let me now turn to our Q1 results on Slide 3.
In Q1, total reported sales declined 7%.
Organic sales were down 10% versus prior year.
Total sales included a two-point positive contribution from our ASEM and Kalypso acquisitions.
Note that Sensia is now included in our organic results.
During the quarter we saw a sharp acceleration in order intake, especially for our products.
Total orders were back above pre-pandemic levels.
The increased demand was broad-based and well above our expectations and the higher order rates will benefit sales for the balance of the year.
More on that in a moment.
I'll now comment on our new business segments.
Intelligent devices organic sales declined 8%.
In the quarter we saw positive year-over-year growth in motion, where we believe we are gaining market share.
Orders in this segment returned to positive growth a quarter ahead of our expectations.
Software and Control organic sales declined 6%.
In the quarter we saw year-over-year growth in Network and security infrastructure.
Lifecycle services' organic sales decline of 16% was led by continued weakness in oil & gas.
We did see a 25% sequential uptick in Lifecycle services orders in the quarter, which will drive sequential sales improvement through the balance of the year.
In Information solutions and connected services, organic sales were down slightly in the quarter primarily due to COVID-related project delays.
However, we saw double-digit organic orders growth in IS as well as strong demand in the cyber security portion of connected services.
IS/CS built backlog by about 30% versus prior year and we expect IS/CS to have a great year overall, growing double-digits in fiscal '21 with organic sales exceeding $500 million.
Total backlog grew strong double-digits on an organic basis both year-over-year and sequentially.
Lifecycle services book-to-bill reached a record of 1.18 reflecting a significant improvement both sequentially and year-over-year.
Segment operating margin performance of 20% in the quarter was roughly flat with last year on lower sales, a testament to our increasing business resilience.
Adjusted earnings per share grew 11% versus prior year, including the legal settlement gain.
Excluding the gain adjusted earnings per share came in above our expectations for the quarter.
Figures are for organic sales.
Our Discrete Market segment sales declined by approximately 5% however, we saw strong broad order momentum in the quarter particularly in North America that should benefit sales performance for the remainder of the year.
Automotive sales declined approximately 10% versus prior year with mid-single digits growth in EMEA offset by tough comparisons in other regions.
Our EV business significantly outperformed the rest of automotive and include key wins from a major auto brand owner in Europe that is building a new line for EV battery manufacturing.
We also won at a European Tier 1 OEM, which shows our independent cart technology for the precision motion control necessary to build new electric vehicles.
These were both hard fought wins where our strong customer support and technology differentiation were important factors in our success.
Semiconductor grew low-single digits in the quarter and is expected to improve significantly over the balance of the year.
Strong secular tailwinds in this vertical are prompting some of our largest semiconductor customers to increase their capex spend this year.
As a result we are raising our semiconductor outlook to high-single digit growth for the year, up from our original guidance of mid-single digit growth.
Another highlight within discrete was our performance in e-commerce, with sales growing approximately 40% versus prior year.
This is obviously another industry with secular tailwinds and we're well positioned to provide value that will continue to support its tremendous future growth.
Our independent cart technology is a long-term differentiator here as it is in battery assembly and the packaging of consumer products.
Turning now to our Hybrid Market segment.
This segment grew by low-single digits and accounted for 45% of revenue this quarter.
Food & Beverage grew low-single digits.
In addition, packaging OEMs delivered another quarter of double-digit growth versus the prior year.
Life sciences grew about 10% in Q1 well above our expectation for the quarter led by strong broad-based demand in North America.
Thermo Fisher is an important part of the vaccine ecosystem and we were very proud this quarter to be awarded a significant multi-year enterprise software order to supply software and professional services to enable their Pharma 4.0 initiative and drive their COVID readiness and response.
That shows Rockwell's FactoryTalk innovation suite, which uniquely integrates MES, IIoT, analytics and augmented reality in a single software solution to drive productivity.
FTIS in combination with strong pharma industry expertise, full lifecycle services and best-in-breed digital partner ecosystem were key factors in why Thermo Fisher selected Rockwell.
While there is a lot of focus on our role in vaccine formulation, we're also working with the broader vaccine ecosystem to support packaging and distribution requirements.
For every one pallet of vaccines being shipped, 20 to 30 additional pallets of vaccine accessories are required.
Based on the broad-based increase in life sciences' demand, we're are now expecting life sciences to grow mid-teens in fiscal '21.
Process markets were down approximately 25% and weaker than we expected led by larger declines in oil & gas.
Process verticals typically lag our discrete business by about half-a-year.
Turning now to Slide 5, and our organic regional sales performance in the quarter.
North America organic sales declined by 11% versus the prior year primarily due to sales declines in oil & gas and automotive.
Business conditions improved significantly through the quarter and were reflected in strong product orders.
EMEA sales declined 8% led by oil & gas.
Sales from food & beverage and water customers were strong in the quarter.
Sales in the Asia Pacific region declined 7% largely due to declines in process industries that were partially offset by growth in mass transit and semiconductor.
Asia Pacific backlog reached a record high in the quarter and we do expect strong sales growth in the region for both the upcoming quarter and full year.
In China, we saw growth in auto with some important greenfield EV battery wins.
Sequential orders growth in Q1 and double-digit year-over-year growth in backlog support our full-year sales growth outlook in China to be above the company average.
Latin America declines were led by oil & gas and mining.
In the region we saw good growth in food & beverage and tire.
Orders momentum in the first quarter is expected to drive strong growth in the balance of the year.
The higher top-line guidance is primarily related to improvements in the outlook for life sciences and e-commerce in North America as well as in our global outlook for semiconductor growth.
Our new reported sales outlook assumes 10% year-over-year growth at the midpoint including 6% organic growth.
We expect our new software offerings and expanded services will drive double-digit ARR growth in fiscal '21, our new hires will be focused on this objective.
Our new adjusted earnings per share target of $8.90 at the midpoint of the range represents 13% growth over the prior year.
A more detailed view into our outlook by end market is found on Slide 7.
I won't go into the details on this slide but as you can see we expect positive organic sales growth in all of our key end markets this year with the exception of oil & gas.
Our market uptick in orders for Sensia in the latter part of Q1 sets the stage for improving sales later in the fiscal year.
I'll start on Slide 8, first quarter key financial information.
First quarter reported sales were down 7.1% year-over-year.
Organic sales were down 9.7%.
Acquisitions contributed 1.8 points of growth and currency translation increased sales by 0.8 points.
Segment operating margin was 19.8%, slightly below Q1 of last year.
This is the second quarter in a row that segment margin was about flat year-over-year despite lower sales, so a good result.
Corporate and other expense of $28 million was down about $5 million compared to last year.
Last year's amount included transaction fees related to the formation of the Sensia joint venture.
Note that previously, we referred to this line item as general corporate net.
The adjusted effective tax rate for the first quarter was 15.4% compared to 8.3% last year.
The increase in the tax rate is primarily due to a large discrete tax benefit recorded in Q1 last year related to the formation of Sensia and other discrete items.
As a reminder, beginning with this quarter, we changed the definition of adjusted earnings per share to also exclude the impact of purchase accounting, depreciation and amortization expense.
First quarter adjusted earnings per share was $2.38.
As Blake mentioned earlier, this result includes $0.45 related to a favorable legal settlement.
Adjusted earnings per share excluding the legal settlement was $1.93 identical to last quarter and better than we expected.
We're pleased with this result since compared to last quarter we were unable to overcome a $0.30 headwind from the reinstatement of incentive compensation and the reversal of temporary cost actions as of the end of November.
I'll cover year-over-year adjusted earnings per share bridge for Q1 on a later slide.
Free cash flow was $319 million in the quarter including the $70 million legal settlement.
Free cash flow conversion was 115% of adjusted income.
One additional item not shown on the slide.
We repurchased 356,000 shares in the quarter at a cost of about $88 million.
This is in line with our full-year placeholder of about $350 million.
At December 31, $766 million remained available under our repurchase authorization.
Slide 9 provides the sales and margin performance overview of our operating segments.
As a reminder, this is the first quarter we're reporting under our three segment structure, the new three segment structure.
The Intelligent Devices segment had an organic sales decline of 7.9% in the quarter.
Segment margin was 19.4%, 130 basis points lower than last year, mainly due to lower sales partially offset by temporary and structural cost savings.
As Blake highlighted earlier, we had a strong order performance in the quarter particularly in our product businesses.
Intelligent devices' orders grew low-single digits year-over-year and high-single digit sequentially.
Software and Control segment organic sales declined 6.2% in the quarter.
Acquisitions contributed 2.7% to growth and segment margin was 30.2%, which was 80 basis points lower than last year's strong margin performance mainly due to lower sales, partially offset by temporary and structural cost savings.
Software and control orders also grew low-single digits year-over-year and high-single digits sequentially.
Organic sales of the Lifecycle Services segment declined 16.3% year-over-year as the recovery in this segment's offerings tends to lag our products businesses.
Acquisitions contributed 3.9% to growth and operating margin for this segment increased 50 basis points to 8.9% versus 8.4% a year ago despite lower sales.
Contributing to the lower year-over-year margin improvement -- I'm sorry, contributing to the year-over-year margin improvement were temporary and structural cost savings and the absence of Sensia one-time items recognized in the first quarter of fiscal 2020.
First quarter book-to-bill performance for the Lifecycle Services segment was 1.18, a strong start to the year.
The next Slide 10 provides the adjusted earnings per share walk from Q1 fiscal 2020 to Q1 fiscal 2021.
Starting on the left, core performance had a negative impact of about $0.25 driven by lower organic sales.
Temporary cost actions partially offset the sales impact by $0.20.
These were the salary reductions and 401(k) match suspension that we implemented in Q3 of fiscal 2020, which remained in effect through the end of November 2020.
Incentive compensation was a year-over-year headwind of about $0.10.
Tax was a headwind of about $0.10 primarily due to the Sensia-related tax benefit recorded last year and other discrete items.
Acquisitions contributed about $0.05.
This represents the positive contribution from acquisitions that we completed in 2020 and so far in 2021.
As a reminder Sensia is now reported in core.
Finally, as mentioned earlier, the legal settlement contributed $0.45 to adjusted EPS.
Moving to Slide 11, monthly product order trends.
This slide shows our order -- daily order trends for our Software and Control and Intelligent Devices segments excluding the longer lead time configured to order offerings.
The trend shown here accounted for about two-thirds of our overall sales.
Order intake for products improved again this quarter as the recovery continue.
As you can see there was a sharp acceleration in demand in November and December.
Orders for the Lifecycle Services segment also improved in the quarter but are recovering slower than product orders.
A strong order performance resulted in record total company backlog growing over 20% year-over-year and double-digits sequentially.
Our quarterly product order trends are shown on Slide 12.
This is the same data as the prior slide summarized by quarter.
Our order levels in the first quarter are now clearly above pre-pandemic levels, both for products and the total company.
This takes us to Slide 13, updated guidance.
We are increasing our organic sales growth outlook by 1 point.
The new range is 4.5% to 7.5% with a midpoint of 6%.
Given the weaker U.S. dollar we now expect currency translation to contribute about 2.5% to growth.
We expect acquisitions to contribute about 1.5%.
In total, the midpoint of our reported sales guidance range is 10%.
We have also updated the adjusted earnings per share guidance range to $8.70 to $9.10.
I'll review the bridge from the prior guidance midpoint and the new $8.90 midpoint on the next slide.
Segment operating margin is now expected to be about 19.5%.
The lower margin compared to prior guidance reflects the software investments that Blake mentioned earlier and the impact of the Fiix acquisition.
These will primarily affect the Software and Control segment and will be weighted toward the third and fourth quarters.
Our adjusted effective tax rate is expected to be about 14%, the same as prior guidance.
As mentioned last quarter, this includes a 300 basis point benefit related to discrete items, which we expect to realize late in the fiscal year.
We continue to project free cash flow conversion of about 100% of adjusted income.
A few additional comments on the fiscal 2021 guidance.
Corporate and other expense is expected to be between $105 million and $110 million.
Purchase accounting amortization expense for the full year is expected to be about $50 million.
Net interest expense for fiscal 2021 is still expected to be between $90 million and $95 million.
Finally, we're still assuming average diluted shares outstanding of about 117 million shares.
This takes us to Slide 14.
This slide bridges the midpoint of our November adjusted earnings per share guidance range to the midpoint of our new guidance.
Starting on the left, there is a higher contribution from core operating performance, primarily due to the higher organic sales guidance.
Currency is projected to add about $0.05 compared to prior guidance.
Next, given the increase in guidance, there is about a $0.10 impact from higher bonus expense.
Finally, there is the $0.45 contribution from the Q1 legal settlement, partially offset by about $0.35 for the incremental investments and the impact of the Fiix acquisition.
The new midpoint of the guidance range is $8.90.
Finally, a couple of quick comments regarding fiscal Q2.
Given our strong order performance in Q1, we expect Q2 sales to grow sequentially and to be about flat year-over-year.
We expect second half year-over-year organic sales growth in the mid-to-high teens.
As a reminder, as we mentioned on the last earnings call, Q2 will have the largest year-over-year headwind from the reinstatement of the bonus in the range of $50 million.
With that, I'll hand it back to Blake for some additional comments.
Historically, the pace of recovering demand for our products after a recession has come faster than we predicted when we were still in the downturn.
This recovery is looking similar so far and we will see Q2 sales and earnings begin to reflect the torn of orders we received in November and December, with significant double-digit year-over-year growth expected in the second half of the year.
The rate of infections in each region around the world has had a direct impact on the timing and rate of their respective economic recoveries.
The Americas were last in and seem to be the last to recover, with our sales most highly correlated to this geography given our revenue there.
We are working over time to meet this demand and staying close to our component suppliers around the world.
We are actively hiring an additional capacity for Logix, it's coming online this month.
The new Milwaukee manufacturing center is working two shifts a day to keep pace with this increased level of orders activity.
Turning to Slide 15.
We're also investing in software development to drive our future growth.
Last November at our Investor Day, we talked about how we will be releasing Software as a Service within our FactoryTalk portfolio to add value in the design, operate and maintenance phases of the customers' investment lifecycle.
The recent legal settlement gain will allow us to advance these deliverables.
Recent acquisitions are playing an important role in these offerings as well with fixed software central to FactoryTalk Maintenance Hub within the Software and Control business segment.
Fiix is already showing great momentum and just booked their first million dollar annual recurring revenue contract.
Their leadership is already a part of the larger plans for accelerating our SaaS offerings.
It all begins with great people and I continue to be immensely proud of our employees in all parts of the organization and around the world.
We continue to hire top talent and the two new members of the team we announced today will add to an already great leadership team.
With that, let me pass the baton back to Jessica to begin the Q&A session.
Michelle, let's take our first question. | compname posts q4 loss per share of $1.55.
q4 adjusted earnings per share $1.14.
q4 loss per share $1.55.
market uncertainty tempering q1 outlook.
q4 sales fell 13.1 percent to $193.8 million.
sees q1 earnings per share $0.50 to $0.70.
sees q1 adjusted earnings per share $0.75 to $0.95.
sees q1 2020 sales $185 million to $200 million.
for full year 2020, rogers expects capital expenditures to be in a range of $40 to $45 million.
q4 revenues were impacted by expected weakness in industrial and automotive markets.
q4 revenues were impacted by greater than anticipated slowdown in wireless infrastructure demand.
looking ahead to q1, we have limited visibility across multiple segments due to still unfolding impact of coronavirus outbreak.
looking ahead to q1, believe that revenue will be impacted in range of 7% to 10% by coronavirus outbreak. | 0 |
In addition, a slide deck providing detailed financial results for the quarter is also posted on our website.
This quarter, e-commerce data is not included in our category overview due to a restatement of the external validate.
Our team has moved with speed to address the ongoing challenges of operating in this environment, while continuing to focus on keeping each other healthy and safe.
As I will talk about in a moment, while the pandemic-driven demand is the main story, we remain focused on our business strategies to ensure that we are well positioned as the pandemic subsides.
Leading with innovation, operating with excellence, and driving productivity are the keys to our success both now and into the future.
Looking at the results for the quarter, we maintained our top line momentum with strong sales across categories and markets around the world, resulting in organic sales growth of 12.7% with battery up 11% and auto care up 27%, globally.
We delivered adjusted gross margin of 40.7% as we were able to meet the demand while incurring lower incremental costs than we did last quarter.
This combination of strong top line growth and improving margins resulted in adjusted earnings-per-share growth of 38% and adjusted EBITDA growth of 17%.
We were also able to take advantage of low interest rates to refinance a portion of our debt, which will result in significantly reduced interest expense going forward.
We are off to a solid start for the fiscal year.
With lower interest expenses due to the refinancing, we are increasing our outlook for the full year adjusted earnings per share to a new range of $3.10 to $3.40.
In a few minutes, Tim will provide more detail on the results for the quarter as well as our view for the full year.
Let me start with category trends where we continue to see strong consumer demand.
As Jackie mentioned earlier, our category data this quarter does not include e-commerce due to an external database restatement.
Globally, battery category value was up 6.9% and we continue to see consumers purchasing batteries for immediate use.
Consumers have increased the number of devices they own as well as their usage of those devices.
With a gain of 2.5 share points, Energizer is growing faster than the category, driven by distribution gains in the U.S. and in international markets, including Canada, France, Korea and the UK.
With auto care, the U.S. category grew more than 10% as a result of changes in consumer behavior, including an increased focus on cleaning and disinfecting as well as an increase in do-it-yourself activities.
During the quarter, Energizer's auto care share was flat.
Of note during the quarter, we did see strong growth in non-measured channels, including e-commerce, home center and international markets.
In auto care, we are meeting the needs of consumers by rolling out innovation and strengthening our product pipeline.
We recently launched an Armor All disinfectant, as consumers are more focused than ever on keeping their cars clean and disinfected.
We also acquired a small formulations business which to-date has primarily commercialized household disinfectants.
The robust portfolio of innovative cleaning, disinfecting and odor-eliminating formulations we've acquired is an extremely attractive addition to our R&D pipeline and is expected to enhance our leadership in auto care.
In looking at e-commerce, while we don't have consumption data this quarter, based on our sales, we continue to see solid e-commerce performance versus prior period.
Our investments and ongoing focus are paying off and positioning us to lead well into the future.
If we take a step back, the pandemic-driven demand in our categories has been and for the foreseeable future, will continue to be the main story, and while our priority will be to successfully navigate a very complicated operating environment in order to meet this elevated demand efficiently, we are also undertaking initiatives to emerge from this period poised for growth in the future.
As we are nearing completion of our integration efforts, including the recent bolt-on acquisitions, we are also undertaking several initiatives to modernize our core operational capabilities.
Let me take a moment to provide an update on these initiatives.
Despite the challenges of this past year, our integration activities for the battery and auto care acquisitions have continued and are scheduled for completion by the end of 2021.
In the first quarter, we realized $20 million in synergies and we remain on track to achieve $40 million to $45 million in 2021 and to deliver more than $100 million in total synergies.
We also closed on the acquisition of an Indonesian battery plant, which contributed significantly to our ability to meet the strong demand during the quarter and will enable further efficiencies in the future.
In addition to the integration activities, we have launched several significant projects to modernize our core, as the pandemic related shifts have shown very clearly we must become a more digitally advanced organization in order to ensure we can meet the demands of the consumer in a rapidly changing operating environment.
We are transforming our global product supply organization by moving to an end-to-end category structure, which will create greater agility within each category and closer connections to customers and consumers.
We are also investing in our business planning tools and supply planning analytics to provide more predictive insights, which are needed for today's environment.
The end result will be a product supplier organization that is better equipped to capitalize on opportunities while also enhancing our ability to navigate disruption.
These efforts are already paying off as we were able to meet the continued elevated demand, especially in batteries with lower-than-expected COVID-related costs.
This project will continue to be important in the near-term to meet demand and in the medium-term to take better advantage of opportunities across our business.
We are also investing in more advanced data and analytics capabilities, which will enable us to better detect and understand in near real-time, impacts to the business, from shift in consumer behavior and macroeconomic events, such as mix shifts in markets or products.
Armed with the most recent data and insights, our commercial and marketing teams can respond and more effectively connect with consumers and drive growth in our business.
These projects as well as other smaller ones will enhance our ability to operate more effectively and will also drive out costs from the business.
We are committed to the efficient lower cost operating model you have seen from us in the past, while being equally committed to ensuring we have the flexibility to invest in opportunities to drive future growth.
We believe these initiatives will allow us to do both.
Our strategic priorities of leading with innovation, operating with excellence and driving productivity have served us well as we navigated the pandemic and they will remain critical going forward.
However, 2020 also provided significant insight that will enable Energizer to emerge as a stronger, more resilient and dynamic company.
The pandemic reminded us that consumers are at the heart of what we do.
Fundamentally, it was consumer behavior that drove disruption.
As their habits and routines changed, they gravitated to trusted brands and engage with our categories in new and different ways.
They accelerated the changes in how they consume information and ultimately how they shop.
Our consumer insights, combined with our powerhouse brands, enable us to create value, for our retail partners by ensuring we are there to meet consumers where they are going.
Remaining consumer focused, investing in our brands and ensuring we can adapt at the speed in the marketplace are the keys to our success in the future.
We will leverage the best attributes of a large scaled organization with the mentality of a start-up, where small teams are unleashed to focus on critical initiatives.
With that, I will now turn things over to Tim, who will provide more details about our financial performance for the quarter, including our refinancing efforts, capital allocation and our outlook for the fiscal year.
As Mark indicated, our organic revenue growth of 12.7% coupled with cost controls and favorable currency tailwinds resulted in strong adjusted earnings per share of $1.17, adjusted EBITDA of $192 million and adjusted free cash flow of $90 million.
Taking a deeper look at the top line, both our Americas and International segments grew organically more than 12% with batteries up 11% and auto care up more than 27%.
As Mark mentioned, the categories in which we compete continued to experience elevated demand.
In addition, our organic sales growth also benefited from distribution gains that began last summer as well as some shifting of shipments between quarters.
Finally, the growth we are seeing this year is off of prior-year first quarter organic sales decline of 3.4%.
Adjusted gross margin decreased 110 basis points versus the prior year to 40.7%, although this represented a sequential improvement versus the last quarter.
Gross margin was impacted primarily by incremental COVID costs of approximately $12 million, largely related to air freight, fines and penalties and personal protection equipment necessary to meet the sustained elevated demand, end channel customer and product mix as well as increased operating costs resulted from increased tariffs associated with higher volumes, commodity cost and transportation cost, consistent with inflationary trends in the global market.
Partially offsetting these impacts to gross margin, the first quarter benefited from synergies of $13 million and favorable currency exchange rates.
As we exit the first quarter, we believe the incremental COVID costs from air freight and fines and penalties over the remainder of the year will significantly diminish.
However, like many other companies, we anticipate additional cost pressures from increased tariffs, commodities and transportation to impact us over the remainder of the year and we have includes these items in our outlook.
A&P as a percent of net sales was 5.8% versus 6.4% in the prior year, due primarily to the strong top line growth experienced in the current quarter.
Consistent with our priorities, we continue and invest, on an absolute dollar basis, in A&P to support our brands with total A&P up $3 million or 6%.
Excluding acquisition and integration cost, SG&A as a percent of net sales was 13.4% versus 15.1% in the prior year.
This was primarily due to the elevated sales experienced in the current quarter.
On an absolute dollar basis, adjusted SG&A increased $2.7 million, driven in part by higher overheads associated with the top line sales growth and the timing of costs partially offset by synergies of $7 million and lower travel expense due to COVID.
As Mark mentioned, we realized $20 million of synergies in the quarter with $13 million in cost of goods sold and $7 million in SG&A.
For the full year, we continue to expect to realize $40 million to $45 million of incremental synergies.
In total, we have recognized nearly $90 million since we completed the battery and auto care acquisitions and remain on track to realize in excess of $100 million by the end of fiscal 2021.
We also took advantage of accommodating debt markets to refinance our existing short-term secured debt and our 2027 unsecured bonds with a new $1.2 billion term loan.
Based on the new all-in interest rates, we anticipate annualized interest savings of roughly $25 million with about $19 million to be realized over the remainder of fiscal 2021.
We also amended certain covenants in our credit agreement, which will create additional capacity and flexibility in our debt capital structure.
Our net debt to credit defined EBITDA at the end of the quarter was 4.6 times, reflecting improved EBITDA performance and debt pay down during the quarter of $80 million, excluding refinancing activities.
At the end of the quarter, our total debt was approximately $3.4 billion, with nearly 85% now at fixed rates and an all-in cost of debt of approximately 4.3%.
And finally, we continue to drive shareholder returns through our balanced approach to capital allocation, by investing in our business through innovation, brand-building activities and the projects we mentioned earlier to modernize our core and drive cost out of the business, delivering a quarterly cash dividend of $27 million; repurchasing 500,000 shares for $21 million, representing an average price of $42.61; paying down $80 million of debt excluding refinancing activity; and finally, completing two bolt-on acquisitions.
As a result of our strong organic growth in the first quarter and the interest expense savings from the refinancing we undertook in December, we are updating our full year fiscal 2021 outlook for the following key metrics.
Net sales growth is expected to be at the upper end of the range of 2% to 4%, driven in large part by continued elevated battery demand in North America and favorable currency impacts.
Adjusted gross margin rate is expected to be essentially flat on a year-over-year basis in line with our previously provided outlook.
Adjusted EBITDA is expected to be at the upper end of our previously provided range of $600 million to $630 million and free cash flow of $325 million to $350 million remains unchanged due to working capital requirements, in particular, inventory, as we look to rebuild safety stock.
Adjusted earnings per share is now expected to be in the range of $3.10 to $3.40.
I would also like to provide a reminder regarding the quarterly phasing for the remainder of 2021.
Beginning late in our second quarter of 2020 and through today, we have seen elevated demand for both battery and auto care products due to the impacts of COVID.
In 2021, we expect to continue to see net sales growth until we lap those elevated demand, at which point, we will likely start to see year-over-year declines in net sales as we approach a more normalized level of demand.
We expect this will begin to occur toward the end of the second quarter in battery and late in the third quarter in auto care.
With respect to gross margin rates, we expect them to remain consistent throughout the year.
The gross margin rate in this quarter was better than our expectations due to lower than expected COVID costs, the timing of the realization of synergies and the impact of favorable foreign currencies.
While we are increasing components of our outlook for the full year, there remains a great deal of uncertainty over the balance of the fiscal year with respect to the pandemic and related macro factor and impacts, including currencies, commodities and transportation costs.
We have addressed the items that are within our control and continue to improve our execution.
Actions that we have taken, include continuing to drive increased distribution with strong organic growth across all categories and geographies; improving supply chains surety with expanded capacity and significantly reducing incremental COVID cost by the end of the first quarter; and finally, refinancing more than half of our debt portfolio over the past seven months through the accommodative debt markets.
We remain confident that continued focus on our strategic priorities and our balanced approach to capital allocation will allow us to deliver long-term shareholder value.
In the midst of a very uncertain operating environment, we will focus on meeting the demands of today, while building the capabilities we will need to succeed in the post-pandemic period.
Our operating performance in the first quarter is a testament to the efforts of our colleagues around the world to make, ship and deliver the products that our consumers need during this time. | energizer holdings sees fy adjusted earnings per share $3.10 to $3.40.
sees fy adjusted earnings per share $3.10 to $3.40.
q1 adjusted earnings per share $1.17 from continuing operations.
organic net sales increased 12.7%, or $93.3 million, in first fiscal quarter.
energizer holdings sees 2021 outlook for revenue growth and adjusted ebitda to the high end of previously disclosed outlook range. | 1 |
I'm Monica, Vinay, Vice President of Investor Relations and Treasurer at Myers Industries.
If you've not yet received a copy of the release, you can access it on our website at www.
It's under the Investor Relations tab.
These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements.
Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings.
I'd like to start the call by expressing my sincere appreciation to our entire Myers team for their continued efforts during the pandemic.
Our customers count us to deliver value added high quality products in the safe and timely manner in your efforts remain critical to ensuring that happens.
There were an improvement over the last year and better than we had originally anticipated.
In short, we had a great quarter.
I'm pleased with our results, our direction and our progress.
We still have a lot of work to do, but I'm excited about Myers performance in third quarter.
Sales in our consumer end market increased significantly year-over-year as a result of higher demand for our fuel containers which is due primarily to heightened storm activity.
We're also encouraged by the continued increase in demand that took place in our auto aftermarket business.
In addition, demand for RV Products in our vehicle end market also continued to stay strong.
Our businesses delivered gross margin expansion again this quarter.
Gross profit margin increased 400 basis points, 35.6% for the third quarter of this year.
This was due to solid execution in favorable price cost margin.
As a result of the gross margin expansion, our adjusted operating margin increased 500 basis points to 11.8%.
And our adjusted EBITDA margin increased 370 basis points to 14.8%.
We generated solid free cash flow of $16.2 million during the third quarter and as a result we had $84 million of cash on hand as of September 30th.
We also had $194 million available under our credit facility and our debt to EBITDA ratio was only 1.1 times.
As a result, I feel very comfortable that we have more than enough liquidity and flexibility to execute on our new strategy that I will discuss later in the call.
He is doing a great job and I appreciate all of his efforts and hard work.
Net sales for the third quarter were $132 million, an increase of 5% compared with the third quarter of 2019.
The increase in sales was due primarily to significantly higher fuel container sales in our consumer end-market driven by hurricane activity.
We also increased our auto aftermarket sales both from stronger and market demand in our legacy business and from incremental sales due to the Tuffy acquisition.
Gross profit margin increased 400 basis points to 35.6%.
This was primarily due to higher sales volume and favorable price cost margin.
Also gross profit in 2019 included a $3.5 million charge for estimated product replacement costs.
Our adjusted operating income increased 83%, the $15.6 million for the quarter.
This was the result of higher gross profit margin coupled with lower depreciation and amortization.
Adjusted EBITDA increased 40% to $19.6 million and adjusted EBITDA margin was 14.8%.
Adjusted diluted earnings per share was $0.30 compared with $0.15 for the third quarter of 2019.
In the Material Handling segment, net sales increased 3%.
Sales of fuel containers in our consumer end market were up nearly 40% primarily as a result of increased storm activity.
However, food and beverage market sales were down high single digits due to lower seedbox volume year-over-year.
Sales to our industrial end market decreased mid single digits due to lower sales to industrial distributors, partially offset by higher e-commerce sales.
Sales in our vehicle end market were down double-digits as higher sales to RV customers were more than offset by lower sales to automotive OEMs. Material Handlings adjusted operating income was up 59% to $16.5 million due to higher sales volume, lower depreciation and amortization expense and favorable price cost margin.
Also in 2019 adjusted operating income included a $3.5 million charge for estimated product replacement costs.
In the Distribution segment, sales increased 10% due to $2.9 million of incremental sales from the August 2019 Tuffy acquisition, and higher domestic sales in the legacy business.
Distribution's adjusted operating income increased 41% to $5.1 million primarily as a result of higher sales volume and lower SG&A expenses.
Turning to slide six, I'll review our balance sheet and cash flow.
For the third quarter of 2020, we generated free cash flow of $16.2 million compared with $22.1 million last year.
Working capital as a percent of sales at the end of the third quarter was 9.2%, which was up compared to Q3 of last year but was lower than last quarter.
The year-over-year working capital increase was primarily due to higher accounts receivable and inventory balances due to strong sales in September and strategic investments in inventory that we made earlier in the year to protect our supply chain during the pandemic.
We have already begun reducing inventory balances and expect working capital to return to more normal levels by the end of the year.
Cash on the balance sheet at the end of the third quarter was $84 million and our debt to adjusted EBITDA ratio was 1.1 times, which is consistent with previous quarters.
Before we begin, please note that this outlook is based on current and projected market condition and there is still uncertainty around these projections.
Starting with our consumer end market, the increase in demand during the third quarter was even greater than we had anticipated due to heightened storm activity.
As a result, we now expect a full year sales increase in the double-digit range in this market, which is an improvement from our previous outlook of a mid single-digit increase.
That said, we do not expect the increased demand we experienced in the second and third quarters to continue into the fourth quarter.
Instead, we expect sales volumes in the consumer end market to return to more historical fourth quarter of [Indecipherable].
In our food and beverage end-market, we now anticipate a revenue decline in the mid-teens for the full year of 2020.
Although, we expect feedback sales to increase year-over-year in Q4, we don't expect demand to be as high as we originally forecasted.
And as a result, we expect the seedbox sales will be down for the full year of 2020.
Additionally, annual sales to food processing customers are expected to be lower year-over-year due to impacts from COVID-19 including delayed product trials.
Turning to our vehicle and market while RV demand has improved.
We do not anticipate that the higher sales in that portion of the market will offset the decrease in sales year-over-year, the automotive OEM customers.
Therefore, our outlook for the vehicle end market is unchanged.
With sales expected to be down double-digits for the full year 2020.
In our industrial end market, the soft demand environment and industrial manufacturing and distribution is expected to continue through the remainder of the year.
Signs of end-market improvement that we saw late in the second quarter subsided during the third quarter.
Therefore, we have lowered our industrial end market outlook to be down in the mid-teen percentage range for the full year of 2020.
Finally, in our auto aftermarket, we have seen demand continue to improve and are now forecasting sales to increase in the low single digits, which is an improvement from our previous outlook of a low single-digit decline.
Turning to slide eight, you can see our guidance for 2020.
On a consolidated basis, we now anticipate full year sales to decline in the low to mid single-digit percentage range, which is a slight improvement from our previous expectation of the decline in the mid to high single-digit range.
We continue to expect depreciation and amortization to be approximately $21 million.
Net interest expense to be approximately $4 million.
A diluted share count of approximately $36 million shares.
And capital expenditures to be roughly $15 million.
Lastly, we anticipate that the adjusted effective tax rate will be approximately 26%.
Now I'd like to talk to our new long-term strategy in the strategic pillars we have in place to drive its execution.
We've developed a long-term strategy that's broken down into three discrete horizons.
Each of these horizons builds on the preceding one.
The first phase, which we call Horizon one consists of three approaches, self-help, organic growth and bolt-on M&A.
Self-help will focus on purchasing, on pricing and on SG&A optimization.
In purchasing, as an example, we are centralizing procurement.
In the past, each of our business units purchased their own products.
So we had multiple units buying their own versions of a similar raw material.
We didn't consolidate our buy and leverage.
We're changing that approach.
We're now consolidating purchasing into a single function, and we'll leverage procurement company wide.
As a result, we've greater leverage with our suppliers and expect to lower our cost.
A key objective of self-help is to improve our margins by driving a greater wedge between our raw material costs and our product sales prices, centralized purchasing will address our raw material costs.
On the pricing side, we will be using pricing and data analytics to determine where and how we can improve our pricing.
I believe an enhanced focus on pricing will help identify areas of opportunity for Myers to better capture the value, our products deliver to our customers.
Next is SG&A optimization.
Over the coming months, we will continue to move forward with the one Myers approach, combining key elements of the company together so that were stronger, more efficient and more effective.
Over time, we will reorient some of our SG&A resources, prioritizing sales, product and market management and innovation.
As an example, we will reduce our overhead costs, and we will redeploy these dollars into our sales function, increasing our number of salespeople.
The self-help measures will drive profits and will fund our organic growth and bolt-on M&A opportunities.
On the organic growth side, we will strengthen our commercial capabilities.
We've developed a roadmap to bolster and improve our commercial function.
This has been a key area of focus since I joined Myers.
While we still have a lot to do in this space, I'm encouraged by what I see so far.
Going forward, we will go to market as one company, one Myers.
As one Myers, we will bring solutions that are based on all of our current capabilities, rotational molding, blow molding, injection molding and thermoforming.
Having this full set of capabilities is a differentiator in the market.
Instead of separate sales teams for each business unit, we were just selling one technology.
Now our sales force will bring all of Myers technologies to the market.
This new approach will turbocharge our organic growth efforts.
In addition to the self-help and the one company approach and other big changes, our approach to bolt-on M&A.
We will now focus our efforts in deal flow on building our plastics business.
We will focus on deals that are close to home in terms of technology and markets.
This is a change from the past.
Now when we think about M&A, we plan to build on our current technologies in expertise in plastics molding.
While we are strong in plastics -- we are strong in plastics, we have good brands, and we are Number one or Number two in the areas where we participate.
Going forward, we will embrace our polymers heritage and we use bolt-on M&A to expand our offering and plastics molding.
Speaking of M&A, I would like to provide a short update on the Tuffy acquisition.
It's been just over one year since we purchased Tuffy Manufacturing and combined it with our Myers Tire supply business.
We purchased Tuffy for the right price at the right time.
We integrated smoothly and efficiently and as a result is performed above our expectations.
In order to ensure that we successfully integrate future acquisitions that will likely be larger and more complex than the Tuffy acquisition.
We brought on Dave Basque, who had many carve outs in integrations of down [Indecipherable].
Dave is putting in place a robust process to successfully integrate future acquisitions.
Over the next quarter, I expect us to share proof points on this part of our strategy.
We believe that by executing on the strategy under Horizon one, we can grow Myers to a billion dollars in annual revenue and our target is to be at that run rate by the end of 2023.
Now I would like to speak to the second step, Horizon two.
Horizon two will be built from the profits generated from successful execution of Horizon one.
Horizon two will continue to include the self-help initiatives, organic growth initiatives and bolt-on M&A.
However, in Horizon two, we shift gears and we'll begin executing larger enterprise level acquisitions.
We will continue building and growing in the plastics and polymer space.
We just execute at a greater scale.
We'll continue to focus on specialized value-added products and stay away from commodity products just as we do today.
The experience we gained from completing the bolt-ons and Horizon 1, will prepare us to successfully execute larger acquisitions under Horizon two.
In addition to the enterprise level M&A and Horizon two, we also expect to be in a position to grow in adjacent technologies.
As examples, we may build out the unique capabilities we have in thermoforming or in rubber processing or metal fabrication.
As it stands today, we have a small presence in each of these.
And it appears we have meaningful organic growth opportunities to build them out.
Our long-term vision concludes with Horizon three which is geared around going global.
I can see a path to grow Myers to approximately $2 billion in revenue while largely staying in the United States.
However, to grow beyond that threshold and into Horizon three, we will likely need to expand globally via M&A.
Although, this is a few years off, it's important to have the vision in the direction for the company, in order for Myers to reach its full potential, we will need to go global and expand in own risk attractive countries outside of the United States.
On the organic side of Horizon three, we plan to further build on our Plastics backbone, but also evaluate expansion into other substrates.
An example would be metal substrates and there'll be more to come there.
Our roadmap for execution includes our strategic objective as well as four supporting pillars.
Our strategic objective is to transform the Material Handling segment into a high growth customer centric innovator of engineered plastic solutions.
While at the same time, we continue to optimize and grow the distribution segment.
Myers is in a great position.
We have excellent technologies and products in the material handling side and we have deep industry knowledge and experience in a strong foundation on the distribution side.
Make no mistake, our company's future is bright, our runway is long and I can't think of anywhere else I would rather be.
We have four pillars that are simple and clear and we'll drive execution.
They are organic growth, strategic M&A, operational excellence, and high performing culture.
These four pillars are the cornerstones of Myers transformation and will ensure we successfully deliver the goals and objectives of Horizon one.
The first pillar focuses on organic growth and we will address four areas, sales and commercial excellence, innovation and new product development, sustainability, and e-commerce.
These four areas are clear priorities of Myers and are the primary levers to drive organic growth.
Speaking of sustainability, we recently announced, we've joined the alliance and plastic waste.
A global non-profit organization committed to ending plastic waste in the environment.
Our focus on sustainability will help drive innovation and our long-term growth.
We are proud to be a part of the alliance and look forward to helping shape future projects that recover create value from and ultimately eliminate plastic waste.
Our second pillar strategic M&A is geared around bolt-on opportunities that build on our Plastics franchise.
Part of this effort is our integration playbook that will ensure a world-class approach to acquisition integration.
The 3rd pillar operational excellence is part of the Myers D&A, part of the Myers foundation and we will build on it.
We will continue to have a mindset of continuous improvement and we will build out the functions of pricing, purchasing, and sales and market management into our core capabilities.
The 4th and final pillar is the heart of the company, our culture.
We will build a high performance mindset in culture.
A key tenet of our culture will be our focus on safety.
We have a good safety record but must work to get better every day.
Talent development will be a priority as well.
We will develop our talent in-house, through the creation of continuing education, learning academies and on the job training.
We can achieve greatness, without being an employment -- employer of choice.
To that end, we must build our culture in three important areas, inclusion, servant leadership and community involvement.
I'll close here and I'll share with you my confidence and excitement on our new direction.
We have a strong plastics business with a broad suite of technologies and expertise.
We are now focused on building this engine in growing its scale organically and through M&A.
In addition, we have a well-regarded industry leading auto aftermarket distribution business with a promising outlook.
I could not be more excited to lead this company today and into the future.
Duane, we're now ready to take questions. | compname reports q3 adjusted earnings per share $0.30 from continuing operations.
q3 adjusted earnings per share $0.30 from continuing operations.
revised its outlook for 2020 revenue.
now expects full-year revenue to decline in low-to-mid single digits.
does not expect events that drove sales in consumer end market to recur in q4. | 1 |
Click the earnings materials box in the center of the page.
Jochen, let's get started.
We delivered a solid performance in the second quarter and first half of this year.
I'm pleased with the pace of improvements we've seen with today's numbers reflecting the execution of our Hardwire strategy as demonstrated by the positive financial results despite significant supply chain challenges.
As a company, we continue to manage through the impacts of COVID-19 with the extraordinary efforts of our global team keeping employees' safety and community well-being a priority.
The supply chain and logistics challenges linked to the pandemic faced by our industry and many others continue to impact the sector with our teams managing the effects of disruption to ensure that we are able to continue building and delivering iconic Harley-Davidson products to the world.
We are seeing the initial proof points of our Hardwire execution and the positive impact of this strategy on our results, particularly in the strategically important North America region.
While the pandemic and the related supply chain complications continue to impact our international business with certain regions at different stages of post-pandemic recovery, we can see the consumer excitement and optimism is returning, and we are encouraged by the signs of positivity in the market.
I also want to note our continued fight against the proposed EU tariffs that we discussed at the last quarter.
We continue to pursue all remedies to the additional EU tariffs.
We believe these tariffs relate to a trade dispute not of our making and that it's unfair for our business to be targeted as part of this dispute.
The initial outcomes of the trade talks at the G7 meeting are encouraging, and we remain hopeful for resolution.
But first, I'll let Gina provide more details on the financial performance of the quarter and first half of the year.
Second quarter results reflected continued strong demand and improved operating margins as we manage through a volatile supply chain environment.
Total revenue of $1.5 billion was 77% ahead of last year as we lapped the impacts of the COVID shutdown.
Given the 2020 dynamic to help contextualize this year's performance, we've included comparisons back to 2019 for this quarter.
Revenue was down 6% versus 2019, primarily driven by the actions taken as part of the Rewire to prune unprofitable motorcycles as well as exit unprofitable markets.
Total operating income of $280 million was significantly ahead of 2020 and 9% ahead of 2019 with growth across both of our reported segments.
The Motorcycles and Related Products segment delivered $186 million of operating income, which is $307 million better than 2020 and 3% better than 2019.
Even though the quarter had 12,000 fewer units than 2019, we benefited from improved motorcycle unit mix, significantly lower sales incentives as we focused on building desirability, and a reduced cost structure behind our Rewire actions.
The Financial Services segment delivered $95 million of operating income, $90 million better than 2020 and 25% ahead of 2019.
Second quarter GAAP earnings per share of $1.33 was $1.93 ahead of Q2 2020.
When adjusting to exclude the impact of EU tariffs and restructuring charges, our adjusted earnings per share was $1.41, up $1.79 over prior year.
Turning to year-to-date results.
Total revenue of $3 billion was 37% ahead of 2020 and 2% behind year-to-date 2019.
Again, the decline versus 2019 was primarily driven by the actions taken as part of Rewire to prune the portfolio and partially offset by increased volume driven by the shift in model year launch timing and improved unit mix.
Total operating income of $627 million was $635 million ahead of 2020 and 48% ahead of 2019.
This strong growth versus 2019 was driven by the Rewire actions noted as part of our Q2 performance, including favorable mix, lower sales incentives, and reduced operating expense.
The shift in timing of the model year launch had a positive impact as well.
GAAP year-to-date earnings per share was $3.01, up $3.16 from a year ago, while adjusted year-to-date earnings per share was $3.11, up $2.98 from last year.
Global retail sales of new motorcycles were up 24% in the quarter behind strong demand for core Touring and large Cruiser products in the U.S. as well as a successful launch of our Pan America motorcycle into the Adventure Touring space.
North America Q2 retail sales were up 43% versus 2020 and up about 5% over Q2 2019.
Growth over 2019 was driven primarily by improved sales in our core segments, Touring and large Cruisers.
In our international markets, COVID continued to have an impact, with many key countries in various states of lockdown and reopening throughout the quarter.
We also experienced a continuation of the logistics challenges noted in Q1, which resulted in longer ship times to key ports.
EMEA sales recovered after much larger declines in Q1 as sales of Touring and Cruisers rebounded.
This improvement was offset by our decision to not sell Street and legacy Sportster bikes.
The TAM declines were driven primarily by Rewire actions to close certain dealers, exit countries, and take pricing actions across select models.
We believe these actions are working to restore profitability across the market in spite of the retail unit declines.
In Asia Pacific, in particular, in India and Australia, Q2 retail sales were negatively impacted by the discontinuation of Street motorcycles.
The region was also disproportionately impacted by global transportation headwinds.
Worldwide retail inventory of new motorcycles at our dealers was down over last year and down versus the previous quarter.
Inventory levels were lower than originally planned, driven by stronger-than-anticipated demand, coupled with longer shipping times in our international markets.
While we originally have planned for Q2.
Inventory levels to build coming out of Q1, we have seen that these lower levels have helped to foster increased desirability as evidenced by strong new and used motorcycle retail prices in the U.S. and continued improvement in dealer profitability in the quarter.
International markets have seen a much larger impact in the global transportation challenges and it's likely some markets have seen retail sales impacted.
Looking at revenue, total motorcycle segment revenue was up 99% in Q2 and up 45% on a year-to-date basis.
Focusing on current quarter activity, 81 points of growth came from higher year-over-year volume and motorcycle units and parts and accessories as we lap last year's pandemic impact and work to meet the strong current year demand for our motorcycles, which includes the new Pan America; 13 points of growth from mix driven by a larger percentage of Touring bikes in the quarter along with favorable regional mix behind strong U.S. shipments; 5 points of growth from foreign exchange; and finally, one point of growth from pricing and incentives as we eliminated a majority of corporate discounts and incentives as part of the Hardwire strategy.
Absolute Q2 gross margin of 30.6% was up 14.5 points versus prior year driven by stronger volumes and favorable unit mix.
Higher logistics and raw material inflation and incremental EU tariffs were more than offset by volume leverage and other savings across our supply chain.
Q2 operating margin finished at 14% and was up significantly versus prior year due to the drivers already noted.
The gross margin gain was partially offset by higher operating expense as we lap the cost savings initiatives undertaken last year to preserve cash at the onset of the pandemic.
The supply chain remains very fragile, not only for our business but for every global manufacturer.
Our team has continued to do a great job managing through the unprecedented challenges, and to date, we've had no sustained downtime in our factories.
We have continued to see inflation across all modes of freight as well as within raw materials, and we are forecasting this to continue throughout the fiscal year.
To help offset, we implemented an average 2% pricing surcharge on select models in the U.S. effective July 1st for the remainder of model year '21.
Financial Services segment, operating income in Q2 was $95 million, up $90 million compared to last year.
Net interest income was favorable for the quarter driven by lower average outstanding debt and cost of funds as compared to the second quarter of last year.
The total provision for credit losses decreased $75 million year-over-year, primarily due to the reserve rate changes of $63 million as we lapped last year's increase, which was largely driven by the economic impacts of the pandemic.
In addition, actual credit losses were $12 million lower.
The favorability in credit losses was due in part to benefits provided to individuals under the recent federal stimulus packages.
Additionally, motorcycle values at auction remained elevated as the supply of used motorcycles was limited and demand remained strong.
Looking at HDFS's base business, new retail originations in Q2 were up 29% versus last year behind higher new motorcycle sales and strong used motorcycle origination volume.
At the end of Q2, HDFS had approximately $820 million in cash and cash equivalents on hand and approximately $1.3 billion in availability under its committed credit and conduit facilities for a total available liquidity of $2.1 billion.
Cash and cash equivalents remained elevated but were down, approximately, $900 million from Q1 as we continued to pull cash back down to normalized levels.
HDFS's retail 30-day plus delinquency rate was 2.21%, up 46 basis points compared to the second quarter of last year, which is the high point in issuance of pandemic-related extensions.
The delinquency rate continues to be favorable when compared to recent history.
The retail credit loss ratio remained historically low at 0.84%, a 103 basis point improvement over last year.
While we do expect the delinquency rate to normalize over time, given the influx of stimulus funding and the improved economic conditions, we believe it's likely losses will continue to remain low through the remainder of the year.
Wrapping up with Harley-Davidson Inc. financial results.
We delivered year-to-date operating cash flow of $644 million, up $34 million over prior year.
The key driver of improved cash flow was higher net income, partially offset by an increase in wholesale finance receivable originations.
As we look to the balance of the year, we are maintaining our guidance on the Motorcycle segment revenue growth of 30% to 35%.
For the Motorcycle segment operating income margin, during the second quarter the European Union made a decision to implement a six-month stay on raising the incremental tariffs from 31% to 56%, while negotiations occur between the U.S. and the EU.
The step-up in tariffs was originally planned for June 1st and it will now be in effect in December if a resolution does not take place prior to then.
Last quarter we provided two margin guidance ranges due to the uncertainty and how the tariff situation would evolve.
We had stated our official guidance to be 7% to 9%, which assumed complete mitigation of the incremental tariffs.
With the full impact of the incremental tariffs, our guidance was 5% to 7%.
Given the developments throughout the quarter, our tariff exposure in 2021 is more certain but less than what we originally communicated.
Based on what we know today, our estimated tariff impact for this year is, approximately, $80 million versus the initial estimate of $135 million.
This improvement would result in our estimated GAAP operating income margin moving from 5% to 7% to our revised guidance of 6% to 8%.
If we are successful in materially mitigating the incremental EU tariffs for the remainder of 2021 and get back to the planned tariff rate of 6%, our operating margin range would remain 7% to 9%.
We are increasing the Financial Services segment operating income growth guidance to 75% to 85%, which is an increase from the previously communicated range of 50% to 60%.
The improved outlook takes into account the loss favorability we had seen year-to-date as well as the outlook for the rest of the year.
Lastly, capital expenditures remain flat to our original guidance of $190 million to $220 million.
Slide 14 provides additional context on how our seasonality and strategy shift impact the back half of the year.
This chart is largely unchanged from the previous quarter with the one exception that it now includes the impact of the EU tariffs.
Assuming the $80 million tariff impact, we expect the back half operating margin percent to be negative mid-single digits.
This back half guidance incorporates the impact in the shift in model year launch timing, logistics and raw material inflation rates in line with what we've seen throughout Q2, the approximately 2% pricing surcharge, and a step up in operating expense as we invest into the Hardwire and prepare for the launch of model year '22.
As the Hardwire strategic plan is implemented, we continue to enhance organizational speed, alignment, and efficiency, which we believe has set us up to win.
The changes implemented through Rewire in 2020 and the intentional Hardwire-related outcomes underscore the significant transformation of Harley-Davidson over the course of the past year.
We continue to be guided by H-D1 as a high-performing winning organization based on our 10 defined leadership principles, built on the powerful vision and mission of Harley-Davidson.
Across our company, we continue to see the desire and growing capabilities of our team to win.
We know our future successes will only come from an effort by everybody on our team.
I know many of you are listening in today.
Talking about winning, I'm excited that this month our Harley-Davidson Screamin' Eagles team rider Kyle Wyman won the inaugural MotoAmerica King of the Baggers championship series aboard his Harley-Davidson Road Glide special.
Everyone at Harley-Davidson is immensely proud of our racing team and for the tireless commitment to securing this championship.
Kyle's incredible dedication and focus on winning was matched by the passion and energy of the team of Harley-Davidson engineers who developed these Baggers race bikes constantly working to improve the performance of these remarkable motorcycles.
This team and their success truly exemplifies the spirit of H-D1.
Not to mention, Kyle won this race despite having his arm in a cast following an injury and surgery only a couple of weeks before the final race, a true Harley-Davidson hero.
This win is a strong statement for our ability to lead and innovate in our core Grand American Touring segment.
As I've said since we started this journey, the Hardwire strategic plan and success is underpinned by desirability and our ambition to enhance and grow our position as the most desirable motorcycle brand in the world.
Desirability is our DNA.
It's embedded in our vision; it's at the heart of our mission; and it's part of our 118-year legacy.
Harley-Davidson's desirability preserves the value of our customers' purchases, builds our brand beyond our riders, ensures loyalty, and drives engagement.
By designing engineering and advancing the most desirable motorcycles in the world reflected in quality, innovation, and craftsmanship we are building our legacy.
In building a lifestyle brand valued for the emotion reflected in every product and experience for riders and non-riders alike, desirability will continue to provide the framework for our Hardwire strategic plan and the framework for our success measures.
I'd now like to address a few specific highlights delivered against some of the Hardwire strategic priorities.
It's been a busy few months at Harley-Davidson.
Aligned to our desirability and core product and category focus in Touring and Cruises, we continue to see an increase in consumer appetite and demand for our brand, our iconic motorcycles and our other products.
The pandemic has provided a reminder of the power of getting outside, reconnecting with the Harley-Davidson community and the unique freedom and adventure that our brand represents.
We continue to experience significant demand for our products and our brand with solid demand for our most profitable segments.
This improved product mix is resulting in stronger year-over-year motorcycle segment margins and can be attributed directly to our desirability and Rewire efforts.
This strong quarter underlines the increased strength of the market and of our brand, in particular in the U.S. and Canada.
And while we've continued to see demand in Europe and Asia, these regions are also being affected by both, the enduring impacts of the pandemic and the wider global logistics challenges.
In line with the Hardwire and our streamlined market strategy, we continue to maintain a long-term focus on profitability, and we are pleased with the initial outcomes as we continue to execute against the strategy.
Aligned with our focus on our core segments, in April we launched our Icons Collection.
Produced only once, these extraordinary adaptations of production motorcycles look to our storied past and bright future.
We've seen a fantastic customer response to the first model, the Electra Glide Revival with these limited serialized models selling out immediately.
The focus on selective expansion allows us to target segments that deliver a balanced combination of volume, margin, and potential, and that are aligned with our brand capabilities and identity.
We are in these segments to win, supported by the right allocation of time and energy, balanced with the right investments in product, brand, and go-to-market capabilities.
As highlighted at the last quarter, we've seen an exceptional response to our first adventure touring bike based on the Rev Max platform, the Pan America following its very successful launch earlier this year.
Dealers and riders have been taking delivery of Pan America motorcycles as part of the sellout pre-order allocation since May, and the response from riders on and off the road has been overwhelmingly positive, reinforcing our strategic launch within the adventure touring market.
We believe the opportunity within the Adventure Touring segment is significant, not just in Europe, the largest adventure touring market in the world, but in North America where the market remains a great opportunity, and we are now using our power to grow it.
We believe that with Pan America, we are well placed to take market share in Europe and to become the number one model in the segment in North America.
With Pan America, we've seen outstanding sell-through with the initial run selling out globally.
Looking ahead, we see great potential to build on the success of Pan America and to target new riders in the Adventure Touring space.
By targeting new audiences, we will continue to look to further unlock a whole new dimension of customer and opportunity for the company as we continue to grow our global market share in the Adventure Touring segment.
The success of Pan America reflects our focus and is an integral part of our Hardwire strategy of selective expansion.
We saw the potential built on our off-road heritage and to compete and win in what we believe is the high growth and attractive margin segment of Adventure Touring.
Aligned to Hardwire, we will continue to strategically pick and compete in categories where we see high potential and where we have a clear path to winning.
On July 13th we launched the Sportster S at our Global Reveal event from Evolution to Revolution.
Sportster is not only one of the longest continuously produced motorcycles in history, but also one of the most iconic.
The Sportster S is the latest all-new motorcycle built on the Revolution Max platform setting a new performance standard for the Sportster line.
The launch of this next-generation Sportster defined by power, performance technology, and style reinforces our commitment to introduce motorcycles that align with our strategy to increase desirability and to drive the vision and legacy of Harley-Davidson.
The Sportster S is equipped with a host of technologies designed to enhance the riding experience, including three pre-programmed ride modes with which electronically control the performance characteristics of the motorcycle and the level of technology intervention.
The global reveal event generated over 127 million PR impressions with overwhelmingly positive sentiment, with many publications heralding the return of the iconic Sportster.
We also saw one of the highest social engagement rates on our H-D social channels.
It is clear that riders around the world are excited for Sportster S. As we approach a week since launch, we have seen exceptionally strong customer engagement for Sportster S with the highest leads generated for a new model in recent years.
We're excited about the potential of this bike and look forward to seeing it hit the streets this fall.
As we continue to increase our customer focus, we're also driving an updated product segmentation that better reflects our customers' needs and preferences and our unrivaled combination of product, heritage, and innovation.
Sportster S will be the first motorcycle in the all-new sport category.
This category showcases how Harley-Davidson's innovating and redefining core motorcycle segments with unmatched Harley-Davidson technology, performance, and style.
The touring category has been renamed Grand American Touring, denoting our legacy and stronghold position in a key market segment.
Adventure Touring will represent our entry into critical global segment where we're competing to win.
Each of these segments, along with other existing segments, such as Cruisers, will build their own personalities and products, further enhancing the customer appeal and relevance.
As part of the Hardwire strategy, we also made a commitment that Harley-Davidson will lead in electric.
While we are clear that combustion remains the core for our Harley-Davidson business for the foreseeable future, we believe there is great potential for long-term growth in electric vehicles.
Earlier this year, we announced our intentions to launch a dedicated EV division to allow the strategic focus to deliver desirable growth in this high-growth segment.
We recognize the pioneering spirit and brand value in LiveWire for our community and took the decision to evolve the original LiveWire motorcycle into a dedicated EV brand.
On July 8th, we presented the evolution of LiveWire as a stand-alone brand and the introduction of LiveWire ONE, the electric motorcycle built for the urban experience with the power and range to take you beyond.
With the MSRP at launch in the US for $21,999, pre any applicable tax credit, we believe LiveWire ONE will redefine the segment through innovative engineering and digital capabilities and bring a whole new generation of riders and non-riders into our company's fold.
Innovating to win is core to our focus, and as the first OEM with a hybrid omni-channel model, LiveWire combines the best in digital and physical retail allowing the customer to interact with the brand on their own terms.
By launching online at LiveWire.com and at 12 LiveWire brand dealers in California, New York, and Texas, we placed geographic focus on EV customers and relevant charging infrastructure.
As this develops, we plan to increase the physical LiveWire footprint across the U.S. and the whole of North America.
We also plan to open our first LiveWire Experience Gallery designed to facilitate a fully immersive brand experience in fall-winter of this year in Malibu, California.
Our focus on the digital experience is aligned to the EV customer.
LiveWire.com, the new dedicated LiveWire app, and a new interactive bike build present a heightened ownership experience for the customer, including a digital path to purchase, a first for the LiveWire brand.
We've had a tremendous launch response to the new brand, and building on the U.S. launch, we intend to take LiveWire to international markets in '22.
By investing in electric technology, it remains our intent to be at the forefront of innovation and development as we look to lead the EV segment.
We've always been about more than a machine, and we believe our complementary businesses are huge opportunities for long-term global growth of the Harley-Davidson brand.
Parts and accessories and general merchandise form part of the Harley-Davidson lifestyle, and together with HDFS, play a valuable role in our overall vision and mission and inspiring existing and new customers to discover the adventure that is uniquely Harley-Davidson.
We believe there is great potential to grow our customer base, both with the riders and non-riders and to add to customer lifetime value shaping our future success as a global lifestyle brand.
Customization is a key part of our heritage, and this quarter in parts and accessories, we have seen a strong performance despite substantial supply chain challenges.
We continue to develop and evolve our product offering as we work toward enhancing our leadership position as a definitive destination for authentic parts and accessories for our riders of both new and used Harley-Davidson.
For many non-riders, general merchandise is the entry point to the brand.
We will be talking more about our H-D lifestyle in the fall, but we're excited by the long-term potential to leverage our brand value, to invest in our on and offline retail channels, and grow our general merchandise business globally.
For both, parts and accessories and general merchandise, aligned to our hardwire ambition, we continue to evaluate opportunities to redesign our supply chain and go to market capabilities to drive further efficiency and growth.
We also expect brand collaborations to be integral to our general merchandise strategy and allow us to leverage the unique and powerful brand that is Harley-Davidson.
Last week, we launched our first product collaboration of the year with Jason Momoa and the Harley-Davidson Museum as a limited production American-made collection of 16 vintage inspired men's apparel and accessory styled sold exclusively on Harley-Davidson.com and in our museum store.
Jason's genuine passion for the brand reinforces how collaborations such as this one line with our hardware strategy to expand our complementary businesses with engaging products, services, and experiences.
The response from our community to this collection has been terrific, and we expect full sell-through of the collection in the coming days.
Last but not least, building on the successful launch of H-D Certified last quarter, the first certified pre-owned Harley-Davidson motorcycle program ever, we're excited to launch H-D1 marketplace today on Harley-Davidson.com, the ultimate online destination for used Harley-Davidson motorcycles in North America.
By blending the best of a digital and in dealership experience, H-D1 marketplace is designed to facilitate the confident and seamless purchase journey for used Harley-Davidson motorcycles for the first time in our history, H-D1 marketplace will allow all Harley-Davidson pre-owned motorcycles, including H-D Certified bikes of every participating Harley-Davidson dealer to be online in one place making it easier for customers to find that unique pre-owned motorcycle that they had been searching for.
All, I repeat, all qualified dealers have signed up to participate.
With financing provided by HDFS, our goal is for H-D1 Marketplace to be the number one destination for anyone looking to buy used Harley-Davidson.
Additionally, customers will have the opportunity to sell their Harley-Davidsons directly through the H-D dealer network through the Sell My Bike feature.
We believe the H-D1 Marketplace 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.
The launch of H-D1 marketplace is also the first step in transforming H-D.com into the home of all things Harley-Davidson, from enhanced omni-channel purchase experiences to unique community engagement to exclusive content and learning on a global scale as we look to innovate online to lead the industry.
Before we head to questions, I'd like to summarize some of the highlights since we launched our new Hardwire strategy.
Following the new 21 motorcycles introduction, we successfully launched Pan America, our first Adventure Touring bike.
We introduced H-D Certified, our first ever pre-owned program.
We launched our Icons Collection with Electra Glide Revival selling out instantly.
We created a new EV division and stood up LiveWire as an independent EV brand with LiveWire ONE as its first product.
We launched Sportster S, the evolution of the iconic Sportster as part of a reclassification of our overall market segmentation.
And today, we introduced H-D1 Marketplace, the ultimate digital destination for pre-owned Harley-Davidson motorcycles in North America.
We delivered strong Q2 and first half financial performance despite the unprecedented pandemic-related supply and logistics challenges in the sector.
We expect these challenges to continue and recognize the potential associated risks to our business for the remainder of the year.
Harley-Davidson is a brand with global recognition and appeal.
With 118 years of uninterrupted heritage, craftsmanship, and unrivaled iconic design, we are truly unique.
We believe there is tremendous potential for our brand and business globally, and we will not rest until we are the best-in-class in every market we compete in. | harley-davidson inc delivers q1 gaap diluted earnings per share of $1.68.
delivered q1 gaap diluted earnings per share of $1.68.
qtrly motorcycles and related products (motorcycles) segment revenue up 12 percent.
qtrly revenue $1,423 million, up 10%.
harley-davidson - bottom-line results reflect q1 significant net income improvement with strong results in motorcycles and financial services segments.
qtrly motorcycles & related products segment revenue up 12 percent amid strong retail demand for touring motorcycles.
sees 2021 motorcycles segment revenue growth to be 30 to 35 percent.
sees 2021 motorcycles segment operating income margin of 7 to 9 percent.
sees fy 2021 capital expenditures of $190 million to $220 million. | 0 |
With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Karen Camiolo, Treasurer and Principal Financial Officer; and John McGinnis, President of Seneca Resources.
We may refer to these materials during today's call.
While National Fuel's expectations, beliefs and projections are made in good faith, and are believed to have a reasonable basis, actual results may differ materially.
National Fuel will be participating in the Scotia Howard Weil Energy Conference in March.
If you plan on attending, please contact me or the conference planners to schedule a meeting with the management team.
Overall, the first quarter was a good one for National Fuel.
Earnings were right in line with our expectations.
And from an operations perspective, we continue to execute on the plans we've laid out in prior quarters.
At Seneca, production for the quarter was up nearly 20% over last year.
Seneca continues to see excellent results from the Marcellus and Utica wells it brought on production in recent quarters.
Our team has done a great job cracking the code on our Utica development program, both in the WDA and at Tract 007 in Tioga County.
It's also worth highlighting our California oil production, which was up about 5% over last year on the strength of our recent Pioneer and 17N development programs at Midway Sunset.
Lower Natural Gas prices are obviously a concern.
Earlier this month, we dropped a rig and are currently operating two rigs in our Western Development Area.
Given the challenging pricing environment, as we said in last night's release, we intend to make further reductions in Seneca's activity level in the coming quarters.
John will have more to say on Seneca's program later on the call.
Our lower E&P activity level will also lead to reduction in Seneca-related gathering capital at NFG Midstream.
Having said that, as you can see in last night's release, we're raising the midpoint of our gathering capital spending guidance for the year by $10 million.
This increase is driven by capital expenditures related to a new gathering agreement with a third-party producer in the vicinity of our Trout Run system in Lycoming County.
This is a nice little project.
It is expected to add roughly $5 million to $10 million per year in third-party revenues starting in fiscal 2021.
It's a great example of how we can optimize our existing assets to generate new growth opportunities.
The first quarter was fairly routine for our regulated businesses.
Utility segment continues to perform well with earnings up $0.01 a share over last year.
In the fall, we wrapped up another successful utility construction season, and as we have for the past several years, we continue to allocate capital for the modernization of our system.
For the calendar year, our modernization program replaced over 150 miles of older distribution pipeline, including 113 miles in New York where we have a regulatory tracking mechanism that provides us with timely recovery of this rate base investment.
The warmer weather we've experienced in the Northeast will likely lead to lower second quarter earnings in our Pennsylvania jurisdiction, where we don't have a weather normalization clause.
On a consolidated basis, the impact shouldn't be overly significant.
Our customers should see a real benefit from low natural gas prices.
We expect winter heating bills will be more than 10% lower than last year.
In the Pipeline and Storage segment, though earnings were down due to the lingering effects of the KeySpan contract expiration, looking to next year and beyond, the outlook for this business is excellent.
The Empire North and FM100 projects will add combined $60 million in incremental annual revenue over the next few years.
Both projects are proceeding according to plan.
Empire North is under construction and on track to be in service late summer or early fall of this year.
If FERC stays on its expected timeline, we expect a certificate for the FM100 project later in the fiscal year.
continues to work through its rate case before FERC.
We've held multiple settlement meetings with parties, and I am optimistic we'll reach a settlement.
Our balance sheet is in great shape and our reduction in spending at Seneca will help ensure it stays that way.
Just recently, S&P affirmed our investment grade credit rating and maintained a stable outlook on our credit.
In the near term, we expect a modest outspend as we build the Empire North and FM100 projects, but beyond that we should be generating significant free cash flow.
2020 is looking to be a challenging year for natural gas producers, but National Fuel is well positioned.
We're financially strong and our integrated yet diversified business model provides a large measure of stability to earnings and cash flows.
Looking to the future, though we're slowing the pace of our E&P program to match the reality of natural gas prices, our regulated segments remain on track to see meaningful growth.
Seneca had a solid first quarter.
We produced 58.4 Bcfe, an increase of around 19% compared to last year's first quarter, and a slight decrease quarter-over-quarter.
While we continued to see strong operational results with drilling and completion activity on our recent pads coming in ahead of schedule, given the current natural gas price environment, we are reducing our fiscal '20 activity level and associated capital.
As Dave mentioned, this last week, we dropped one of our rigs after drilling a four-well Utica pad in Tioga County.
We now have two rigs operating in the basin, both of which are in the WDA.
Additionally, during last quarter's earnings call, we discussed the possibility of a further reduction in the activity, should prices not rebound during the winter.
And obviously, prices have not rebounded, and in fact have continued to decline.
As a result, we are now planning to drop a second rig this summer and defer some of our EDA completion activity into the next fiscal year.
We are lowering our fiscal '20 capex guidance around $42 million or 10% at the midpoint to now range between $375 million to $410 million.
This reflects approximately $100 million reduction or 20% in Seneca's expected fiscal '20 capital expenditures versus 2019 levels.
Because of this further activity reduction will occur relatively late in our fiscal year, we do not expect to see a significant production impact in fiscal '20.
As to production timing, last quarter, I had mentioned that we expected to see increases during our second and fourth quarters.
We still expect to see increased production in our second quarter as we turned in line 12 wells in late January and expect to turn in line another six wells later next month.
However, by deferring some EDA completion activities into next year, we now expect to see flat to slightly declining production during our third and fourth quarters.
Overall, our production guidance for fiscal 2020 remains unchanged with our strong first quarter results, largely offsetting our lower production expectations in Q4.
Moving to our marketing and hedging portfolio.
We will remain well-positioned for the remainder of the year.
We have approximately 102 Bcf or 60% of our remaining fiscal '20 East Division gas production locked in physically and financially at a realized price of $2.28 per Mcf.
We have another 43 Bcf of firm sales providing basis protection to over 85% of our remaining forecasted gas production that's already sold.
In California, we produced around 6,000 barrels of oil during the first quarter, an increase of around 5% over last year's first quarter.
This increase was due primarily to our recent drill activity in both Pioneer and 17N, both located within our Midway Sunset field.
These properties are now producing around 800 barrels a day.
And as we look out for the remainder of fiscal '20, we expect Q2 oil production to be down modestly from our Q1 production level and relatively flat thereafter.
And finally, over 70% of our oil production for the remainder of the year is hedged at an average price of around $62 per barrel.
National Fuel's first quarter operating results were $1.01 per share, down $0.11 per share quarter-over-quarter.
Lower natural gas price realizations were the largest driver of the decrease.
In addition, the expiration of a significant contract on our Empire Pipeline late in last year's first quarter and an increase in our effective tax rate contributed to the drop in earnings.
Our higher effective tax rate was driven by two factors.
As mentioned on previous calls, the enhanced oil recovery tax credit that was in place last year is no longer available due to the current crude oil prices.
And second, the difference between the book and tax accounting rules and expensing of stock-based compensation grants can lead to effective tax rate impacts on the periods in which they struggle.
Last year, we had a large favorable impact resulting from this, which did not recur this year.
Looking to the remainder of the year, our earnings guidance has been revised downward to a range of $2.95 per share to $3.15 per share, a decrease of $0.10 at the midpoint.
This is primarily related to the reduction in our natural gas price outlook, which now reflects a $2.05 per MMBtu NYMEX price and $1.70 per MMBtu Appalachian spot price assumptions for the remainder of the year.
This is partially offset by stronger first quarter pricing and production relative to our expectations.
The remainder of our major guidance assumptions are unchanged.
Given that our earnings guidance range is based upon the forward strip at a given date and the recent volatility in commodity prices, I'll provide some earnings sensitivities for your reference.
The $0.10 change in NYMEX pricing would change earnings by $0.04 per share, a $0.10 change in spot pricing would impact earnings by $0.02 per share, and a $5 change in WTI oil pricing would also impact earnings by $0.02 per share.
On the capital side, taking into account our reduced activity level, our new consolidated guidance is in the range of $695 million to $785 million, a decrease of approximately $33 million at the midpoint.
With our revised earnings projections and lower capital spending planned for the year, we now expect our funds from operations and capital expenditures to be roughly in line with each other.
Adding our dividend, we expect a financing need of approximately $150 million for the full year.
We started the year with nearly $700 million of liquidity available under our revolving credit facility, and we plan to use that as the first source of financing.
Given the favorable conditions in the capital markets, we will remain opportunistic as it relates to long-term financing needs and nearer-term maturities.
As John and Dave said, operationally, things are moving along in line with expectations.
While natural gas prices are challenged financially, we are in a good spot to weather this period of low commodity prices and remain flexible to take advantage of opportunities when they are available. | compname reports q4 earnings per share $6.12.
q4 earnings per share $6.12. | 0 |
I'm Quynh McGuire, Vice President of Investor Relations.
You may access this announcement via our website at www.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website.
That will be referenced in today's call.
References may also be made today to certain non-GAAP financial measures.
Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer.
I'll now turn this discussion over to Leroy.
As you may have seen as shown on Slide 3, we announced today that Koppers will be hosting an Investor Day scheduled for Monday, September 13, 2021 beginning at 9:00 A.M. Eastern Time.
I sincerely hope that you'll be able to join me and our senior management team for this event and it will take place in Pittsburgh, Pennsylvania.
The venue location is still to be determined.
We will, of course, closely monitor health and safety guidelines regarding the COVID-19 pandemic, but are looking forward to bringing back in person to tell our story.
Moving on to Slide 5.
I'm proud to report that Koppers continues to fulfill its purpose of protecting what matters and preserving the future by transporting critical goods, providing power and connectivity to homes and businesses, and keeping our infrastructure strong and reliable.
At Koppers, we take our responsibility seriously, knowing that the things we all take for granted, every day, do not occur without our products and services, and we're incredibly proud to do our part.
Now, I'd like to start with the Zero Harm update, as always, after many delays due to the pandemic, our team is happy to get back to deploying our ongoing Zero Harm training sessions, in person and in a safe manner.
And it couldn't happen at a more important time as our safety performance during the first quarter lagged our expectations.
We need to get our safety professionals back in front of our people, in operations, to train and reinforce positive behaviors since that is now happening as COVID restrictions begin to get relaxed.
Throughout the year, we will be working to roll out our Foundations training which emphasizes the importance of empathy for fellow colleagues and the criticality of communications as it relates to the presence of hazards or hazardous behavior.
Additionally, we recently presented our company's annual Zero Harm President's award, which I'll describe in detail in a few moments.
Moving to Slide 7.
And it offers an update of the key aspects of our employee health and well-being efforts.
And regarding COVID-19, we currently have about 13% or 265 employees testing positive with rates dropping significantly over the past six weeks.
Sadly, we did have one employee recently pass away, having contracted the virus outside of the workplace.
It's a terrible reminder that as close as we feel to being out of the woods, the virus is still out there, wreaking havoc and the best way to protect yourself is to get vaccinated.
I say that not as a political statement, not to trying to force my beliefs on others, but as someone who doesn't want to see any more people that are under my care, unnecessarily die of a virus that is extremely unpredictable.
We implemented a Life-Saving rule related to COVID, some months ago, and it remains in effect, demonstrating the importance of this issue and the fact that it remains our single biggest fatality risk.
As CDC guidelines are updated, we'll adjust accordingly at our facilities in the US as appropriate.
In addition, we maintain COVID pool testing at four key locations in North America.
We're scheduling vaccine clinics at our facilities when possible and offering a $250 incentive to those who are fully vaccinated.
In addition, we're using point of dispensary occupational medical clinics and other commercial outlets to make vaccination as easy and convenient for employees as possible.
Now, despite my pleased employees, at this point, I only have about 40% of our US employee base as been vaccinated.
And I don't really expect that rate to change all that much given that most everyone has been eligible for a while now.
Internationally, the rate is much lower at this point, but that has more to do with vaccine availability than indifference.
On Slide 8, we see an overview of our operations and planning efforts at our facility in Stickney, Illinois, the tar plant experienced approximately one month of unplanned downtime, beginning March 20.
And has been back up and running for a few weeks now, and while it was a major inconvenience operationally and commercially, The impact on our consolidated results for the first and second quarter is expected at less than 5% and already baked into our full-year guidance.
Employee travel, we continue to limit those to essential-only trips.
An example of that would be the recent deployment of our Zero Harm training modules for front-line employees as well as peer-to-peer workshops.
Now, with COVID vaccination rates increase, we're resuming this training at selective locations.
As always we closely follow social distancing measures and masking protocols, and also we're conducting hazard assessments for certain tasks in order to protect our employees from the highest job site risks.
Regarding off reentry, we're still urging employees who are able to work from home to continue doing that.
And those who need to come into the office must use facial masks and observe all social distancing protocols when not located inside an enclosed Workspace.
We're postponing an official return to the office until September 7, just after the US Labor Day holiday, with limited office return, starting July 1, for those who would like to choose that option.
The pandemic has brought the work-life balance issue to the forefront, so we have asked our employees for suggestions on how to improve that aspect of their lives.
Now, there were many interesting ideas to consider, and ultimately, we plan to implement certain measures over time.
And while we haven't ironed out all of the final details as of yet, it's fair to say that we realize that a one-size-all -- fits-all approach is not fitting for an organization that's spread out as we are in many smaller employee pockets.
What's fit for Pittsburgh is not necessarily what fits for Nyborg, Denmark or Sydney, Australia.
One thing that's for certain though and that is our approach to flexibility in the workplace will reach heights we wouldn't have ever imagined prior to the pandemic.
Now to [Phonetic] notable accomplishments during the quarter.
In April, we presented -- Koppers Zero Harm President's award to our crosstie recovery facility in L'Anse, Michigan, as shown on slide 10.
The L'Anse group led all Koppers' teams worldwide in practicing proactive leading activities related to safety and zero lagging indicators.
I want to congratulate the team at L'Anse for earning the President's Award and to the 10 other impressive teams in locations listed in the finalists' category.
Moving to Slide 11 that recognizes our L'Anse's facility going for three years without any serious injuries and our plant in Nyborg, Denmark, recently completing 365 days, an entire year, without any serious injuries which includes keeping their employees and contractors safe, while managing a number of major projects.
Slide 12 illustrates the new mobile app introduced by our UIP business to better connect directly with customers on products, technical reports, and pole shipments.
It's a great reflection of the different ways we're looking to serve our customers and bring them more value by making our people and the critical information that they need more accessible.
Chief Sustainability Officer, Leslie Hyde offered an overview in a local publication, Pittsburgh Magazine, of our sustainability strategy, while Tom Horvat, Performance Chemicals, Director of Global Marketing, spoke on the consumer appeal of treated wood products to building products digest.
Linkwomen observed Women's History Month by launching a college scholarship in the name of our late Treasurer, Louann Tronsberg Deihle.
Eligible participants are female family members of Koppers' employees.
And Linkwomen encourages professional development for all Koppers employees and has been recently working on a project to look at ways to increase female interest and involvement in the stem fields.
Also, in February, we honored Black History Month by highlighting Tracie McCormick, our Assistant Treasurer and Mario Franks, a 23-year Koppers lift truck operator veteran in our Florence, South Carolina facility.
And also, we challenged employees to recommend ideas to further improve our work-life balance.
As a result we launched LINKparents, a new employee resource group that gives parents and caregivers an outlet to share advice and appreciate diverse perspectives.
On Slide 15, you'll see highlighted one of the most interesting interactions we had in the community this past quarter, which was the Police Chief Town Hall that was organized and moderated by our own Global Director of inclusion and diversity, Lance Hyde.
Lance was able to gather six leaders in law enforcement from around the country to engage in a discussion on ways that we can all work better together to help bridge the racial divide.
We opened up participation in the event to customers, suppliers, and the community, and had approximately 1,200 people join this virtual event to encourage positive change.
And finally, during the past quarter, on Slide 16, our Ashcroft British Columbia team donated funds to a long-term care facility, while employees from our Galesburg, Illinois plant assembled food boxes during the pandemic.
On a bigger picture scale, Koppers celebrated Earth Day on April 22 by promoting tips on how to conserve energy and water and on how to reduce, reuse, and recycle materials in everyday life.
So one [Phonetic] more way we demonstrate that we're living on our sustainability principles and practical actionable ways.
As shown on Slide 18, consolidated sales were $408 million, which was a first-quarter record for Koppers and also an increase from sales of $402 million in the prior year.
Sales for RUPS were $192 million, up slightly from $190 million.
PC sales rose to $124 million, up from $111 million, and CM&C sales came in at $92 million, down from $101 million.
On Slide 19, adjusted EBITDA for the quarter was $55 million or 13.5% and this is a first-quarter record and also up from $38 million or 9.4% in the prior year.
Adjusted EBITDA for RUPS increased to $16 million, up from $13 million.
PC EBITDA rose to $28 million, up from $17 million and CM&C EBITDA was $10 million compared with $7 million.
On Slide 20, sales for RUPS were $192 million, slightly higher than the $190 million in the prior year.
This was primarily due to Class I volume increases, higher demand in the railroad bridge services, and crosstie disposal businesses, and partially offset by year-over-year declines in commercial crossties.
In Q1 crosstie procurement decreased 27% from the prior year due to a continuing tight supply for untreated ties as well as unfavorable weather.
Crosstie treatment in the first quarter was higher than prior year by 6%, driven by increased volumes from Class I railroad customers.
Moving on to Slide 21.
Adjusted EBITDA for RUPS was $16 million in the quarter compared with $13 million in the prior year, and this was driven by a favorable product mix and stabilization in our maintenance of way businesses, offset in part by lower commercial crosstie volumes.
For 2021, we anticipate a favorable outlook for our maintenance of way businesses, which were severely impacted in the prior year due to the pandemic.
On Slide 22, sales for PC were $124 million compared to sales of $111 million in the prior year.
We experienced continued strong sales growth due to ongoing high demand for copper-based preservatives, higher sales in the US from continued home repair and remodeling projects, and higher volumes internationally from improved industrial and agricultural demand.
Adjusted EBITDA for PC was $28 million compared with $17 million in the prior year.
The higher profitability can [Phonetic] be attributed to higher sales volumes, a favorable product mix, and better absorption on increased production.
Profitability also benefited from the demand generated by the strong home repair and remodeling trend.
Moving on to Slide 24.
This shows CM&C sales at $92 million compared to sales of $101 million in the prior year.
The year-over-year decrease was primarily due to lower volumes of phthalic anhydride in the US, lower carbon pitch pricing and volumes globally, and lower volumes for carbon black feedstock in Australia.
Also, the prior year benefited from increased phthalic anhydride sales volumes due to one of our competitors experiencing supply disruption issues during that time period.
On Slide 25, adjusted EBITDA for CM&C was $10 million in the quarter compared to $7 million in the prior year.
Despite the market challenges, CM&C generated higher profitability and a double-digit margin.
This was primarily driven by a lower cost structure and production efficiencies.
In terms of carbon pricing and cost trends compared with the fourth quarter, the average pricing of major products were higher by 15%, while average coal tar costs went up by 11%.
Compared with the prior-year quarter, the average pricing of major products was lower by 2%, while average coal tar cost decreased by 7%.
Now, let's review our debt and liquidity.
As seen on Slide 27, at the end of March, we had $766 million of net debt, with $326 million in available liquidity.
We continue to project $30 million of debt reduction for 2021 and we expect to be at 3.1 times to 3.2 times with our net leverage ratio at year-end.
We remain in compliance with all debt covenants and we do not have any significant debt maturities until 2024.
The recent history of our net debt leverage ratio was also shown on this Slide, as well.
As March 31 -- at March 31, our net leverage ratio was 3.4 times, which was a significant decline from 4.5 times just a year ago.
Longer-term, our goal continues to be between 2 times and 3 times.
So, let's review our business segments and how 2021 looks to be taking shape, starting with our Performance Chemicals group.
On Slide 29, the overall outlook for Performance Chemicals has improved from the more cautious approach we were taking as we entered the year.
We've seen strong year-over-year demand in North America through April, which is not a surprise as prior year comps did not reflect the stay-at-home pandemic effect of home improvement projects.
We did see a mid-quarter minor low [Phonetic] in volumes relative to what we had seen in previous eight months, which we attributed to record lumber prices that we believe were holding traders back to a certain degree as they were looking to avoid getting caught possibly with high-priced inventory if the market took a sudden sharp downturn.
Consumer demand for the product to satisfy the backlog of projects has the industry pushing through the inventory hesitancy and volumes have reverted back to what we had been seeing.
Overseas, the international picture looks to exceed 2020 results due to prior year being severely impacted by the pandemic, as such we're cautiously optimistic about PC's ability to generate EBITDA in 2021 that will actually meet or potentially even surpass the prior year, after initially thinking that we could see some drop off from prior year demand as the year went on.
I'm still a little concerned about where things go in the back-third of the year from a demand standpoint but feel comfortable enough raising our guidance in this business due to the lead we have built in Q1, a better comfort level on Q2, and the rebound in our international segments.
Koppers has continued its rise to record highs and as a result, the industry will need to build that cost increase into materials if this trend continues into 2022.
Across the North American market, residential and commercial treating outlook remained strong, with ongoing pent-up home improvement demand driving lumber prices to record levels.
Big Box retailers have mostly built up their inventory during the first quarter and independent dealers have now decided to jump into the market, despite the higher lumber prices to get ready for the anticipated spring rush.
And our projections of 2021 being a big year for preservative conversions also remain in place as our CCA/DuraClimb utility poles are expected to increase market share over the next year or so as a result of the phase-out of Penta.
Both the US EPA and Health Canada are proposing canceling Penta registrations in the respective countries which would be the final nail in the coffin for the product whose only manufacturer previously announced that they were discontinuing production of the product as at the end of this year.
We continue to consider the proper entry point into copper naphthenate, where other oil borne systems for wood species that cannot take [Phonetic] to our client, but overall we feel satisfied in the interest of our waterborne product as a great substitute for the Southern yellow pine wood species region.
And we're pleased to note that plans for the capacity expansion at our facility located in Hubbell, Michigan, remain on target for the third quarter, which should provide some cost relief in the back half of the year should volumes drop below prior-year levels.
Also, we've de-risked our supply chain by locking in long-term domestic supplies for intermediates over the second half of the year, which will also cut down on lead times.
Continuing on regarding North America, on Slide 30, we show that friendly customer consolidations that are happening currently could mean new volume growth by the fourth quarter and into 2022 as our capacity is expanded.
Now the data that we track to determine the health of our PC business seems to be pointing in a good direction.
According to the National Association of Realtors, existing-home sales rose 12.3%, year-over-year, in March 2021, but fell 3.7% from prior month because of nearly historic lows in housing inventory.
The sales prices of median existing homes soared to record levels and would have been higher had more inventory been available.
The NAR forecasted buyer confidence is on the rise.
The Leading Indicator of Remodeling Activity says home repair and improvement expenditures are expected to increase 4.8% and reach $370 billion by the first quarter of next year as homeowners take on larger discretionary renovations deferred during the pandemic.
These indicators strongly suggest that people are feeling more positive about the economy as validated by the Consumer Confidence Index, which saw another strong increase for the second straight month.
The Index in April came in at 121.7, up from 109 in March, which marked a significant rise from the 90.4 index in February.
Internationally, our PC activity in South America remains on a positive path and looks to be a growing market.
After several failed attempts to acquire manufacturing capacity in Brazil, we're now looking hard at greenfielding a site, which would put us in a much stronger market position in a growing region where we already hold significant market share through an important tolling model.
Australasian business had a strong first quarter and looks to reap the benefits of an anticipated post-pandemic housing boom.
In Europe, as certain of our product registrations are set to expire, we pulled demand forward to satisfy longer-term customer needs, and therefore, we will be challenged in this region as the year progresses.
Now, given that this is a small piece of our global PC portfolio, we don't anticipate any issue in offsetting the expected weakness in the remainder of 2021.
We have been sorting through the long-term alternatives for this business for a while now, and we'll be moving forward soon with the plan to bolster our aging product portfolio through the introduction of new products with the acquisition of existing technology that has a longer regulatory timeline.
Slide 31 brings us to an overview of our Utility and Industrial Products business.
Demand in the US and Australia appears to remain strong in 2021.
Though we may see a bit of sales decline as a result of our recent exit from our operating agreement with TEC in Texas, but we expect that that will translate into improvement in EBITDA as production moves from TEC's Jasper, Texas location to our Somerville, Texas, treating facility.
The TEC arrangement that we inherited with the acquisition of the UIP business was unprofitable and deemed unflexible without some meaningful contractual changes, which we just could not seem to reach agreement on with TEC.
As a result, we'll now be going in alone in Texas, which is probably best in the long run, anyway.
Texas is a creosote pole market and as a burgeoning market for pole disposal, all elements that speak to the strength of our integrated business model.
Now, even if we put the pandemic behind us, it will remain an imperative for utilities to limit or avoid service interruptions.
It's likely that some portion of the workforce will continue to work remotely and as a result the workforce is expected to be more dispersed geographically, compared with a pre-pandemic environment.
An emerging trend shows that more Americans are moving south and west and to the extent that migration and home construction trends are occurring in the Southern US, our business could benefit due to having strong market share in the region.
[Technical Issues] same time energy and telecommunications needs are expected to continue to increase, which should result in a need for upgrades and expansions of the transmission network.
Mentioned earlier, the production of Penta preservative will cease at the end of 2021 and the registration for user Penta is on the road to being canceled in the US and Canada.
And we're converting our first plant from Penta to CCA, a Koppers produced preservative, while evaluating copper naphthenate, DCOI as additional oil borne alternative.
We expect our CCA/DuraClimb product to lead the way in the Eastern US market for a combination of cost and performance reasons.
Our capital program this year is also allocated to adding drying capacity to treating sites, further reducing cost and supply risk.
First kiln is expected to come online in Q2, with the second in Q3.
In Australia, an aging network and a need to rebuild infrastructure following last year's wildfires appear to create a solid demand base for 2021.
Pine poles have gained greater acceptance due to the lack of hardwood, so we're also adding drying capacity in Australia to facilitate increased pine pole production.
Moving on to the RUPS business on Slide 32.
Demand for all product lines looks to be strong for this year and next, as margins are expected to improve with continued cost control.
Integrating tie and pole treatment in Somerville along with processing of end of life ties, illustrates the Super Plant model, referenced in the past, is a key goal for Koppers in the coming years and a core tenant of our network optimization strategy.
The biggest risk we face currently to 2021, results for -- the biggest risk we face currently to 2021 results for our crosstie business is the tightened hardwood supply.
Now, this has been an every couple-of-year issue within the industry, where the supply of hardwoods for untreated crossties tightens either due to weather issues, competing demands for hardwood, or both, and we'll work through it as we have in the past, but if our untreated numbers don't start increasing soon, we could see an impact on treating and shipments by the end of the year.
Now, despite the challenges, the industry is currently dealing with on the supply side, we do remain focused in the crosstie market on increasing our market share and we continue to drive efforts to renew key Class I contracts by the end of 2021.
The expansion of our North Little Rock facility to be completed by the end of this year, further puts us in position for EBITDA improvement in 2022 as it will lower our cost footprint, enable and enable us to compete for a greater share of the market.
Larger market indicators paint an overall encouraging picture for the RUPS business.
The Railway Tie Association forecast 2.7% growth in 2021% and 3.6% in 2022 for crossties, primarily driven by the commercial market while Class I volumes are seeing holding at similar year-over-year levels.
[Technical Issues] raw material availability is slightly constricted according to the RTA, but their view for the next six months to 12 months is ideal, which is probably a little more optimistic than our view at this moment.
And as mentioned earlier, remains our biggest near-term risk.
Rebounding national economy and government stimulus payments are expected to spur increased consumer spending.
RTA reports that retailers' inventory to sales ratios are at their lowest levels in a decade, meaning freight activity should benefit from suppliers' needs to replenish inventory.
Rail traffic continues to recover from 2020 levels as of March 31, year-to-date, according to the American Association of Railroads.
Total US carload traffic decreased 2.6% year-over-year, while intermodal units increased 3.2%.
Combined, year-over-year, the US traffic was up by 5.6%.
The AAR adds that railroad volumes correlate strongly with manufacturing output, so recent signs of strength point to positive indicators for the railroad industry.
Slide 33 shows the impact of Maintenance of Way projects on the RUPS segment, and even though, COVID-19 negatively affected this business tremendously, Maintenance of Way still generated EBITDA and margin improvement in 2020.
In the backlog, the railroad structures project this year is 50% higher than a year ago, pointing to increases in profitability from a full pipeline of incoming work.
In 2021, we don't anticipate as much disruption from COVID-19 as compared with the prior year, which should improve project efficiency.
We're actively working to expand the crosstie recovery business, including the addition of Class I accounts.
We also see more growth potential by leveraging the synergy between landscape crossties and the needs of our PC customers.
Combination of new value-added services, lowering cost, and increasing efficiency for rail customers point to a growing revenue model.
And the Mains-of-Way [Phonetic] business is emerging as a bigger proportion of our RUPS business, having transformed from one of our most negatively impacted businesses during the pandemic and to now representing roughly half of all the EBITDA increase for RUPS in 2021.
According to IHS Markit automotive group, light vehicle production is projected to grow about 14% in 2021, globally, with US production expected to increase 24%.
As such, we expect growth in overall EBITDA margins as demand improves and cost management continues.
Progress of CMC through the pandemic has proven that the model we have built can consistently deliver EBITDA in the low to mid-teens, regardless of the economic cycles.
In North America, we see more tar production in 2021, regaining normal levels in the second half of the year and we expect transportation cost savings as imports from Europe are reduced or eliminated.
Carbon pitch and creosote demand look to be solid, while higher average oil prices should maintain higher profitability in our phthalic anhydride business.
Our CMC footprint worldwide has been streamlined to the degree that we can now support reinvestment in our Stickney, Illinois facility.
And these improvements are under way since last year, designed to provide long-term reliability by minimizing the risk of operational disruptions like what recently occurred.
Higher profitability is anticipated through increased efficiency, upgraded technology, lower costs, improved environmental performance, and most importantly, an enhanced safety record.
Slide 35 details CMC operations in Europe and Australia.
Europe remains the region with the most commercial challenges as the slowdown in aluminum capacity has affected our competitors customer base disproportionately and increased pricing pressure for the remaining base of business.
And while higher oil prices represent a net positive for our overall CM&C business, the one area where it presented challenges in Europe where it makes coal tar more competitive raw material for the carbon black feedstock market, thereby pushing down supply and putting pressure on pricing.
This is where our commercial supply chain chain group has proven to excel over the years in managing these ever-changing dynamics, and I'm confident they'll be successful managing at this time as well.
In the Australian market, we see that higher China benchmark pricing will support a healthier carbon pitch pricing environment.
And should this pricing remain in place, we anticipate that Australia will generate the largest year-over-year improvement of the CMC regions.
Pulling everything together, on Slide 37, our sales forecast for 2021 remains in the range of $1.7 billion to $1.8 billion, compared with $1.637 billion in the prior year.
Our RUPS and CMC businesses are expected to generate a similar range of increase with PC estimated to be somewhere close to prior-year sales numbers.
On Slide 38, we're increasing our EBITDA projections for 2021 to a range of $220 million to $230 million compared with $211 million in the prior year.
The biggest driver in our increased guidance is our increased confidence that PC will see elevated levels of demand, at least through the third quarter.
The EBITDA estimate translates to an increase in our adjusted earnings per share guidance, which is seen on Slide 39, and is now $4.35 to $4.60 per share, compared to the prior guidance of $4 to $4.25 per share, and prior-year adjusted earnings per share of $4.12.
Finally, on Slide 40, our capital expenditures were $24.2 million in the first quarter or $19.5 million net of $4.7 million in cash proceeds from asset sales.
The cash proceeds came from the February sale of the Follansbee facility and the final release from escrow of dollars held from our 2018 sale declared [Phonetic].
The Follansbee sale is an important milestone for Koppers as it will save us considerable ongoing costs and cash flow, and allow us to refocus efforts in cash toward the growth and improvement opportunities in our other -- in our other businesses.
We remain on track to spend a net amount of $80 million to $90 million on capital expenditures this year with half of that dedicated to growth and productivity projects that are expected to generate $8 million to $12 million of annualized benefits.
In summary, I have greater confidence in our ability to deliver a significantly better financial performance this year, now that we're through the first four months of 2021 and have better visibility on the second and third quarters.
Beyond 2021, I remain excited about the many opportunities that we have to further build upon our integrated business model, focused on wood and infrastructure, and look forward to sharing the details of how we believe we can take Koppers to over $300 million of EBITDA generation by the end of 2025 at our upcoming September 13 Investor Day.
With that, I would like to open it up to any questions. | expects ebitda, on an adjusted basis, will be approximately $220 million to $230 million for 2021.2021 adjusted earnings per share is forecasted to be in range of $4.35 to $4.60.
expects that 2021 sales will be approximately $1.7 billion to $1.8 billion. | 1 |
Joining us today are Jon Michael, Chairman and CEO; Craig Kliethermes, President and Chief Operating Officer; and Todd Bryant, Chief Financial Officer.
Pretty standard structure for today's call, with Todd running down the financial results for the quarter ended June 30th; Craig will add some commentary on current market conditions and our product portfolio; we will then open the call to questions, and Jon will close with some final thoughts.
Yesterday, we reported second quarter operating earnings of $1.09 per share.
Results reflect positive current year underwriting profit, supplemented by favorable benefits from prior year's loss reserves.
All in, we experienced 25% top-line growth and posted an 84.8 combined ratio.
Additionally, our core business was complemented by a strong quarter from Maui Jim and Prime.
While investment income was down modestly in the quarter, year-to-date operating cash flow of $165 million has supported growth in our invested asset base.
Realized gains for the quarter were elevated as we rebalanced our equity position, leaving a modest $4 million change in unrealized gains on equity securities.
As you know, large movements in equity prices in comparable periods can have a significant impact on net earnings, which you can see in both the quarterly and year-to-date comparisons to 2020.
Aggregate underwriting and investment results push book value per share to $27.46, up 11% from year end, inclusive of dividends.
Craig will talk more about market conditions in a minute, but from a high level, all three segments experienced growth.
Property led the way, up 33% as rates and market disruption continue to support growth.
Casualty gross writings improved 24%, with all major product lines contributing.
For Surety, premium was up 11% as our contract and transactional business grew nicely in the quarter.
From an underwriting income perspective, the quarter's combined ratio was 84.8 compared to 88.4 a year ago.
Our loss ratio declined 4.1 points to 44.4.
Storm losses booked in the quarter totaled $8 million, with $7 million impacting the Property segment and $1 million the Casualty segment.
On an overall basis, prior year's reserves continue to develop favorably, enhancing both the Casualty and Property loss ratios.
Surety, however, experienced adverse loss development in the quarter, as we further strengthen incurred, but not reported reserves, on the 2020 accident year for the energy portion of our commercial surety business.
Lastly, on the loss front, our current accident year loss ratio for Casualty continued to improve.
On an underlying basis, if you exclude prior year's reserve benefits and catastrophes, our Casualty loss ratio was down 7 points.
COVID-related impacts in 2020 account for about 4 points of that decline.
Excluding that, however, the loss ratio was still down 3 points.
An improving mix and modest reductions in loss booking ratios, similar to what we discussed on the last few calls, have driven the positive results.
With respect to COVID-specific reserves, amounts are largely unchanged from year end.
Our quarterly expense ratio increased 0.5 point to 40.4.
Similar to last quarter, the increase and the increase in general corporate expenses are largely driven by amounts accrued for performance-related incentive plans.
The combination of significantly higher operating earnings and improved combined ratio and growth in book value drove these metrics higher.
Apart from elevated incentive amounts and continued technology-related investments, other operating expenses were relatively flat.
On the asset side of the balance sheet, our investment portfolio had the major components pulling the same direction, with positive results from equities and fixed income.
Higher bond returns have come alongside lower reinvestment rates, as treasury yields have declined from the highs we saw earlier in the year.
Despite the return of lower yields, strong operating cash flow is accruing to the benefit of total invested assets.
A growing portfolio helped to flatten the curve of investment income, which was down just over 1% in the quarter.
Total return was 2.8% for the quarter, and we continue to put money to work in nearly all environments to stay fully invested.
Apart from the capital markets exposure, investee earnings were significant compared to 2020.
Maui Jim and Prime contributed $10.6 million and $3.6 million, respectively, both benefiting from robust markets and an improving macro economic environment.
All in all, a very good quarter and a strong first half of the year.
A very good quarter, as Todd mentioned, with 25% top-line growth and an outstanding 85 combined ratio.
We are very pleased with our results and our position in the marketplace.
We're seeing widespread growth across almost every product in our portfolio as a result of an improving economy, higher retention rates on renewal business, increased submission flow on new business and rising rate levels.
Although frequency of claims slowed during the pandemic, they have begun climbing back to previous levels, and we remain watchful of the long-term impact of social inflation.
We also continue to keep an eye on loss cost inflation associated with rising building, material and labor costs.
This could prove challenging as we enter the hurricane season, which will likely increase the cost of rebuilding, but also lengthen related business interruption claims.
We think there is more opportunity to get rate as the industry is still underperforming overall.
The industry much more broadly recognize the rising risk levels associated with inflation, the uncertain impact of the pandemic, the possibility of a rising number of severe weather catastrophes, and more unique exposures like the recent building collapse.
We anticipate that these factors will drive and sustain current rate levels and momentum.
We have the benefit of underwriting discipline and product diversification.
This permits us to navigate all market conditions, pushing for rate adequacy where needed, shrinking our position if necessary to maintain underwriting margins while growing shareholder value.
Now for some more detail by segment.
In Casualty, we grew top line 24% and reported an 83 combined ratio, as we benefited from significant favorable reserve development.
Rates, overall, are at or above loss cost, as we achieved 6% for the quarter and 7% year-to-date.
Rates are still up significantly in excess liability products and select auto markets where we compete.
Rates remained relatively flat in primary liability, small package business, and even in several auto niches where competition remains fierce.
We achieved growth in underwriting profit across all major products in our Casualty portfolio.
We have benefited from a quicker recovery in the public auto space as buses are coming back online faster, and we are also realizing goodwill earned with our customers and our producers last year when we reduced premium in recognition of exposure changes during the pandemic.
Casualty growth excluding our transportation unit was still up 18% for the quarter and 12% year-to-date.
In Property, we achieved top-line growth of 33% while reporting an 84 combined ratio.
All of our major products in this segment grew top line and reported underwriting profits.
The pace of rate changes flattening, but still positive across the board.
Overall, rates were up in Property 8% for the quarter and 9% year-to-date, with catastrophe win continuing to lead the way at plus 17% for the quarter and plus 21% year-to-date.
PMLs for wind are up about 15% for the year, but are still well contained at the 250-year level with reinsurance protection.
I don't want to move on from this segment without commenting on the recent collapse of the Champlain Tower in Surfside, Florida.
It was a very tragic event and our thoughts continue to be with the families of all those impacted.
We do write contractors, architects and engineers and properties in the area, but we do not target multi-unit high rises or condo associations in any of our businesses.
Although our loss exposures appear minimal at this time, we will continue to do our part by tightening our underwriting guidelines, and as a result, improve the risk management posture of contractors and those responsible for building maintenance in our chosen markets.
In Surety, we reported 11% top-line growth and a 96 combined ratio.
We were able to achieve an underwriting profit in this segment despite an elevated risk environment related to the number of bankruptcy filings in the energy sector of our commercial surety business.
We maintained significant reinsurance protection against large losses.
We also have strong partners who value our underwriting discipline and have mutually benefited from our relationship for over two decades.
Our underwriting team remains disciplined and continues to underwrite more profit in this space.
We have further tightened our restrictive standards, targeting the highest credit quality principles, insisted on more structured protection in collateral, raised rate levels and lowered tolerances for any delayed commissioning work by the principle.
Our commercial, contract and miscellaneous surety markets are growing and remain profitable year-to-date with an 87 combined ratio.
Overall, an excellent quarter and a very nice first half of the year.
Our disciplined underwriting, diversified portfolio of niche products, talent -- and talented team have delivered once again.
They enable us to provide a consistent underwriting appetite to our customers and producers and strong stable returns to our shareholders. | operating earnings for q2 of 2021 were $49.9 million ($1.09 per share).
qtrly book value per share of $27.46, an increase of 11% (inclusive of dividends) from year-end 2020. | 1 |
First, I'll begin by providing an update on how we are navigating our business through the COVID-19 pandemic, while supporting our employees, customers, communities and shareholders.
Secondly, I'd like to briefly comment on a few points about our first quarter financial performance and finally, I'd like to revisit several key strategic initiatives and programs.
Our company's existing pandemic preparedness plan and ongoing pandemic exercises enabled F.N.B to stay at the front of this escalating crisis.
Dating back to 2018, our management team went through a pandemic simulation and collaborated with our business continuity team to develop a formal pandemic response plan.
During this process, sustainability was thoroughly evaluated and ultimately formed the foundation of the comprehensive plan currently in place.
Additionally, our ongoing commitment to invest in our digital channels and technology played a critical role in our ability to provide convenient banking options for our customers, who were not able to leave their homes.
Our investments in technology also enabled us to build and establish an automated process to handle nearly 15,000 business applications for the SBA Paycheck Protection Program in just one week's time.
Our efforts resulted in approving and processing 75% of those applications in the first round of funding, representing $2.1 billion in loans.
We anticipate processing the remaining applications during the second round of funding.
As I mentioned, when Phase 1 of F.N.B's technology initiative called clicks-to-bricks began, we had previously introduced online appointment setting and we're able to quickly make specialized COVID-19 content and offerings available in our solution centers.
We tapped into the strength of our established communication channels for both customers and employees, keeping both audiences informed of any update.
Our employees' response to this crisis has been exceptional.
Their professional, compassionate, positive, and resilient attitudes have been a bright light in helping each other, our customers and our communities while navigating these unprecedented times.
Protecting the health, safety, and financial well-being of our employees remains critical as we find ways to address any impact to their health or the health of their families.
For example, F.N.B provided our team with up to 15 days paid leave and also expanded our existing paid caregiver leave program.
Additionally, to assist with any possible financial hardships resulting from the coronavirus, F.N.B provided a special assistance payment to essential employees working on the front line and in our operations areas, who ensure that our customers continue to receive vital financial services.
We also leveraged our IT infrastructure by making accommodations to give employees the ability to work remotely where appropriate.
To-date, we have approximately 2,200 colleagues working remotely, which represents about half of our workforce and largely non-retail position.
This capability also speaks to our investment in technology and IT infrastructure.
As we focus on our communities, the F.N.B Foundation committed to provide $1 million in relief in response to COVID-19, benefiting food banks and providing essential medical supplies.
Many of our employees began reaching out to our clients and our communities to provide support.
At our Pittsburgh headquarters, F.N.B's vendor management team has been using our vetting process to assist Allegheny County and quickly researching new vendors, offering medical supplies and services to combat COVID-19.
With respect to our retail branches, we have focused on drive-up services and closed our lobbies, reverting to appointment only practices, which are supported by the appointment setting capability within our clicks-to-bricks platform.
As you can imagine, the monumental commitment of our leadership team and employees to operate in this challenging environment required to sustain 24/7 effort.
I would like to commend our employees for the actions they've taken to execute and abide by our safety measures, while continuing operations.
With these key priorities and actions in place, let me pivot and comment briefly on our first quarter performance.
Given all that's happened in a noisy quarter, our underlying core performance remained solid.
Our philosophy is to maintain our approach to risk management through varying economic cycles and serve as the primary capital provider to our clients.
While F.N.B like many banks will be subject to a difficult economic environment, this philosophy and the actions we have taken to strengthen our balance sheet and reduce risk should position F.N.B well as we move through the current crisis.
Looking at the quarter's result, GAAP earnings per share of $0.14 included $0.15 of bottom line impact from significant items primarily related to COVID-19 and the adoption and implementation of CECL in the corresponding reserve build under these macro economic conditions.
Topline results were solid as revenue increased to more than $300 million, driven by strong loan and deposit growth and positive results across our fee-based businesses.
Average commercial loans grew $225 million or 6% as we saw activity pick-up in late March, particularly in C&I with growth of 17%.
I'll note there was limited impact to average balances from anticipated liquidity draws.
Compared to the first quarter of 2019, average deposits increased 5% with growth in non-interest-bearing deposits of 7%, leading to an improved funding mix.
The net interest margin expanded to 3.14%, supported by strong loan growth, a 7 basis point improvement in total cost of funds and higher accretion levels compared to the prior quarter.
The fundamental trends in non-interest income were strong with capital markets revenues of $11 million, setting another record in the first quarter.
Insurance and mortgage banking income also had strong underlying performance.
Due to the significant shift in the interest rate environment, our non-interest income includes $7.7 million of impairment on mortgage servicing rights.
Excluding changes in MSR valuation, mortgage banking income totaled $6.7 million, up more than 50% from the first quarter of 2019 with significant pipelines moving forward.
On a core basis, expenses remained stable compared to the fourth quarter and disciplined expense management will continue to be a top priority as we move beyond this crisis.
Vincent and Gary will provide more detail on the implementation of CECL and additional details on the financials in their remarks.
We closed out the first quarter of 2020 with our credit portfolio remaining in a satisfactory position in the midst of the current global challenges that have come as a result of COVID-19.
The first quarter also marked the adoption of the CECL accounting standard, which as I communicated last quarter, brings additional changes to the reporting of credit quality metrics.
I will also review the steps we are taking to monitor the books and manage the emerging risks, while continuing to meet the credit needs of our borrowers and the communities in which we operate.
Let's now review our first quarter results.
The level of delinquency at March 31 totaled 1.13%, up 19 basis points over the prior quarter and included a temporary uptick in early stage, a majority of which has already been brought current NPLs and OREO totaled 64 basis points, a 9 basis point increase linked-quarter.
This increase does not reflect credit deterioration, but rather changes non-accrual reporting moving from the former PCI pool accounting to the new CECL standard.
Net charge-offs remained low at $5.7 million for the quarter or 10 basis points annualized.
Provision expense for the quarter totaled $48 million of which $38 million relates to a reserve build for adverse macroeconomic conditions tied to COVID-19.
The ending reserve stands at 1.44%, up 15 basis points compared to our day one CECL reserve of 1.29%, providing NPL coverage of 256% at quarter-end.
It's worth noting that inclusive of unamortized loan discounts, our period ending reserve represents 66% of our 2018 DFAST severely adverse scenario charge-offs.
Our teams have been working tirelessly over the last several weeks, meeting with borrowers, reviewing credits, tracking performance metrics and administering government-backed lending programs as part of our response to the COVID-19 crisis.
We entered the crisis with our credit portfolio in a position of strength due in large part to our core credit philosophies that I have discussed with you before, including consistent underwriting, proactive management of risk, attentive and aggressive work-out, and a balanced asset mix spanning our entire footprint.
We have taken many actions over the last several years to maintain a lower risk profile to position our book to withstand various economic cycles and adverse conditions, similar to those we are currently experiencing.
Over the last four years, we have sold approximately $700 million in loans to proactively de-risk the balance sheet, a large portion of which were higher risk acquired loans that we were able to move off the books at a financial benefit to the company.
We've also historically limited our exposure to highly sensitive industries like travel and leisure, food and accommodation and energy with exposure to these three industries remaining very low, totaling only 3.8% of our loan portfolio.
As it relates to relief programs, we were able to quickly mobilize our credit teams to review and approve payment deferral plans for qualified borrowers, which to-date totals approximately 6% of our loan portfolio.
As an SBA preferred lender, we have also been working diligently to support our small business borrowers in securing PPP financing that is fully backed by the SBA.
The volume and key performance metrics for these relief programs are monitored daily through a specialized set of reports developed in response to COVID-19.
Using our holistic credit systems, we have been tracking daily utilization rates, deferral activity, PPP loan volume and borrower impact assessments, which are broken down further to allow us to monitor our credit portfolio by line of business, loan product, geography, and industry.
In addition to expanded analytics, we have also leveraged our existing allowance and DFAST frameworks to conduct scenario analysis and stress testing including select loan portfolios.
All of the actions taken will help us manage through the challenging conditions faced by the industry today.
Above all, I would like to take a moment to recognize our team of bankers and credit support staff for all of their hard work and dedication to help meet the credit needs of our customers and communities during this challenging time.
We'll continue to draw on the leadership and experience of our credit and banking teams to manage through this challenging environment as we have in past cycles.
Today, I'll cover our results for the first quarter and provide an update on the current environment.
As noted on slide nine, first quarter GAAP earnings per share totaled $0.14, which includes $0.15 of significant items.
The TCE ratio ended March at 7.36%, reflecting 16 basis points of CECL adoption impact and another 15 basis points for the $48 million of after-tax items.
These significant items are listed in the reconciliation tables with the biggest piece being the COVID-19 related reserve build of $38 million during the first quarter.
We used a pandemic driven recessionary scenario in evaluating the macroeconomic projections.
Let's start with the review of the balance sheet on slide 14.
Linked-quarter average loan growth totaled $278 million or 5% annualized, attributable to commercial growth of 6% and consumer growth of 2%.
The average commercial growth includes less than 1 percentage point annualized for COVID-19 related increases in commercial line utilization that occurred in the month of March.
Continuing on the balance sheet slide, on a linked-quarter basis, average deposits were relatively flat as normal seasonal outflows impacted average balances.
On a year-over-year basis, average deposits were up $1.2 billion or 5.2%.
From an overall liquidity standpoint, we are comfortable with our current position, including the benefit of opportunistically accessing the debt capital markets to raise $300 million in holding company liquidity at very attractive spreads on February 20th.
We also executed a portion of our previously announced share repurchase program, buying back 2.4 million shares prior to March 12th, representing 0.7% of our total shares outstanding.
Turning to the income statement on slide 15, net interest income totaled $233 million, up $6.2 million or 2.7% from last quarter.
The net interest margin expanded 7 basis points to 3.14%, driven by solid average loan growth, lower cost of funds, and higher discount accretion levels now that we are in a CECL environment.
During the first quarter, the higher discount accretion offset the pressure on variable rate loan yields, given the significant decline in the short end of the curve.
On the funding side, the total cost of funds decreased 7 points to 1.01% from 1.08%, reflecting lower borrowing costs as well as the shift in funding mix and a 10 basis point reduction in the cost of interest bearing deposits.
Slide 16 and 17 provide details for non-interest income and expense.
There continues to be strong performance in capital markets, mortgage banking, insurance and trust as well as for operating non-interest income as a whole.
As Vince noted earlier, we are consistently receiving positive contributions from our fee-based businesses, which diversifies our revenue base and helps to mitigate the impact of a volatile interest rate environment.
Looking at the first quarter, non-interest income totaled $68.5 million, a 7.4% decrease from last quarter, due mainly to the impact from the $7.7 million MSR impairment, given the moving down in interest rates.
Excluding the impairment, non-interest income increased $2.2 million or 3% with capital markets posting a record of $11.1 million, increasing 29% from the fourth quarter, driven by strong origination volume.
Turning to slide 17, non-interest expense on a run rate basis remained stable compared to fourth quarter levels.
This excludes $2 million of expenses associated with COVID-19, $8.3 million of branch consolidation costs, and $5.6 million of expense related to changes in retirement provisions for new grants under our long-term incentive program that do not affect the total cost of the grants, but do affect the expense recognition timing.
Bank shares and franchise taxes increased $1.7 million, reflecting the recognition of a $1.2 million state tax credit in the prior quarter and higher year-end 2019 bank capital levels while other increases and decreases essentially offset each other.
The efficiency ratio equaled 59% compared to 56% as the other unusual or outsized items increased current quarter's efficiency ratio by over 3 percentage points.
Regarding guidance, the outlook we shared in January is no longer relevant, given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover.
However, in the spirit of transparency into our short-term forecasts, we are providing our current directional outlook for the second quarter of 2020 on slide 18 based on what we know today, which is subject to change, given the very fluid situation we are all managing through.
We expect second quarter net interest income to decline mid-single digits from first quarter levels as the net interest margin reflects a full quarter's impact of the current interest rate levels.
We expect average loan balances to be up mid-to-high single-digits, reflecting higher March 31 spot balances and $2.1 billion of PPP loans from the initial phase of the program that are expected to fund during the quarter.
The second phase of the program would be additive to these figures as we strive to accommodate all of our customers that want to participate.
We expect expenses to be flat from the core level of $178 million this quarter.
We expect our core fee trends to continue from solid levels in the first quarter with service charges expected to decline due to COVID-19 impacts on certain products and services.
We expect the effective tax rate to be around 20%.
I'd like to touch on several initiatives that stand out as we move forward.
In January, we launched our new interactive website designed with enhanced functionality that creates a one-stop shopping and interactive digital experience.
Online appointment setting, a streamlined account opening process and deploying interactive teller machines throughout our footprint are just a few of the functionalities that our clicks-to-bricks digital strategy affords us.
Combined with our network of nearly 40 ITMs and 550 ATMs and our robust award winning mobile applications, we are well positioned to continue to provide service to our customers through multiple channels and meet their needs during this time of social distancing and economic challenges.
We've invested heavily in our mobile and online platform, which is critical during a time of limited operations in the physical channels.
Mobile deposits are up more than 40% in the last two weeks of March compared to the year ago period and pre-COVID-19 first quarter levels.
F.N.B will continue to build-out our digital capabilities as previously planned.
To protect our customers and communities from economic disruption, F.N.B was one of the first banks to develop a structured deferral program and announced several measures to support customers who may be enduring financial hardships and were directly impacted by COVID-19.
Furthermore, we instituted an outreach program and activated an outbound calling initiative to contact thousands of customers across all business units during the crisis, ensuring their needs were being met.
We also continue to participate in the previously mentioned Paycheck Protection Program and evaluate other COVID-19 related federal government relief programs to determine their suitability for our customers and communities.
Regarding our outlook, liquidity and overall capital position, we consistently run stress test for a variety of economic situations, including severely adverse scenarios that have economic conditions like current conditions.
Under these scenarios, our regulatory capital ratios remain above the thresholds and we are able to maintain appropriate liquidity levels, demonstrating our ability to continue to support all of our constituencies under stressful financial conditions.
As we gain more clarity on this evolving health pandemic and the resulting challenging economic environment, we will continue to update you on key business drivers and expectations.
In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those in need.
This is an unprecedented time for our nation and our industry.
Our mission has always been to improve the quality of life in the communities we serve.
Now more than ever, we must work together to support those impacted by this public health crisis. | sees q1 revenue down 7 percent.
sees fy revenue $4.9 billion to $5.1 billion.
qtrly revenue of $1.15 billion, down 4 percent versus q4 2019, up 2 percent organically.
q4 adjusted earnings per share $1.42.2021 adjusted earnings are expected to be in range of $6.65 to $7.35 per diluted share.
full-year 2021 free cash flow is expected to be in range of $530 to $620 million.
expects to repurchase $400 to $500 million of fmc shares in 2021, beginning in q1. | 0 |
Today's call will be led by chairman and chief executive officer, Doug Dietrich; and chief financial officer, Matt Garth.
And I'll also point out the safe harbor disclaimer on this slide.
Statements related to future performance by members of our team are subject to these limitations, cautionary remarks, and conditions.
I'll walk you through our results for the fourth quarter and the full year of 2021.
I'll also give you my insights on the year, focusing on our key financial and strategic highlights, as well as the various dynamics we faced and successfully managed through.
Matt will then discuss our financial results in more detail and outline our first-quarter outlook.
Following that, I'll finish up by describing how we see 2022 shaping up as a strong year for us, touching on our key priorities, growth initiatives, and market conditions.
Let me start by going through the takeaways for the fourth quarter, which concluded a very strong year for MTI.
Market demand continued to remain robust, and we delivered sales of $477 million, 10% higher than last year, and earnings per share of $1.25, an increase of 16%.
Despite the market conditions, this is, by far, the most difficult operating quarter of the year as we had to navigate through a variety of inflationary and logistics pressures, which became more pronounced late in the quarter.
Cash flows remained solid through the fourth quarter, capping off a strong year.
Operating cash flow was $69 million and free cash flow was $46 million, and we made progress to lower our debt levels by paying down $20 million of debt.
Let me share how the quarter played out from an operational perspective and the actions we put in place to address the rapidly changing conditions.
Heading into the fourth quarter, we anticipated that inflationary costs and logistics and supply chain challenges would persist, and we have positioned ourselves to recover these costs through implemented pricing actions.
While much of this transpired as expected, we experienced significant additional cost escalations, notably due to rapid energy price spike in Europe.
We also saw increase -- an increase in supply chain disruptions, mainly due to truck and rail availability for shipments.
This was exacerbated by COVID-related labor challenges, primarily in the last month of the quarter.
The combination of these dynamics led to higher plant operating costs and delayed shipments, resulting in about $5 million of reduced income in the quarter.
Despite these circumstances, our global team did a great job executing, adjusting operating schedules, securing freight logistics, and taking further pricing measures.
Our order books remain robust, and the actions we've taken should more than recover the additional cost pressures we faced, setting us up for a stronger first quarter.
On the growth and business development front, we had several highlights during the quarter.
The integration of Normerica is progressing well, and we executed on significant opportunities in the quarter to grow our Pet Care business further in 2022.
We also made a small acquisition of a specialty PCC assets in the Midwest U.S., which strengthens our logistics and manufacturing capabilities.
In addition, we signed two new satellite contracts in Asia, one for a PCC facility in India and another with a packaging customer in China.
All in all, it was a productive quarter from a growth perspective, and the operating and pricing adjustments we've already made position us well for a stronger start to 2022.
Before Matt gets into the financial details for the quarter, I'd like to review some highlights from 2021.
It was a strong year for MTI, as our business recovered from the 2020 COVID demand lows to deliver record results.
We accomplished this through a combination of operational execution and a focused commitment on advancing our key growth initiatives, which have meaningfully shifted our sales portfolio to be more balanced and stable.
To demonstrate this transition over the past few years, revenue from our consumer-oriented businesses has doubled and today, they comprise 30% of our total sales portfolio.
It is this portion of our portfolio that's positioned in higher growth noncyclical markets.
First and foremost, we delivered record annual sales and earnings per share for our company.
Sales increased 17% over last year to $1.9 billion.
Operating income was up 13% to $241 million, and our earnings per share grew 26% to $5.02.
Serving our customers and innovating to grow with them is what motivates our team.
We continue to accomplish this while navigating through complex and rapidly changing conditions during the year.
We operated in an environment with sharply rising input costs, which required frequent operational adjustments, strong supply chain management, and process improvements.
Our teams work closely and transparently with our customers to manage through these dynamics, and we were successful in implementing a broad array of strategic pricing actions across our portfolio to offset the $50 million in extra costs we had to absorb.
The past year required a significant amount of agility from our employees, and I'm proud how they engage to drive improvements, efficiently run our operations, and support our customers' evolving needs.
Generating strong cash flow, further strengthening our balance sheet, and maintaining flexibility with how we deploy our capital are priorities.
Our financial position gives us significant optionality to allocate capital to shareholders, while also investing in attractive growth opportunities.
We demonstrated this in 2021 by deploying $86 million to fund high-return organic projects, as well as to maintain and improve the performance and safety of our facilities.
We acquired Normerica and the Specialty PCC assets, while also returning $82 million to our shareholders through share repurchases and dividends.
Our balance sheet remained strong, and we kept our net leverage ratio near our target level of two times EBITDA.
Now, let me take you through how we advanced a broad range of initiatives, which sets us up nicely for continued growth in 2022.
I'll start with our consumer-oriented products.
Most of these businesses are in our household, personal care, and specialty product line, and they performed very well with sales growth of 21%.
This growth is a result of our positions in the structurally growing and stable markets and has been bolstered by our investments in new technologies, capacity expansions, and through extending the geographical reach of these businesses.
Normerica acquisition is one of those investments as it further expanded our Pet Care business in North America.
We've also realized significant sales increases in other specialty applications, such as edible oil purification and personal care, which grew by 48% and 80%, respectively, last year.
The next part of our growth strategy that we delivered on during the year was expanding our core product lines in faster-growing geographies.
Our Metalcasting business continues to grow globally, leveraging our blended bond system value proposition with customers in large foundry markets.
Metalcasting sales were up 21% in Asia as we expanded our customer base and further penetrated into China with sales of our pre-blended products increasing by 20%.
We continue to demonstrate our value in other countries and specifically in India, where sales of our blended products were up nearly 40% in 2021.
Our PCC business continues to grow geographically with a 22% sales increase in Asia.
We benefited from 280,000 tons of new capacity that came online over the past year.
In addition, we signed two new satellite contracts in 2021, totaling around 70,000 tons, which will be commissioned by the end of this year.
And we're growing in our core markets.
Our Refractory segment is a great example of this as we've captured significant new business in the electric arc furnace market.
In 2021, we signed long-term contracts worth $100 million through the deployment of our new portfolio of differentiated refractory products and high-performance laser measurement solutions.
Another area where we've successfully driven new profitable growth opportunities is by tapping into attractive adjacent markets through our broadened product offering.
I'll highlight a couple of areas for you.
We signed a long-term agreement in December to deploy ground calcium carbonate technology for a new coated paperboard mill in China with a premier packaging customer.
And we're really excited about this one as it's MTI's first GCC satellite offering specifically tailored for packaging customers and represents a fundamental step in our ability to drive new growth opportunities in the white paperboard market.
In addition, we have several trials underway with other technologies in both the white and brown packaging space.
I've talked to you about our broad capabilities in water remediation and the traction we've made with FLUORO-SORB, our proprietary solution for remediating PFOS contamination in groundwater.
2021, we completed our first major commercialization for a large-scale project, and we generated interest in several other large drinking water and soil stabilization projects.
Our growth this past year in wastewater remediation was 15%, and we see this trajectory continuing in 2022.
New product development is an integral part of our growth strategy, and we've made significant strides to improve the speed of execution, increase the number of products commercialized and enhance the impact of our latest solutions.
Over the past five years, we've cut the time from development to market in half.
And during the same time frame, we've increased the sales generated from new products by more than 60%.
In addition, half of our new products are geared toward a sustainability solution for either MTI or our customers.
And lastly, we strengthened our company through the acquisition of Normerica, which met all of our M&A criteria.
The addition has made us one of the largest vertically integrated private label pet litter providers globally.
And as the commercial and operational integration progresses, we see a clear pathway to drive higher growth rates and profits in our Pet Care business.
All told, this is a really productive year for us on all fronts.
I'll come back to share my perspectives on the year ahead.
But to sum up, our growth achievements in the past year puts us in an advantageous position for a strong 2022.
I'll review our fourth-quarter results, the performance of our segments, as well as our outlook for the first quarter.
Now, let's review the fourth-quarter results.
Sales in the fourth quarter were 10% higher than the prior year and 1% higher sequentially.
Organic growth for the company was 4% versus the prior year, and the acquisition of Normerica contributed the remainder of the growth.
Operating income, excluding special items, was $54.7 million, and operating margin was 11.5%.
The year-over-year operating income bridge on the top right of this slide shows that we experienced $27.4 million of inflationary cost increases versus the prior year, which we offset with $18.6 million of pricing.
In addition, supply chain challenges, including trucking and labor availability, resulted in a delay of volumes from the fourth quarter, particularly in our Processed Minerals and SPCC product lines.
The sequential bridge on the bottom right shows how inflation continued to accelerate from the third quarter to the fourth quarter.
And heading into the quarter, we expected the pace of inflationary costs to moderate from the third quarter, and we expected to recapture some margin with our planned price increases.
As we move through the fourth quarter, inflationary costs accelerated to nearly $10 million, including higher energy costs in Europe and Turkey.
We were able to mitigate the unexpected increase with additional pricing in the quarter.
However, a portion of the necessary price adjustments could not be passed through contractually until January 1.
In addition, logistics and labor availability challenges resulted in shipment delays, lower productivity at our facilities, and ultimately, higher per-unit production costs in the period.
These challenges, including the delayed sales volume and the unexpected spike in energy costs, resulted in approximately $5 million lower operating income than we originally expected for the quarter.
We've already made additional price adjustments in January, and our pricing is expected to exceed inflationary pressures, expanding margins in the first quarter.
We also expect to catch up on the operational challenges we faced in the fourth quarter.
Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 10.8%, 80 basis points below the prior year.
Earnings per share, excluding special items, was $1.25 and represented 16% growth versus the prior year.
Earnings per share benefited from foreign exchange gains, driven by the depreciation of the Turkish lira, as well as lower interest expense and a lower share base versus the prior year as we continue to pay down debt and repurchase shares in the quarter.
Full-year earnings per share was $5.02, a record for the company and represented 26% growth versus the prior year.
Now, let's review the segments in more detail, starting with Performance Materials.
Fourth-quarter sales for Performance Materials were $256.2 million, 17% higher than the prior year and 2% higher sequentially.
The acquisition of Normerica contributed 13% growth versus the prior year, and organic sales contributed an additional 4%.
Household, personal care, and specialty product sales were 24% above the prior year and 4% higher sequentially, driven by Normerica and continued strong demand for consumer-oriented products.
Despite strong end-market demand and a full order book, our global Pet Care sales came in lighter than we expected due to logistics challenges in North America and Europe.
Metalcasting sales were 9% higher than the prior year and 16% higher sequentially, driven by strong demand globally, continued penetration of green sand bond technologies in Asia, and the return of volumes from the third quarter seasonal foundry maintenance outages.
Environmental product sales grew 13% versus the prior year on improved demand for environmental mining systems, remediation, and wastewater treatment.
Building Materials sales grew 21% versus the prior year on higher levels of project activity.
Sales in both of these product lines were lower sequentially due to typical seasonality.
Operating income for the segment was $29.1 million and operating margin was 11.4% of sales.
Margin was temporarily impacted this quarter by approximately $3 million of logistics challenges and inflationary cost increases that could not be passed through contractually until January 1 of this year, primarily in Pet Care and our Metalcasting business in China.
The Normerica business has been navigating the same supply chain and inflationary cost challenges as the rest of our business, and we have deployed pricing and productivity actions to achieve accretion as planned in 2022.
Now looking to the first quarter, we see a significant rebound in margins for this segment, driven by pricing actions that went into effect on January 1 and continued strong demand across the product lines.
And overall, we expect the operating income for this segment to be approximately 20% higher sequentially.
And now, let's move to Specialty Minerals.
Specialty Minerals sales were $141.5 million in the fourth quarter, 2% higher than the prior year, and 4% lower sequentially.
PCC and Process Mineral sales were both 2% above the prior year.
This segment was the most impacted by the spike in energy in Europe, as well as logistics and labor challenges we saw in the fourth quarter.
Segment operating income was $14.5 million and represented 10.2% of sales.
In total, operating income was impacted by $4 million in the quarter, which came from approximately $2 million of unexpected energy inflation and additional $2 million due to the sales and productivity impact resulting from logistics and labor challenges, primarily in our Northeast U.S. plants.
Pricing adjustments were made in January to cover these inflationary costs, and low logistics challenges continued into January.
We do not foresee these challenges persisting through the quarter.
Now moving to the first quarter.
We expect higher PCC volumes sequentially on the ramp-up of our new satellite in India and the restart of the satellite in the U.S., and we expect continued strength in Specialty PCC and Processed Minerals.
We see margins rebounding to more normal levels based on the pricing we have implemented.
We should also see improved productivity in shipment volumes, depending on to the extent to which logistics and labor constraints ease.
Overall, for the segment, we expect first-quarter operating income to be 20% to 25% higher than the fourth quarter.
And now, let's move to the Refractory segment.
Refractory segment sales were $79.2 million in the fourth quarter, 7% higher than the prior year, and 4% higher sequentially on new business volumes and continued strong steel market conditions in North America and Europe.
Segment operating income remained strong at $12.4 million, 12% higher than the prior year, and operating margin was 15.7% of sales.
Turning to the first quarter.
We expect another strong operating performance from this segment with operating income up 20% on incremental volumes from new business.
We did see a slight moderation in steel utilization rates in North America in the fourth quarter from the mid-80% range to the low 80s.
However, the demand fundamentals for this segment remains strong.
Now let's take a look at our cash flow and liquidity highlights.
Full-year cash flow from operations was $232.4 million.
Capital expenditures were $86 million as we invested in high-return growth and productivity projects, as well as sustaining our operations.
Free cash flow was $146.4 million.
The company used a portion of free cash flow to repurchase $75 million of shares, completing the prior-year share repurchase authorization and beginning the new $75 million 1-year share repurchase program that the board of directors authorized in October.
As of the end of the fourth quarter, total liquidity was over $500 million, and our net leverage ratio was 2.1 times EBITDA.
Our balance sheet remains in a very strong position, which provides us with the flexibility we need to continue to invest in high-value, high-return growth opportunities, both organically and inorganically.
Looking ahead, we expect another strong year of cash flow generation with cash from operations increasing commensurately with higher income.
Our capital spend will be in the range of $85 million to $95 million for 2022.
We have a solid pipeline of high-return organic growth opportunities, and we plan to deploy capital spend toward these opportunities, as well as sustaining and improving our operations.
And overall, we expect free cash flow increasing to the $150 million to $160 million range for the full year.
So now, let me summarize our outlook for the first quarter.
Overall, we see continued strong demand across our end markets and our order books reflect this.
In the fourth quarter, we saw unusually high spikes in energy costs and increased challenges around logistics and labor availability.
Our latest view for the first quarter is that the inflationary pressures and logistics challenges will continue.
However, we have pricing actions and operational adjustments in place today to more than offset the known increases and significantly expand margins in the first quarter.
Overall, for the company, we expect a strong performance in the first quarter, with operating income in the range of $63 million to $65 million, 15% to 20% higher than the fourth quarter, and with earnings per share around $1.25.
As we look ahead, this is going to be another dynamic year with many of the same inflationary and logistics pressures continuing.
But with the momentum across our businesses and the growth projects underway and our strong operating performance, 2022 is shaping up to be another record year for MTI.
Overall, I'm very excited about where we are as a company and where we're going.
We've transformed MTI into a higher-growth, higher-margin, and higher-value company.
We have more opportunities in front of us beyond what I've shared with you today that will further enhance this trajectory.
We're well-positioned to leverage our balanced portfolio, and we have a breadth of attractive projects across our businesses that will drive our sales and earnings momentum this year.
We focused on accelerating our geographic penetration in our core product lines and building our growth opportunities in adjacent markets.
In addition, we'll further strengthen our R&D pipeline with a focus on increasing the percentage of revenue from new products, as well as introducing solutions, which help us penetrate attractive markets.
With our solid financial footing, we have the resources to execute on all of our growth initiatives.
Our strong balance sheet and cash flow generation give us the flexibility to deploy capital to shareholders, while at the same time, accelerating our growth trajectory through acquisitions, similar to what we achieved this past year.
We have a targeted list of inorganic opportunities that will continue to transform our company with a focus on profitable growth.
Underpinning everything we do is our culture of continuous improvement.
Operational excellence is embedded in our company with our employees at its center.
It's our employees and their high level of engagement around problem-solving through kaizen events, utilizing standard work practices, and implementing suggestions to improve daily processes, which enables us to adapt to changing environments.
It's this ingrained culture that is the foundation of MTI's unique operating capabilities.
Sustainability is the core value at MTI.
And over the past several years, we've made significant progress to embed our ESG priority deeper into our company, our operating mindset, and our growth strategies.
In 2022, we'll be focused on promoting our safety culture of zero injuries, achieving -- or exceeding our six environmental reduction targets, increasing our product portfolio geared toward sustainable solutions, and making MTI a more diverse and inclusive place to work.
We look forward to sharing more about these initiatives as we publish our 14th sustainability report in July.
To sum it all up, we have a winning formula, an engaged team, and a leading portfolio of businesses.
With sales growth of 10% to 15% expected this year, combined with our distinct operational capabilities, we have all the elements in place to deliver a very strong performance in 2022.
I'll leave you with the final takeaway.
Over the past two years, we've demonstrated two key attributes of our company.
2020 is financial resilience during very challenging conditions.
In this past year, it's significant growth potential.
It's our more balanced portfolio, which has enabled this performance and which will continue to deliver higher levels of profitable growth going forward. | minerals technologies q3 earnings per share $1.30 excluding items.
compname reports third quarter 2021 earnings of $1.22 per share, or $1.30 per share excluding special items, a record quarter for the company.
q3 earnings per share $1.30 excluding items.
q3 sales rose 22 percent to $473 million. | 0 |
I'd like to remind everyone that a number of statements being made today will be forward looking in nature.
Please remember that such statements are only predictions.
Actual events and results may differ materially as a result of risks we face, including those discussed in Item 1A of our most recent Forms 10-Q and 10-K.
Management uses this information internally to analyze results and believe that may be informative to investors in gauging the quality of our financial performance, identifying trends and providing meaningful period-to-period comparisons.
And with that, I'll hand the call over to Rick.
Revenue for the third quarter of fiscal year 2021 was $1.24 billion, and diluted earnings per share were $1.51.
The company's operating margin was 11.2% for the quarter.
Operating income margin is calculated after the expense for amortization of intangible assets, which increased significantly due to the two acquisitions.
Excluding the amortization expense, results in an operating margin of 12.2%.
COVID response work contributed an estimated $460 million of revenue in the quarter, which was approximately $185 million higher than our projection for the third quarter.
The profitability of this work has been steadily improving and now delivers operating income margins above our corporate average.
The CDC vaccination hotline contract and, to a lesser extent, the other COVID response work are responsible for the overperformance in this third quarter.
COVID response work has contributed $860 million of revenue on a year-to-date basis, and our full year estimate is approximately $1 billion.
This implies the beginning of the expected wind down of this work and a step down in the fourth quarter.
It is worth noting our revenue estimate for COVID response work for the fourth quarter is relatively unchanged from our previous forecast.
The estimated organic revenue growth for fiscal 2021 adjusted to exclude the Census contract and COVID response work is 2.6%, assuming the midpoint of our new guidance range disclosed today.
This is hampered by contraction due to the negative impact of the COVID-19 pandemic on some core programs.
And while it is still early, the two acquisitions we completed during the fiscal year are both performing in line with our projections.
The attained federal revenue for the three months ended June 30, 2020, was $56 million, which equates to approximately $224 million on an annualized basis.
VES contributed $46 million of revenue, beginning from the acquisition date of May 28, 2021, which equates to approximately $515 million of revenue on an annualized basis.
Let me briefly touch on the balance sheet and cash flow items.
At June 30, 2021, and we had gross debt of $1.71 billion, and we had unrestricted cash and cash equivalents of $96.1 million.
At June 30, 2021, our receivables were $1.13 billion resulting from the inclusion of VES acquired receivables and a substantial increase in revenue in the quarter.
The DSO of 77 days includes VES on a pro forma basis and was skewed by the high level of revenue in June as compared to April and May.
DSO was 75 days at December 31, 2020 and 70 at March 31, 2021, which included Attain Federal on a pro forma basis.
Cash from operations of negative $33 million and free cash flow of negative $41.6 million for the three months ended June 30, 2021, were significantly impacted in the quarter due to this additional investment in working capital.
Assuming the midpoint of our new revenue guidance range and assuming 72 days DSO, we expect the cash from operations to be in the range of $425 million to $455 million for the full year.
The fourth quarter should be a strong quarter for cash inflow.
I would like to note that collections often occur toward the end of a month and slipping by only a few days can impact our cash flow forecast.
Cash flows from investment activities report significant activity, including almost $1.8 billion of cash outflows for the two acquisitions.
Cash flows from financing activities showed the draw of $1.7 billion on our new credit facility in May.
The credit facility is flexible and at $2.1 billion in total provides us an additional $400 million for liquidity and to fund smaller acquisitions.
Completion of the new facility runs a milestone for the company and adds substantial capacity to enable larger transactions such as VES.
It supports our strategy to be acquisitive for purposes of driving long-term organic growth, which we believe leads to creation of shareholder value.
On June 1, we announced completion of the VES acquisition, which follows the March one acquisition of Attain Federal.
We view these acquisitions as major milestones for Maximus, as they represent execution of our acquisitive strategy and puts the company in a favorable position to achieve our future organic growth goals.
This pro forma assumes Attain Federal and VES had been acquired on July 1, 2020, and therefore, included for a full 12 months in our operating results.
The operating income and operating margin for the 12-month period, excluding amortization of intangible assets, was $591.3 million and 12.7%, respectively, for the combined company inclusive of Attain Federal and VES.
Both acquisitions blend up our gross profit margin and are accretive to our results from operations.
While the acquisitions are positive, we continue to experience a drag on earnings from the impact of the health crisis on some of our core programs.
As we have noted in previous quarters, we assume that the public health emergency will persist through the remainder of fiscal 2021, as signaled by the January 22 letter from the then Secretary of the Department of Health and Human Services to U.S. governors.
We continue to believe that it is not a matter of if, but rather a matter of when these core programs will return to a more normal state of operations.
As for the remainder of fiscal 2021, our expectation for the full year is for revenue to range between $4.2 billion and $4.25 billion and for diluted earnings per share to range between $4.65 and $4.75.
We expect cash from operations to range between $425 million and $455 million and free cash flow between $375 million and $405 million for the fiscal year 2021.
As I noted, we are seeing evidence of the COVID response work tapering off, and that is reflected in our guidance for fiscal year 2021.
The midpoint of guidance implies an operating income margin of 9.8%.
Operating income is after amortization of purchased intangibles, while finalization of the valuation of the intangible assets is still pending.
Our best estimate for fiscal 2021 amortization expense is $44 million and reflects the increase due to the two acquisitions.
The operating income margin, excluding the amortization of purchased intangible assets, implied by the guidance for the full fiscal year ending September 30, 2021, is 10.9%.
The fourth quarter results for fiscal 2021 will be negatively impacted by the start-up contracts outside the U.S., which are expected to have operating losses in the range of $13 million to $15 million within the fourth quarter.
Our effective income tax rate for the full year ended September 30, 2021 is expected to be between 25% and 25.5%.
We expect interest expense to be approximately $14 million for fiscal 2021 and approximately $10 million in the fourth quarter.
This interest expense reflects the successful financing that we completed on May 28, 2021.
We included a table showing diluted earnings per share, excluding the amortization of intangible assets for fiscal 2019, fiscal 2020 and the fiscal 2021 forecast, assuming the midpoint of guidance.
The fiscal '21 diluted earnings per share guidance would be $0.53 higher, excluding the projected amortization of intangible assets.
As the COVID response work begins its wind down and now that the Census contract is complete, it is worth reflecting on the shorter duration work.
Both scopes of work created significant learning opportunities for us as well as our gaining significant new customer relationships, including this year's projection, inception-to-date census and COVID response work combined revenues are estimated to be approximately $2 billion.
The cash realized from the Census contract and the COVID response work was significant to our ability to acquire both Attain Federal and VES and still maintain a total debt to adjusted EBITDA ratio below 3:1.
We believe that Maximus is a stronger company as a result of performing the Census contract and the COVID response work.
As we announced in January, I am planning to retire on November 30, and David Mutryn will assume the CFO role on December 1.
Third quarter fiscal 2021 revenue in the U.S. Services Segment increased to $436.3 million, driven by an estimated $164 million of COVID response work.
The segment operating income margin was 14.3%, reflecting the negative impact on some core programs, including those impacted by the pause of Medicaid redeterminations as well as push out of non-COVID planned new work.
These factors also impact our fiscal 2021 full year expectations for the U.S. Services Segment operating income margin, which is expected to range between 16% and 17%.
Revenue for the third quarter of fiscal 2021 for the U.S. Federal Services Segment increased to $617.6 million from $450.1 million in the prior year period due to particularly strong COVID response work and contributions from the two acquisitions offset by the lower revenue from the Census contract.
COVID response work contributed an estimated $280 million of revenue to the Segment.
Results in the quarter included a full period of Attain Federal and operations for VES from the acquisition date of May 28.
The operating income margin for U.S. Federal was 13.9%.
The quarter benefited from higher-than-expected volumes on the COVID response work.
Our full year fiscal 2021 guidance for the U.S. Federal Services Segment is between a 10% and 11% segment operating income margin.
For the fourth quarter of fiscal 2021, we expect a margin between 11% and 12% for the segment.
Turning to Outside the U.S. Segment, revenue for the third quarter of fiscal 2021 was $189.6 million, Operating income was $8.3 million, resulting in a margin of 4.4%.
The better-than-expected results for the Outside the U.S. Segment were largely due to good performance in Australia.
On our May six call, we noted contracts with start-up losses to be incurred in the third and fourth quarters in the Outside the U.S. Segment as the revenue ramps into the next fiscal year.
The UK Restart contract is responsible for the largest share of the incremental start-up loss.
These start-up losses are more heavily weighted to the fourth quarter of fiscal 2021.
As a reminder, the profitability for each of these Outside the U.S. start-up contracts is expected to exceed 10% operating income margin, and we expect significant improvement to the financial contribution from these contracts in the second half of fiscal 2022.
With the start-up losses, the fiscal 2021 full year margin for Outside the U.S. is expected to be in the low single digits with the fourth quarter swinging to a loss as activity picks up on the UK Restart program.
Turning to capital allocation.
The ratio of debt, net of allowed cash to pro forma EBITDA for the 12 months ended June 30, 2021, calculated in accordance with our credit agreement is 2.4:1.
Our expectation for the remainder of fiscal year 2021 and into fiscal year 2022 is to use our free cash flow to continue to pay our regular quarterly dividend and to pay down our debt.
Our stated aim is to use most of our free cash flow over the next few quarters to push this ratio closer to 2:1.
During this period, we will continue to search for and execute tuck-in transactions that are accretive, deliver good value and have a strong potential to drive future organic growth.
Longer term, we will continue to prioritize strategic acquisitions as our preferred use of capital.
We are often asked to comment on our dividend policy.
Our plan is to continue to pay a regular quarterly dividend that is fixed regardless of short-term earnings fluctuations, but that increases over time as our earnings increase.
We target a dividend yield between 1% and 2% of our stock price.
Based on our stock price over the last several months, the current annual dividend of $1.12 per year has ranged between 1.2% and 1.4% yield.
This cash yield is consistent with the peer groups we study.
Turning to fiscal 2022, I would like to share some early thoughts that are shaping our thinking for next year.
We remain in a period with higher-than-usual uncertainty due to the pandemic and several unknowns persist that we have already mentioned.
On the plus side, we feel less uncertainty going into fiscal 2022 as compared to this time last year, which gives visibility to the following: number one, we expect the acquired businesses of Attain Federal and VES to deliver approximately $750 million of revenue in fiscal 2022.
This compares to $320 million to $330 million forecasted for the two acquisitions in fiscal 2021.
Number two, we currently expect the revenue in fiscal 2022 from COVID response work to be in the range of $150 million to $200 million.
This is an expected reduction of profitable work, which, as Rick noted, is now earning above our corporate average operating income margin.
Number three, our expectation is that revenue from the star-tup contracts Outside the U.S. will be at least $150 million higher in fiscal 2022 as compared to fiscal 2021.
Number four, we expect amortization expense to be between $80 million and $85 million.
Number five, we expect interest expense to be between $30 million and $33 million, and the effective income tax rate, assuming no change in U.S. Federal rates, should be between 25% and 26%.
Number six, finally, we anticipate that earnings are back loaded in fiscal 2022, with the first quarter expected to be the low point, followed by sequential improvement.
There are two reasons for this: first, we are seeing signs that some core programs, which have been negatively impacted by the pandemic should see performance improvements between the first and second quarters.
We expect the associated costs to be ramping up in the first quarter and the revenue to follow, which is typical with our contracts.
Second, we expect the first quarter to be negatively impacted by the start-up contracts Outside the U.S.
We currently expect the star-tup contracts to achieve breakeven in the first half of the year and to make strong contributions in the back half of the year, setting the Outside the U.S. Segment up for improved margins exiting the year.
Consistent with our past practice, we will provide guidance for fiscal year 2022 in November, including additional color around the quarterly profile.
As the Attain Federal and VES acquisitions settle into our business, we are in a solid position to execute on our long-term organic growth goals across all three segments.
Our position is bolstered by the benefits and new capabilities of the two recent acquisitions and our team's unprecedented efforts throughout this past year, which have deepened our relationships with key clients and brought new clients.
With two months left to go in fiscal year 2021, it's natural for us to be looking toward next year when we expect to see not only macro trends, bringing improvement to our core programs, but also momentum through new programs, such as the UK Restart and additional clinical and digital IT services work afforded by Attain Federal and VES.
Prior to VES, 15% of our work was clinical in nature, whereas it now accounts for approximately 25% of our portfolio.
Further, the additional capabilities from Attain Federal meaningfully expand our technology consulting and growing systems integration skills, increasing our ability to address the most pressing IT needs of our federal clients, while providing internal opportunities to improve the quality and efficiency of our business process services operations.
I'm pleased that we are already seeing the anticipated benefits of these acquisitions to the combined companies and to our clients.
We are increasing the capacity of VES to deliver on the excess inventory reduction goals of the VA, while working to identify opportunities for greater process efficiencies through new digital solutions.
As an example, we have already enhanced the VES contact center to increase capacity and improve veteran outreach and exam scheduling.
Our Attain Federal colleagues are delivering on complex program challenges for critical clients, while gaining the ability to bid on larger opportunities through newly available contract vehicles.
As Maximus moves forward, program administration work, particularly the delivery of citizen services in an independent and conflict banner, will continue to underpin our business.
Over time, we anticipate technology playing a larger role in this area and the work continuing to evolve to include more clinical assessments and related services.
Our maturing portfolio of digital solutions and increasing systems integration capabilities will enable us to make greater use of the data underlying our operations, provide improved decision support tools to our employees and enable a more seamless and high quality customer experience.
Looking at our segment profile in the wake of the recent acquisitions, U.S. Federal Services now delivers approximately half of our revenue.
Through the team's ongoing efforts as well as the recent acquisitions, the platform capabilities are in place to further our long-term organic growth goals and advance our corporate strategy across all three segments.
Our digital strategy started several years ago with what has now become table stakes, including mobile applications, streamlining program application and enrollment, RPA automating processes and chat and text functions providing additional channels for citizen engagement.
Maximus must routinize these capabilities and create a solid foundation upon which the next generation of digital solutions can be built.
I am proud of our organization's accomplishments in driving cost out of routine transactions and improving the quality and timeliness of our citizen services.
However, we must constantly advance our skills and solutions to meet and exceed client expectations.
Our previous technology investments, such as application and telephony with cloud migration, have created an infrastructure that enables a secure, hybrid work environment and deliver significant value to our clients as demonstrated during the pandemic.
Our platform provides Maximus and our clients more readily available access to valuable data and vast amounts of compute capacity.
Through our current and planned investments in data governance, our rapid innovation and delivery methodology and continued growth of digital competencies across the organization, we are well positioned to deliver new solutions underpinned by AI and machine learning and leveraging other cognitive computing capabilities as part of the next phase of our digital strategy.
Through this client-focused approach, we intend to provide even better decision support tools for our employees and lower costs, while accomplishing more complex transactions for citizens at scale.
Serving as a platform upon which we will grow our federal IT services.
Maximus Attain brings needed skills and experience and enables us to systematize how we conduct digital projects.
With the addition of Attain, we are driving a cultural shift toward thinking in a digital-first fashion moving forward.
To give you more color on the increasing role of AI in our business, let me provide two examples that illustrate use cases focused on creating a better citizen experience and improving the decision support tools available to our clients and employees.
Our speech analytics capabilities, implemented within our California vaccine information line project, enable us to understand customer sentiment and improve call resolution determine certain reasons for long silences that impact handle time and quality, an increased call deflection by assessing why individuals are calling, especially during a surge.
Furthermore, our topic mining solution empowers our state clients to effectively disseminate critical public health information, particularly important capability during the pandemic.
At U.S. Citizenship and Immigration Services, or USCIS, the Maximus Attain team looked at how we could improve efficiency, implementing AI to automate routine tasks, enabling agency employees to focus on other critical work.
This human-plus strategy augments individuals by driving automation, increasing efficiency and supporting a better decision-making process.
I'm also pleased to share the recent award of two modernization contracts from the Internal Revenue Service were a combined $151 million awarded on the GSA Alliant two contract vehicle.
Our team's efforts to support the agency's modernization program have been expanded through the Development, Infrastructure, Security and modernization, or DISM contract, with the technology integration office of the IRS.
This office is responsible for all new technologies brought into the IRS.
We have a long-standing relationship with the IRS, which initially began in 1991 and are uniquely positioned to support the agency as they focus on modernization projects and build solutions to meet their mission-critical needs.
Our people have the knowledge and skills critical to the IRS mission and have been proud to support their government counterparts achievements, particularly during the pandemic.
Our clinical strategy concentrates on execution of the capabilities platforms that are now in place.
As I mentioned, our immediate focus remains in support of VES, the VA and the veterans we serve to increase capacity and address the excess examination inventory.
As a result, we are still targeting the end of the calendar year and into early 2022 for integration to ensure no disruption in service.
Meanwhile, we're working closely with our team to identify and deliver streamlined processes and new digital solutions, which likely will draw, in part, on software development capabilities gained through Attain, an added benefit of these recent combinations.
Outside the U.S., as Rick noted, our margin profile for Restart UK will improve over the next several quarters with OUS start-ups collectively anticipated to achieve 10% or higher operating income margin over the life of the contracts and provide us at least $150 million of additional revenue in FY '22.
I'm also pleased to share that the Maximus UK team has received an extension on the Health Assessment Advisory Service contract through August 2023.
In March of 2020, the Department for Work and Pensions halted all face-to-face assessments, resulting in reduced activity levels and financial performance.
Since that time, the team has worked with the department to adapt, develop and implement alternative services, including both telephone and video assessments.
This approach has enabled us to provide support for thousands of customers, and we anticipate will remain an element of program delivery going forward.
Turning to new awards and pipeline as of June 30.
For the third quarter of fiscal year 2021, year-to-date signed awards were $3.2 billion of total contract value at June 30.
This includes the UK Restart Award that we announced on April 26 and the CDC Vaccination Hotline Award for which we have assumed a $300 million total contract value.
Further, at June 30, there were another $1.38 billion worth of contracts that have been awarded, but not yet signed.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at June 30 was $33.6 billion compared to $35.6 billion reported in the second quarter of fiscal 2021.
The June 30 pipeline is comprised of approximately $4.2 billion in proposals pending, $6.8 billion in proposals and preparation and $22.6 billion in opportunities tracking.
Of the total pipeline, 63.6% represents new work opportunities.
Approximately $1 billion of the pipeline reduction is due to the UK Restart program award with the remainder largely a result of government delays or cancellation of work that pushes opportunities out past the 2-year horizon for pipeline reporting.
We have observed that some of this delay is a residual effect of COVID-19 altering procurement priorities.
As Rick noted, we primarily beat our revenue expectations as a result of higher-than-anticipated volumes on COVID-19 response work in the U.S. Federal Segment.
Illustrating the capabilities we demonstrated during the pandemic, we quickly ramped up approximately 13,000 agents on one contract alone, which required initially hiring nearly 20,000 prospective staff.
We saw our largest starting class ever on one day, comprising more than 12,500 remote agents as part of this effort.
The cloud-based telephony infrastructure built and stress tested for this same contract was among the largest ever constructed for government, capable of handling up to 0.5 million calls per hour or 160 calls per second.
Responding to the changing needs of our clients, our team was able to rapidly scale down the operation as directed.
The highly variable cost structure of our model, coupled with an expansive labor supply chain, enhanced through the Census contract and cloud-based technology gives us the ability to capitalize on sizable opportunities of a short-term nature without stranding capital assets when the programs wind down.
As our results have demonstrated, this both underscores our value to governments and times of need and provides returns that can be invested toward longer-term growth objectives.
The execution of our strategy is maturing as Attain Federal and VES become more fully integrated into our business, and we work to leverage the platforms and capabilities they bring.
This will complement the foundation we have built across clinical services and digital technologies previously and our existing organic growth efforts.
As Rick and I have cautioned this year, the COVID-19 work is tapering off quickly, while, with some exceptions like Australia, our core programs have not yet returned to their prepandemic activity levels.
However, we expect these activities to ultimately return.
We believe it's a matter of timing and not a shift in long-term market characteristics.
Indeed, the fundamental macro trends and long-term needs of governments worldwide that have supported our business for decades remain firmly in place.
With the acquisitions we have completed, the agility we have demonstrated during COVID and the desirable financial attributes of our business model, we find ourselves in well positioned to respond to these trends and meet the growing needs of our government clients.
And with that, we'll open the line for Q&A. | compname says fy2021 diluted earnings per share to range between $4.65 and $4.75.
q3 earnings per share $1.51.
q3 revenue $1.24 billion versus refinitiv ibes estimate of $1.09 billion.
company is raising guidance for fiscal year 2021 to account for strong q3 results.
fy 2021 revenue expected to range between $4.2 billion and $4.25 billion and diluted earnings per share to range between $4.65 and $4.75.
for fiscal 2021, cash from operations is expected to range between $425 million and $455 million.
sees 2021 free cash flow between $375 million and $405 million.
revenue attributable to covid-19 response work is anticipated to be approximately $1 billion for fiscal 2021.
covid-19 response work is tapering off as expected, resulting in a lower q4 forecast as compared to q3 results. | 1 |
I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Note that we posted schedules under Financial Information in the Investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins.
Today, I'd like to reflect on the past year and how we've emerged stronger from the pandemic, including positive performance in the fourth quarter.
I'll also highlight the broader macro environment and how we're executing in the marketplace.
Finally, I'll touch briefly on the accelerators for growth that give us confidence we can achieve the 2022 guidance we've provided today, with more on them to come at CAGNY later this month.
John will then discuss financial results for the quarter and our outlook in more detail.
In 2021, the operating environment remained dynamic as the pandemic continued to evolve and factors like inflation and supply chain disruptions brought additional challenges.
But over the year, our organization and the system continued to manage through these circumstances with focus and flexibility.
We are pleased with the results, which were above 2019 across key metrics, and we remain focused on building a stronger total beverage company.
Now looking more closely at our fourth quarter results.
We saw another quarter of sequential improvement versus 2019, and we ended the year with volume ahead of 2019.
Notably, it was the first quarter in which away-from-home volume was also ahead of 2019 while at-home channels remained strong.
So recapping the quarter 4 performance around the world, starting with Asia Pacific.
China delivered strong performance in the quarter by capturing a growing trend among consumers' zero-calorie offerings, we doubled our Zero Sugar sparkling portfolio in terms of volume compared to the fourth quarter of 2019.
We leveraged RGM strategies and targeting investments to gain share in e-commerce, thus driving growth for the overall business.
In India, initiatives to build omnichannel presence and marketing campaigns around key occasions by leveraging festivals and passion points through occasion-led marketing and integrated execution drove a sequential increase in market share and nearly 30% growth in transactions for the quarter.
Additionally, our local Thums Up brand became $1 billion brand in India, driven by focused marketing and execution plans.
In Japan, while our system was faced with a very challenging year, we gained value share and consumers driven by successful innovation and commercial strategies.
In ASEAN and South Pacific, there were strict restrictions and limited reopenings in many markets for a large part of the year.
In Q4, acceleration of vaccine efforts and strong results from the Fanta Colorful People and Sprite Make it Clear campaigns helped drive our recovery.
In EMEA, volume in Europe in the quarter surpassed 2019 despite mobility restrictions, particularly in Western Europe.
Despite the recovery remaining asynchronous in the region, increased investments behind our brands in the marketplace resulted in our system driving the highest incremental retail value among FMCG players in the region.
In Africa, volume continued to be ahead of 2019 in the fourth quarter, driven by our key markets with strong double-digit growth in Nigeria and Egypt.
Additionally, increased investments behind our affordability and multi-serve packages drove value share for the full year above 2019 in the region.
In Eurasia and Middle East, the top line continued to expand faster than the macro environment, driven by strong revenue growth management, execution, and digital capabilities.
Turkey, one of our key markets, grew 7 points of value share for the year in digital as total digital commerce expanded by close to 90%.
In North America, despite COVID cases leading to business closings and some mobility restrictions, value share growth was strong in the quarter, driven by pricing, revenue growth management, and strong execution in the market.
The new Coca-Cola Zero Sugar continued to deliver strong results, outpacing category growth, while Sprite and smartwater grew drinker base and buy rates.
Innovations also delivered strong performances, led by Coke with Coffee and Simply Almond.
Latin America delivered another quarter of strong performance with mid-single-digit volume growth versus 2019.
This resilience of the system has been driven by years of experience navigating volatile environments through strong and effective execution.
Within Global Ventures, Costa continued to recover through the year but was impacted in Q4 due to COVID-related restrictions.
Costa Express continued its strong performance in the U.K., delivering results ahead of expectations.
In China, the Costa ready-to-drink expansion continued with availability now in more than 300,000 outlets, continuing to drive our share position ahead of our key competitor.
Finally, our Bottling Investment Group continues to focus on productivity and transformation initiatives, delivering strong operating margin expansion for full year 2021.
Due to improved mobility throughout the year, our industry is growing in both volume and value.
Gaining share was a key objective in our Emerging Stronger agenda.
And this year, we gained value share in both at-home and away-from-home channels.
Our NARTD market share is above 2019 levels at a global level and in both at-home and away-from-home channels.
We will continue to identify and address opportunities to further improve our value share, driven by data-backed insights.
As we close the chapter on 2021, we emerge stronger by delivering both top line and earnings per share ahead of 2019, and we gained share in a growing industry.
The actions we took during the pandemic have resulted in an agile, a focused organization that is poised to capture the sizable opportunities that exist.
And we continue to look to the future to build on our momentum and drive growth.
As we turn to 2022, while it is impossible for us to know whether this variant will be the last, what is clear is that our consumers, our customers, and our business are learning and adapting with great resilience.
For example, while we have seen some impacts from the omicron variant through the first few weeks of the year, we are not seeing the same level of disruption as previous waves, and our system is better equipped.
Further recovery in 2022 will be determined by macro factors, including overall consumer sentiment, as well as supply chain challenges; labor shortages; and of course, the inflationary pressures, and interest rates.
We are confident we are well equipped to navigate this environment and deliver on the guidance we provided today.
We're excited about where we are today and the substantial initiatives we have in place for 2022.
The consumer continues to be at the center of our strategy.
And through our total beverage company agenda, we are adapting to the macro and micro trends which are shaping consumer habits.
We advanced our total beverage company agenda last year by streamlining our portfolio, focusing on the core, and investing behind a portfolio of brands that allows us to meet the evolving needs of consumers.
We completed much of this work on brand eliminations while being deliberate with brand transitions.
This optimized portfolio will ensure we follow the consumer and win in emerging and fast-growing categories.
And is complemented by the recent strategic acquisition of BODYARMOR; as well as relationships, like the new agreement with Constellation Brands, which will launch Fresca Mixed; and the extended relationship with Molson Coors, which will launch Simply Spiked Lemonade in the U.S.
Our network marketing model, with global category teams and local operating units, is allowing us to focus on end-to-end consumer experiences that are data-driven and always on.
Our announcement of WPP as our global marketing network partner is a foundational component of our new marketing model.
This new agency approach gives us access to the best creative lines, regardless of source, and is underpinned by leading-edge data and technology capabilities.
The Real Magic campaign is the first campaign which was cocreated internally leveraging this new end-to-end approach.
And the campaign is showing strong results with the consumers.
We have good visibility into the benefits of the new marketing model.
The approach will allow us to deliver best-in-class consumer-centric marketing experiences across our categories and around the world.
We also built more discipline into our innovation process in 2021 with a key focus on scalable bets that can build momentum year over year.
It's still early, but the approach is working.
Revenue per launch and gross profit per launch were up 30% and 25%, respectively, versus prior year.
And we took intelligent local experiments and moved more rapidly to scale them across geographies.
Sustainable packaging like refillables and labelless bottles, along with brands like Coke with Coffee, fairlife, AHA, Costa ready-to-drink, and Lemondo, are all examples of local winners that have been extended to more markets.
For 2022, our innovation process is increasingly supported by data, and our pipeline is robust with built-in agility and consists of big bets along with many shots on goal.
The system has stepped up its RGM and execution capabilities, which is helping us navigate an inflationary environment, driving value growth in a segmented way.
Due to the strength of our bottling partners and the stronger than ever alignment of the system, we are prepared to address opportunities, as well as challenges that may lie ahead.
Our network organizational structure is designed to better connect functions and operating units to help our system scale ideas faster.
As we've emerged stronger, we kept moving forward on integrating sustainability work into our business as it is a key driver of future growth.
During the quarter, we were recognized for our commitment to transparency and action to address environmental risks by earning an A score in CDP's Assessment for Water, an improvement over last year.
We improved or maintained our score in CDP's assessments on other important areas, like climate and forests.
Additionally, to complement our World Without Waste goals, we announced a new global goal to reach 25% reusable packaging by 2030.
Increasing refillable and reusable packaging options responds to consumer affordability and our sustainability aspirations, and it helps create a circular economy as refillable packages have extremely high levels of collection and are low carbon footprint beverage containers.
We expect the recovery will remain asynchronous, but we are encouraged by our growing industry, our unparalleled system strength, and a strategic transformation that enables us to be agile and to adapt.
Our actions drove strong results in 2021, and we have confidence in our ability to deliver another year of strong performance in 2022 and over the long term.
Now John will provide more details on our results and our 2020 guidance.
In the fourth quarter, we closed the year with strong results, despite the impact of the omicron variant across many parts of the world.
Our Q4 organic revenue growth was 9%.
Our price/mix of 10% was driven by a combination of factors, including targeted pricing, revenue growth management initiatives, as well as further improvement in away-from-home channels in many markets.
Unit case growth showed further sequential improvement on a two-year basis, and concentrate sales lagged unit cases by 10 points in the quarter, primarily due to six fewer days in the quarter.
Despite the commodity market inflation and the dynamic supply chain environment, comparable gross margin for the quarter was relatively flat versus prior year.
Pricing initiatives and favorable channel and package mix were offset by the impact of consolidating the fast-growing finished goods BODYARMOR business, along with incremental investments to sustain momentum in the overall business for 2022.
We continued to invest in markets as they recovered and stepped up year-over-year marketing dollars again in Q4, spending in a targeted way to maximize returns.
This increase in marketing investments, along with some top-line pressure from six fewer days in the quarter, resulted in comparable operating margin compression of approximately 500 basis points for the quarter.
For the full year, comparable operating margin was down approximately 100 basis points versus prior year as improved comparable gross margin was offset by the significant step-up in marketing.
Importantly, versus 2019, a key measure we have focused on, comparable operating margin was up approximately 100 basis points.
Putting it all together.
Fourth quarter comparable earnings per share of $0.45 was a decline of 5% year over year, resulting in full year comparable earnings per share of $2.32, an increase of 19% versus the prior year, as the strong resurgence in the business also benefited from a 3-point tailwind from currency and tax.
We delivered strong free cash flow of $11.3 billion in 2021, with free cash flow conversion of approximately 115% and a dividend payout ratio well below our long-term target of 75%.
With these results, we exceeded guidance on every metric for full year 2021.
We have done tremendous work to emerge ahead of 2019 and set the stage to drive our growth agenda for years to come.
We are spinning the strategy flywheels faster and more effectively.
Our organization is focused on execution and enhancing our capabilities to fuel growth.
As James mentioned, the pandemic will be one of the many factors, along with the dynamic macro backdrop that we face in the coming year.
But our local businesses are ready to adapt and execute for growth.
We expect organic revenue growth of approximately 7% to 8%, and we expect comparable currency-neutral earnings-per-share growth of 8% to 10% versus 2021.
Based on current rates and our hedge positions, we anticipate an approximate 3-point currency headwind to comparable revenue and an approximate 3 to 4 points currency headwind to comparable earnings per share for full year 2022.
Additionally, due to a certain change in recent regulations, we estimate an effective tax rate increase from 18.6% in 2021 to 20% for 2022, which is an estimated 2 percentage points headwind to EPS.
Therefore, all in, we expect comparable earnings-per-share growth of 5% to 6% versus 2021, including the combined 5- to 6-point headwind from currency and tax.
We expect to generate approximately $10.5 billion of free cash flow over 2022 through approximately $12 billion in cash from operations, less approximately $1.5 billion in capital investments.
This implies the fourth consecutive year of free cash flow conversion above our long-term range of 90% to 95%.
We continue to raise the performance bar across the organization and are confident in delivering on this 2022 guidance.
In summary, we expect to deliver another year of strong top-line-driven growth, along with maximized returns, driven by the strategic changes we have made in our business.
There are several considerations to keep in mind for 2022.
Overall, inflationary and supply chain pressures continue to impact costs across several fronts in the business, including input costs, transportation, marketing and operating expenses.
With regards to commodity costs.
After benefiting from our hedging strategy in 2021, we remain well hedged in 2022, but at higher levels.
Based on current rates and hedge positions, we continue to expect commodity price inflation to have a mid-single-digit impact on comparable cost of goods sold in 2022.
However, we are taking actions in the marketplace using multiple levers, including RGM in its many forms, along with our productivity initiatives, to help offset much of the impact.
As a reminder for your modeling, the consolidation of the recently acquired fast-growing BODYARMOR finished goods business will have a mechanical effect on margins.
When it comes to capital allocation, our balance sheet remains strong, and our improving cash flow position is allowing us to be even more vigorous in pursuit of priorities that balance financial flexibility with efficient capital structure, first and foremost, to invest in our business; secondly, continuing our track record to grow our dividend; thirdly, to seek opportune M&A, and to repurchase shares with excess cash.
And finally, due to the calendar shift, there will be one less day in the first quarter and one additional day in the fourth quarter.
Despite another year of uncertainty, in 2021, we came together as a system to emerge stronger and position ourselves to drive sustainable growth.
We are encouraged by the momentum in our business and are clear on the direction we're headed.
As we look to 2022, we feel confident in our ability to deliver on the commitments we outlined today.
With that, operator, we are ready to take questions. | q4 non-gaap earnings per share $0.45.
q4 revenue rose 10 percent to $9.5 billion.
organic revenues (non-gaap) grew 9% for quarter and 16% for full year.
global unit case volume grew 9% for quarter and 8% for full year.
for full year 2022 company expects to deliver organic revenue (non-gaap) growth of 7% to 8%.
company expects commodity price inflation to be a mid single-digit percentage headwind on comparable cost of goods sold in 2022.
coca-cola- for 2022 comparable net revenue (non-gaap), expects a 2% to 3% currency headwind based on current rates, including impact of hedged positions.
for full year 2022 comparable earnings per share percentage growth is expected to include a 3% to 4% currency headwind.
sees q1 comparable earnings per share (non-gaap) percentage growth is expected to include an approximate 5% currency headwind.
for q1 2022, comparable net revenues are expected to include an approximate 3% currency headwind.
for full year 2022, expects to deliver comparable currency neutral earnings per share growth of 8% to 10% and comparable earnings per share growth of 5% to 6%. | 1 |
Today's call is being recorded and supporting materials of the property of Dana Incorporated.
They may not be recorded, copied or rebroadcast without our written consent.
Actual results could differ from those suggested by our comments today.
Additional information about the factors that could affect future results are summarized in our safe harbor statement found in our public filings, including our reports with the SEC.
A quick review of our financial results for the quarter highlights significant improvements over last year's pandemic-impacted second quarter.
In reverse of last year, when we were discussing shutdowns and lower sales, this year's second quarter, we delivered a strong $2.2 billion in sales representing a $1.1 billion improvement as our customers continue to see strong market demand and in many cases, outpaced production as supply chain challenges continue to hamper their operations.
Our adjusted EBITDA for the second quarter was $233 million, a $238 million improvement over last year.
Net profit margin was again tempered by high raw material costs and supply chain challenges.
Adjusted free cash flow was of slight use on the quarter, but was an improvement of $120 million over last year, driven by higher earnings.
Diluted adjusted earnings per share was $0.59 for the second quarter of 2021, an improvement of $1.28 per share compared to 2020.
Moving to the key highlights on the upper right-hand side of the page, we'll provide you an update today on how we're managing through the key challenges facing the mobility industry.
Additionally, we're excited to talk about a few new business wins, including electrification programs.
Lastly, I'll highlight our recent announcement to further accelerate our commitment to reduce greenhouse gas emissions and our adoption of science based targets.
Please turn to page five, and we'll begin our discussion with the ongoing supply chain challenges and how it's impacting the current cycle.
We continue to actively manage through the challenging commodity and supply chain environment as we face four key issues: higher raw material costs; semiconductor shortages impacting the production schedules of our customers; logistics constraints and higher transportation cost; and, of course, labor shortages related to COVID restrictions.
These challenges are not specific to our company but are impacting the entire mobility industry, which is seeing high demand, but production is being constrained, resulting in finished vehicle inventories for our OEM customers.
First, high input costs for commodities such as steel driven by high demand and limited supply are inflating prices across all of our end markets.
We're working to offset and recover these higher costs through our established mechanisms, but the inherent lag in those recoveries is creating a substantial margin headwind until the input costs stabilize and turn the other way.
Jonathan will highlight the financial impacts in just a moment.
Second is the semiconductor shortage that is leading to lower production volume at our OEM customers or reducing model availability, particularly in the light vehicle segment, but more recently in commercial vehicles as well.
However, end customer demand remains strong, leading directly to finished vehicle inventory imbalance.
Shipping delays and higher logistics costs continue to impact the industry and are driving higher input cost.
We're seeing this around the world to varying degrees.
Lastly, all three of the end markets are being affected by labor shortages, leading to production inefficiencies, plant downtime and higher labor cost.
We're taking the necessary actions to capitalize on this unique market dynamic of low inventory and high demand as a future opportunity for a stronger and longer duration recovery, as the input challenges subside.
Moving to slide six.
I'd like to talk to you about how we continue to successfully launch our new business backlog programs despite the challenges facing our industry.
In North America, we're excited to be supplying our Spicer SmartConnect all-wheel-drive system to a new compact pick-up truck, slated to go on sale next year.
Vehicles with our disconnecting all-wheel drive systems are designed to transition to all-wheel drive automatically and seamlessly when the vehicle system predicts slipping.
It not only enables impressive gains in performance and safety, but is also more fuel-efficient and perfect for the growing market for small pickup trucks.
Turning to slide seven.
I want to talk about new partnership for us in the electric commercial vehicles.
Dana announced the signing of a strategic agreement with Switch Mobility, which is an Ashok Leyland subsidiary focused on manufacturing electrified commercial vehicles.
The agreement positions us as their primary supplier of electric drivetrain systems, including e-axles, gearboxes, motors, inverters, software and controls for light commercial vehicles and buses in India and Europe.
Light commercial vehicles continue to present significant opportunities that lead the commercial vehicle segment shift to fully electrified platforms.
We are very excited about the partnership and will enable us to have direct positive impact on the delivery of sustainable urban e-mobility.
Please turn to page eight.
Continuing on the transition to electrified vehicles, slide eight highlights an exciting collaboration with Pierce Manufacturing and Oshkosh airport products on their new revolutionary Volterra platform of electric vehicles.
When the first vehicle rolled off the assembly line, they will feature an electric drivetrain with two Dana TM4 motors, coupled with a Dana-manufactured electromechanical, infinitely variable transmission pictured here in exploded view.
The Volterra platform of electric vehicles is engineered to channel mechanical power and battery power to maximize driving and pumping performance while helping reduce fuel consumption.
Depending on the usage and mission profile, the fuel savings could be significant.
The Volterra platform of electric vehicles not only reduces emissions in EV mode, but more importantly, are designed to help save lives.
Every second matters when responding to an airport emergency and the newly Striker Volterra.
ARFF is capable of achieving 28% improved acceleration when fully loaded with the new EV technology.
As an added benefit, the Striker Volterra vehicle results in 0 emissions driving during entry and exit of the fire station ion EV mode, so that there's no longer a need for expensive ventilation systems, within the station.
During the next several months, despite the Striker Volterra performance hybrid will be showcased at airports across the United States allowing firefighters to experience the firsthand, the revolutionary Volterra technology.
At Pierce Manufacturing, the first Pierce Volterra zero emissions pumper was placed in service in June of 2021 with the city of Madison, Wisconsin Fire Department, making it the first electric fire truck in service in North America.
The Volterra pumper is serving frontline duty at Station 8, the city of Madison's busiest fire station.
To date, the city of Madison has responded to over 500 active emergency calls with this new electric pumper.
This collaboration with Pierce Manufacturing and Oshkosh Airport Products enables Dana to expand our presence in the specialty vocational vehicle market while also opening doors to leverage these capabilities across other markets as well.
This success is in our Power Technologies Group.
Several electrified lifestyle and sport trucks have recently been announced.
Earlier this year, we highlighted our battery cooling technology with a global light vehicle OEM and mentioned that there would be more announcements coming.
To that, we're pleased to be showcasing our capabilities by supplying our advanced battery cooling technology.
Unfortunately, we can't yet mention the name of the OEM.
Our extensive range of long ThermaTEK battery cooling product sets the industry standard for innovation.
The award-winning customer design, cooling -- custom design cooling solutions feature lightweight aluminum construction, resulting in ultra clean products that stabilize the battery temperature and enable faster charging.
Turning to my final slide.
At Dana, we believe that leading the way in sustainability directly aligns with our leadership and vehicle electrification and is critical to supporting our customers as they work to achieve their sustainability goals.
That passion is reflected in our desire to advance our emissions reduction targets by developing new zero-emission technologies, delivering innovative products and driving operational efficiencies around the globe.
That is why earlier this month, we announced plans to reduce our annual Scope one and two greenhouse gas emissions by at least 50% by the year 2030, which is a five year pull ahead of our original target of 2035 that was announced last fall.
To help accomplish this aggressive goal, we signed a commitment letter with the Science Based Target Initiative, or SBTi, which aligns resources and incorporates best practices to accelerate emissions reductions.
This partnership between the Carbon Disclosure Project, United Nations Global Compact, the World Resource Institute and the Worldwide Fund for Nature, focuses on partnering with companies to guide emissions reductions initiatives using the science-based targets.
As we continue our sustainability journey, collaborating with organizations like SBTi will support us as we establish ambitious targets and identify key areas where we can further drive sustainability across our operations and our products that enable zero-emissions mobility.
Now I'd like to hand it over to Jonathan to walk you through our financials.
Please join me on slide 12 for an overview of our second quarter results compared to the same period last year.
In the second quarter of this year, sales topped $2.2 billion, delivering growth of over $1.1 billion compared to the prior year.
The doubling of sales is entirely attributed to the recovery experience across all of our segments from the height of pandemic-related shutdowns last summer, despite continuing to fuel the aftershocks in our supply chain today.
Adjusted EBITDA was $233 million for a profit margin of 10.6%, which represents a dramatic improvement over last year's nearly breakeven results, even as this performance is hampered by dramatic material cost inflation and continued supply chain challenges.
Adjusted net income in the second quarter of this year was $86 million, $185 million higher than the same period of 2020.
The diluted adjusted earnings per share was $0.59, $1.28 improvement from the prior year.
And finally, adjusted free cash flow this quarter was a use of $13 million, an improvement of $120 million over the second quarter of last year as higher profit more than funded increases in working capital and capital expenditures to support the growth.
Please turn with me now to slide 13 for a closer look at the drivers of the sales and profit growth for the second quarter.
The change in second quarter sales and adjusted EBITDA compared to the same period last year is driven by the key factors shown here.
First, overwhelmingly, the increase is attributed to the organic growth of nearly $1 billion, as our business laps the trough in sales caused by the onset of pandemic-containment measures last spring and summer.
The incremental conversion of 26% exceeds the decremental conversion from the same period in the prior year by about 200 basis points.
Second, foreign currency translation increased sales by nearly $90 million as the dollar weakened against a basket of foreign currencies, principally the euro.
As is typical, this has no impact on our profit margin.
Finally, steel prices have continued to rise at a rate much higher than anticipated.
Gross commodity cost increased by $70 million, and we recovered $45 million of this in the form of higher selling prices to our customers for a recovery ratio of about 65%.
This remains lower than our normal steady state recovery ratio due to the timing lag caused by the rapid spike in commodity prices.
These increases compressed our profit margin by approximately 180 basis points and represented the primary impediment to achieving 12% margins in the quarter.
Please turn with me to slide 14 for a closer look at how adjusted EBITDA converted to cash flow.
Free cash flow was a slight use in the quarter at $13 million.
This was a substantial improvement of $120 million compared to the same period last year and was entirely attributed to higher profit, which more than funded the higher capital requirements to support the increased volumes.
Please turn me now to slide 15 for a closer look at our revised full year guidance for 2021.
Given strong market demand in the second quarter despite the impact of the chip shortage, we now anticipate full year top line results toward the high end of our guidance range.
This represents a $250 million improvement from the previously indicated midpoint of the range and is driven by higher commodity recoveries, stronger foreign currency exchange and higher demand across all three of our end markets.
However, we still expect profit near the midpoint of our range, implying a margin of between 10.5% and 11% as the additional contribution margin from the higher demand is offsetting the higher commodity cost net of recoveries.
This also implies an adjusted free cash flow margin of approximately 3% of sales.
Diluted adjusted earnings per share is expected to move toward the higher end of our range at $2.45 per share due to lower interest and income tax expenses.
Please turn with me now to slide 16, where I will highlight the drivers of our expected sales and profit changes for the full year.
This chart highlights the key factors driving the change in expected sales and profit for 2021 compared to last year.
First, organic growth is now expected to add nearly $1.6 billion in sales, including our new business backlog of $500 million and the slightly higher end market volume increase mentioned on the previous slide.
Incremental margins are expected to remain strong in the mid-20s, providing about 350 basis points of margin expansion.
Next, we anticipate the impact of foreign currency translation to now be a benefit of approximately $150 million to sales and about $15 million to profit, with no impact to margin.
Finally, we now expect gross commodity cost increases approaching $250 million as steel prices have continued to rise.
We anticipate recovering about $180 million or 70% of the increase from our customers in the form of higher selling prices, leaving a net profit impact of $70 million, which will compress margins by more than 100 basis points.
Please turn with me to slide 17 for more detail on how we expect this year's adjusted EBITDA will convert to cash flow.
We expect full year adjusted free cash flow of about $275 million, representing an improvement of more than $200 million compared to last year.
The growth is entirely driven by the profit I just outlined on the prior page and is partially offset by the higher capital requirements to fuel the sales growth.
Please turn with me now to page 18 for an overview of the debt refinancing we completed in the second quarter.
In April, we were the first major mobility supplier to launch a green bond here in the U.S. The proceeds were allocated to finance green projects, driving our stated sustainability and social responsibility initiatives including; reducing greenhouse gas emissions; expanding the use of energy-efficient production processes; and designing, engineering and manufacturing products that enable the electrification of the world's mobility fleet.
Then in May, we launched our debut bond issuance to the European debt capital markets with a EUR325 million placement to refinance our 2026 dollar notes that had been swapped to euros.
Both of these actions lowered our borrowing costs, extended our maturities and will serve as more permanent components of our debt stack as we deleverage in the coming years.
This hands-on interactive technology experience will be held at our world headquarters in Maumee, Ohio, and broadcast virtually.
The event will feature our industry-leading EV products as well as a selection of electrified vehicles and equipment powered by these systems.
Our goal for the event is to provide further insight into how we see the transition to electrified mobility unfolding in the coming years and how Dana's leadership in this evolution will drive outsized growth and financial returns for our shareholders. | q3 revenue fell 0.4 percent to $3.115 billion. | 0 |
I'm on the Slide 2 of the of the deck for those of you following along.
So, a couple of months ago, we held our first Investor Day as Raytheon Technologies and that day we laid out our 2025 goals to deliver strong top line growth, margin expansion and at least $10 billion in free cash flow by 2025, all while continuing to invest in our businesses and return significant cash to our shareowners.
We continue to be confident in the future because of our strong franchises, the resilient markets in which we operate, our innovative technologies, and our relentless focus on operational excellence and cost reduction, which will drive margin expansion and strong cash flows into the future.
And we continue to see encouraging trends across our market.
Our confidence in our ability to achieve these targets remain strong and as you saw at the end of May, the Department of Defense released the fiscal year '22 budget request, which was generally in line with our expectations with respect to our portfolio of products and the investments we're making in differentiated technologies, including missile defense, space-based systems, next-generation propulsion and hypersonics.
Major RTX programs fared well as -- overall as modernization funding remains at near historic highs.
Requested funding for these programs is favorable to the overall DoD modernization request when compared to last year's plan for fiscal year '22.
It's also worth noting that the overall classified funding request, which supports a significant part of our Intelligence & Space portfolio was also very well supported.
So I'd say we're well positioned with the administration's priorities, driven by our innovative technologies and capabilities to address the evolving threat environment.
This is demonstrated of course by the significant awards we received this quarter, which included over $1 billion in classified bookings at RIS and two important franchise wins in our Missiles & Defense business where we were awarded almost $2 billion for the Long-Range Standoff weapon or LRSO, and $1.3 billion for the Next-Generation Interceptor.
A thing also we should note that the Patriot franchise remains robust as evidenced by Switzerland becoming the 18th partner nation to select the Patriot air defense system.
At the same time, commercial air traffic demand continues to gain momentum across many of our domestic markets as global economies reopen and vaccinations increase.
In the U.S. daily travelers throughout the TSA checkpoints have averaged over $2 million per day in July, and that's more than doubled since January of this year.
That said, we are monitoring the COVID variants and the impact on travel and there's still work to do on global vaccinations and on international border reopenings.
Strong execution against an increasingly favorable backdrop enabled us to deliver top and bottom line growth on both a year-over-year and a sequential basis.
So given our performance year-to-date and the recent trends across our end markets, we're going to raise the low end of our full year sales outlook by $500 million to a new range of $64.4 billion to $65.4 billion.
And we're also going to raise and tighten our adjusted earnings per share outlook with a new range of $3.85 to $4 per share and we're increasing our free cash flow outlook to a range of $4.5 billion to $5 billion for the year.
I'm pleased with the strong orders we saw in the quarter, which grew our company backlog to a record $152 billion and that's a 3% increase since the first quarter.
Our defense book-to-bill was a strong 1.12 resulting in a defense backlog of over $66 billion and commercial backlog increased by $3.5 billion in the quarter.
On the capital allocation front, we repurchased $632 million on shares bringing us to over $1 billion in share repurchase year-to-date and we're on track to meet our commitment of buying back at least $2 billion of shares for the year.
We also continue to execute on the merger integration activities and given our substantial progress and the robust pipeline of opportunities, we're going to raise our gross cost synergy target by another $200 million to $1.5 billion and that $1.5 billion will be realized in the four -- first four years following the merger.
That's now 50% more than our original synergy commitment and there's great execution by the team but I would tell you, we're not done yet.
Like everything, there's always more to do.
In addition to making good progress in our synergy targets, we're also making significant progress on our structural cost reduction projects, which you've heard about back in our May meeting.
We have a pipeline with hundreds of opportunities including the previously announced actions that we're working across the business.
Let me just give you a couple of examples of what we are doing.
And our Collins Aerostructures business has scheduled over 125 lean events this year, and they're focused on specifically reducing the takt time, labor time for the A320neo nacelle.
We've invested in lean events such as these throughout the pandemic because they've allowed the Aerostructures business to reduce nacelle manufacturing time by over 75%.
Of course, though our normal goal here is about an 87% learning curve, these lean events allow us to exceed that in incredible ways.
At Pratt, we continue to build on the overhaul capability and drive turnaround time across the geared turbofan network.
The team has made good progress this year, demonstrated a 15% turnaround time, an improvement over the past year.
But importantly, they're on track to drive a 30% reduction by the end of this year.
These improvements are the direct result to repair infrastructure development and additional productivity improvements across the network, including the application of lean principles in their sharp design as well as automation.
Our strong culture of operational excellence is enabled of course, by the core operating system and significant investments in digital technology and other strategic projects.
Altogether, these initiatives will save over $5 billion in cost through 2025.
So you can see the market fundamentals are strong, we're laser focused on operational excellence and our key franchises are driving strong financial performance.
I'm on Slide 4.
As you could expect, I'm pleased with where we landed for the quarter.
We exceeded our expectations for both adjusted earnings per share and free cash flow.
Sales were $15.9 billion, which was at the high end of our outlook range and up 10% organically versus prior year on an adjusted pro forma basis and up 4% sequentially.
Our strong performance was driven by the momentum in commercial aerospace and continued growth in defense.
Adjusted earnings per share of $1.03 was ahead of our expectations, primarily driven by commercial aftermarket and contract-related settlements at Collins but also better than expected performance at Pratt, RIS and RMD.
On a GAAP basis, earnings per share from continuing operations was $0.69 per share and included $0.34 of acquisition accounting adjustments and net significant and/or nonrecurring items.
Free cash flow of $966 million exceeded our expectations primarily due to the continuation of better than expected collections and lower than expected capital expenditures.
Before I hand it over to Jennifer, let me give you a little color on our synergy progress.
We achieved $185 million of incremental gross cost synergies in the quarter, bringing our year-to-date savings to $390 million and given the pace that we realize these synergies on to-date, we're increasing our 2021 cost synergy target by $50 million, which brings our new target to the year -- for the year to $660 million.
Collins also achieved nearly $50 million of further acquisition synergies in the quarter, bringing total Rockwell Collins acquisition-related savings to nearly $560 million since the deal closed in November of 2018, and we now expect Collins to meet their $600 million acquisition synergy target in 2021, a year ahead of schedule.
So great work by the Collins team on that front.
So with that, I'll hand it over to Jennifer to take you through the segment results, and I'll come back and talk a bit about the outlook.
Starting with Collins Aerospace on Slide 5.
Sales were $4.5 billion in the quarter, up 6% on an adjusted basis driven primarily by the recovery of the commercial aerospace industry, and up 11% on an organic basis.
By channel, commercial aftermarket sales were up 24% driven by a 30% increase in parts and repair, a 16% increase in modification and upgrades, and a 15% increase in provisioning.
Sequentially, commercial aftermarket sales were up 15% with growth in all three channels most notably provisioning, which grew at 40% and parts and repair, which grew 14%.
Commercial OE sales were up 8% from the prior year, driven principally by the recovery of the commercial aerospace industry.
Growth in narrow body, regional and business jets was particularly offset by expected declines in wide-body sales.
And military sales were down 7% on an adjusted basis to the prior year divestitures and down 1% organically on a tough compare.
Recall Collins military sales were up 10% in the same period last year.
Adjusted operating profit of $518 million was better than expected and was up $494 million from the prior year, driven primarily by higher commercial aftermarket and OE sales, the benefit of continued cost reduction actions as well as favorable contract settlements that were worth about $50 million.
Looking ahead, we continue to expect Collins full year sales to be down-mid to down-low-single digit with higher expected commercial aftermarket volumes offsetting slightly less than expected OE deliveries.
And given the favorable mix in the first half of the year, the commercial recovery and the benefit of cost containment measures, we are increasing Collins full-year operating profit outlook to a new range of up $100 million to $275 million versus prior year.
Shifting to Pratt & Whitney on Slide 6.
Sales of $4.3 billion were up 19% on an adjusted basis and up 21% on an organic basis, primarily driven by the recovery of the commercial aerospace industry.
Commercial aftermarket sales were up 41% in the quarter with legacy large commercial engine shop visits up 56% and Pratt Canada shop visits up 18%.
As expected, we also saw a continued ramp in GTF shop visits in the quarter.
Commercial OEM sales were up 30% driven by higher GTF deliveries within Pratt large commercial engine business and general aviation platforms at Pratt Canada.
Military sales were down 3% also on a tough compare given Pratt's military sales were up 11% in the same period last year.
A continued ramp in the F135 sustainment was more than offset by lower material inputs on production program.
Adjusted operating profit of $96 million was slightly better than expected and was up $247 million from the prior year, driven primarily by higher commercial aftermarket sales and favorable shop visit mix.
Looking ahead, we continue to expect Pratt's full year sales to be up low to mid-single digit.
And we are increasing the low end of Pratt's full-year operating profit outlook by $25 million to a new range of down $50 million to up $25 million versus 2020.
Turning now to Slide 7.
RIS sales were $3.8 billion, up 12% versus the prior year on an adjusted basis and adjusted pro forma basis, including the pre-merger stub period, sales were up 6% driven by strength in Airborne ISR Program within sensing and effects as well as strength in the classified cyber programs within cyber training and services.
Adjusted operating profit in the quarter of $415 million was slightly better than expected and was up $86 million year-over-year on an adjusted pro forma basis, driven primarily by program efficiencies.
The quarter also benefited from a gain on a real estate transaction.
RAF had $4 billion of bookings in the quarter resulting in strong book-to-bill of 1.13 and a backlog of $19.4 billion.
Significant bookings included approximately $1.1 billion on classified programs as well as several other notable awards, including the STARS follow-on award for the FAA to implement a terminal automation system in their airports, and our first production award for the U.S. Navy Next Generation Jammer Mid-Band system that utilizes RTX industry-leading gallium nitride technology.
It's worth noting that we continue to expect RIS full year book-to-bill to be about 1.
Turning to RIS full year outlook, we continue to expect sales to grow low to mid single digit, and we are increasing the low end of RIS' operating profit outlook by $25 million to a new range of up $150 million to $175 million versus adjusted pro forma 2020.
Turning now to Slide 8.
RMD sales were up $4 billion up 15% to prior year on an adjusted basis and adjusted pro forma basis, which again includes pre-merger stub period.
Sales were up 9% driven primarily by higher volume on the international Patriot program and on StormBreaker program, both which included liquidation of pre-contract costs.
Adjusted operating profit of $532 million was slightly better than expected and was up $121 million versus prior year on adjusted pro forma basis due to favorable mix and higher program efficiencies.
RMD had $6.1 billion of bookings in the quarter resulting in an exceptionally strong book-to-bill of 1.55, and a backlog of $29.7 billion.
In addition to the franchise awards that Greg discussed, RMD also had a number of other notable awards in the quarter.
We also continue to expect RMD's full year book-to-bill to be about 1.
Turning to RMD's full-year outlook, we continue to expect sales to grow low to mid single digit, and we are increasing the low end of RMD's operating profit by $25 million to a new range of up $50 million to $75 million versus 2020 on an adjusted pro forma basis.
I'm on Slide 9.
Let me update you on how we see the current environment as we look to the second half of the year.
Starting with our commercial end markets, as I've discussed many times before, the shape of the commercial recovery remains critical to our outlook.
That said, we are encouraged by the pace of the vaccine distribution and continued signs of improving air travel demand in many domestic markets.
However, we continue to see international air traffic and border reopenings recover slower than we had expected around the world.
Keep in mind about 65% of 2019 air travel was international.
And while the first half of the year was a little stronger than expected and we're seeing signs of strong summer travel, we still need to see the reopening of international borders and the return of long-haul routes to drive continued sequential aftermarket growth in the second half of the year.
Looking longer term, we continue to expect commercial air traffic to return to 2019 levels by the end of 2023 with domestic and narrow-body fleets recovering before International and wide-body fleets.
Moving to our defense end markets.
We were pleased with what we saw in the fiscal year '22 defense budget request and we remain confident in our ability to grow our defense businesses as we look ahead.
Shifting to operational excellence.
As Greg mentioned, we're increasing our gross merger cost synergy target to $1.5 billion and that's driven by higher savings from the corporate and segment consolidations as well as additional procurement and supply chain savings.
At the same time, we're maintaining a focus on implementing our core operating system and driving structural cost reduction across the businesses.
And finally, our financial flexibility is underpinned by our strong balance sheet, which supports our investments in the business and our capital deployment commitments.
Following our strong first half, we're confident in our full year outlook.
As Greg discussed, we're bringing up the low end of our sales range by $500 million and we're raising our adjusted earnings per share range to $3.85 to $4 per share or up about $0.33 from the midpoint of our prior outlook.
About half of the increase comes from the segments, primarily Collins and the other half is from $0.13 of tax improvement and about $0.03 of lower corporate tax items.
The $0.13 tax benefit is driven by the ongoing optimization of the company's legal and financing structure that we expect to realize discretely in the third quarter.
On the cash side, given the improved earnings outlook, we now expect free cash flow in the range of $4.5 billion to $5 billion for the year.
With that, I'll hand it back to Greg to wrap things up.
So we're on the final slide here, Slide 11.
I just want to reiterate our priorities for 2021 and again, no surprises here.
These priorities remain the same that is first and foremost to continue to support our employees, our customers and our suppliers and communities during the pandemic, and to keep our employees safe.
Our team is dedicated to solving our customers' most complex problems by investing in differentiated technologies to capitalize on our strong franchises.
At the same time we're going to continue to execute on the integration and deliver the cost synergies and we're committed to operational excellence to drive further structural cost reduction across all of our businesses. | compname reports q3 earnings per share $6.15.
sees q4 non-gaap earnings per share $5.05 to $5.15.
q3 earnings per share $6.15.
q3 sales $3.85 billion.
estimates its tons sold will be down 5% to 8% in q4 of 2021 versus q3 of 2021.
estimates its average selling price per ton sold for q4 of 2021 will be up 5% to 7%.
compname says estimates its average selling price per ton sold for q4 of 2021 will be up 5% to 7%.
reliance steel & aluminum - sees demand impacted by normal seasonal factors incl.
customer holiday-related shutdowns, fewer shipping days in q4 versus q3.
qtrly average selling price per ton sold$2,862 versus $2,418 in q2. | 0 |
On our call today are David Gibbs, our CEO; Chris Turner, our Chief Financial Officer; and Dave Russell, our Senior Vice President and Corporate Controller.
Following remarks from David and Chris, we'll open the call to questions.
All system sales results exclude the impact of foreign currency.
Core operating profit growth figures exclude the impact of foreign currency and special items.
All two-year same-store sales growth figures are calculated using the geometric method.
For more information on our reporting calendar for each market, please visit the Financial Reports section of our website.
We are broadcasting this conference call via our website.
Please be advised that if you ask a question, it will be included in both our live conference and in any future use of the recording.
We would like to make you aware of upcoming Yum!
Investor events and the following.
Disclosures pertaining to outstanding debt in our restricted group capital structure will be provided at the time of the Form 10-Q filing.
Third quarter earnings will be released on October 28, 2021, with the conference call on the same day.
I'm excited to share our strong second quarter results as we delivered record second quarter unit development and 23% same-store sales growth.
Importantly, each division reported positive same-store sales growth on a two-year basis, a step up from first quarter trends.
This sustained momentum was underpinned by our investments in digital and off-premise and the adaptability of our brands to meet the needs of consumers in an ever-changing environment.
Though COVID obviously creates a more challenged operating environment, our confidence is stronger than ever in our ability to navigate the resulting uncertainties and in the long-term growth potential of Yum!
As a result, we are reinstating our long-term growth algorithm with one important change.
We are raising our previous guidance of 4% unit growth to between 4% and 5% unit growth.
As a reminder, our long-term growth algorithm includes 2% to 3% same-store sales growth and mid to high single-digit system sales growth leading to high single-digit core operating profit growth.
The diversification of our global portfolio, the resilience of our business model, and the agility of our teams are allowing us to compete and win in a full range of market conditions, including both those markets with accelerated recovery and markets still heavily impacted by COVID.
Looking forward, our iconic brands and unmatched scale, in combination with the world-class talent in our restaurant teams, franchisees, and above-store leaders, have uniquely positioned us for sustained growth.
Now we'll discuss our Recipe for Growth and our Q2 performance and the growth drivers that underpin it.
To start, I'll cover two growth drivers, namely Relevant, Easy and Distinctive brands or RED for short, and unrivaled culture and talent.
Then Chris will share more details of our Q2 results, our unmatched operating capability, and Bold Restaurant Development growth drivers and our strong liquidity and balance sheet position.
First, a few highlights from the quarter.
system sales grew 26%, driven by 23% same-store sales growth.
Importantly, same-store sales grew 4% on a two-year basis, which includes the impact of approximately 700 or about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021.
This was driven by continued strong sales momentum in North America, the U.K., and Australia, with improved performance in Europe as it began to reopen and show signs of recovery.
As I mentioned earlier, each of our brands delivered positive two-year same-store sales growth on a global basis, including the impact of temporary closures, and each brand also reported an improvement in the two-year trend from Q1.
This is a great indicator for the sustained strength and breadth of our recovery.
Even more exciting is the extremely strong net new unit growth of 603 units that we delivered during the quarter, which was both broad-based and record-setting.
Looking across the more than 150 countries in which we operate, we've seen that while the overall global trend is positive, the recovery will neither be consistent from country to country nor linear within a country.
This insight reinforces the competitive advantages of our diversified portfolio and our ability to serve customers through multiple on and off-premise channels.
We've seen that increased customer mobility driven by reopening trends and vaccinations contributed to strong performance in many of our markets.
A key growth driver for our business and priority for our teams is the continued acceleration of our digital and technology initiatives across the globe, geared toward providing customers with new and seamless ways to access our brands.
Even as economies continue to reopen, the importance of the off-premise occasion remains a top priority.
We delivered a second quarter record with over $5 billion in digital sales, a 35% increase over the prior year.
Even more exciting, for the first time, on a trailing 12-month basis, we delivered more than $20 billion in digital sales.
We believe these sales are highly incremental and result from our investments in our digital and technology ecosystem, which enable our teams to deliver an even more RED customer experience.
To bring the impact of our digital efforts to life, I want to share a few proof points.
The Taco Bell U.S. launch of our Taco Bell rewards program in 2020 has continued to grow digital sales for the brand with features such as loyalty member exclusives and early access to crave-worthy promotions.
We're incredibly excited by the early results from the program and the future growth opportunity that remains.
We're seeing significant uptick in frequency and higher spend per visit, leading to an increase in overall spend of 35% for active customers in the Taco Bell rewards program compared to their pre-loyalty behavior.
As another example, at KFC U.S., we launched our internally built KFC e-commerce website and app in early 2021, replacing our previous third-party solution.
As a result, our 2021 digital sales are on pace to soon surpass last year's full-year digital sales amount.
Now let's talk about our RED Brands.
Starting with the KFC division, which accounts for approximately 51% of our divisional operating profit, Q2 system sales grew 35%, driven by 30% same-store sales growth and 5% unit growth.
For the division, Q2 same-store sales grew 2% on a two-year basis, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021.
At KFC International, same-store sales grew 36% during the quarter.
Same-store sales declined 1% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
We had truly outstanding results in March, leading the recovery with double-digit two-year same-store sales growth in the U.K., Australia, Canada, and the Middle East.
Our strong off-premise capabilities, digital strength, and value offerings have continued to meet shifting consumer demand around the globe and there is opportunity for continued recovery as reopening and mobility increases globally.
Next, at KFC U.S., we continued to see strong momentum, with 11% same-store sales growth in Q2.
Importantly, same-store sales grew 19% on a two-year basis, owing to the continued strength of our group occasion business, the digital capabilities mentioned earlier, and our new chicken sandwich.
Our chicken sandwich performed exceptionally well and provides us with a solid platform to drive additional sales layers in the future.
Moving on to Pizza Hut, which accounts for approximately 17% of our divisional operating profit.
The division reported Q2 system sales growth of 10%, driven by 10% same-store sales growth.
While the division had a 3% unit decline versus last year, driven by the elevated COVID-related dislocations and closures of 2020, it has sustained its positive 2021 development momentum, delivering 1% unit growth relative to Q1.
Global Q2 same-store sales grew 1% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
Overall, Pizza Hut International same-store sales grew 16%.
Same-store sales declined 6% on a two-year basis, which includes the impact of about 2% of our stores being temporarily closed as of the end of Q2 2021.
Importantly, the off-premise channel achieved 21% same-store sales growth on a two-year basis for the quarter and delivery continued to be the primary driver of growth as the shift toward an off-premise model continues in most of our Pizza Hut markets.
The top line results from our Australia, Canada, Malaysia, and our U.K. delivery business are shining examples of what it means to nail the RED Brand strategy.
These markets continue to unlock off-premise growth opportunities through a focus on value and innovation, a digital-first customer experience, and distinctive communications with the help of our magnetic ambassadors, spokespeople who bring our brand to life across the world.
At Pizza Hut U.S., we continue to see positive same-store sales with 4% overall same-store sales growth.
On a two-year basis, the off-premise channel grew 18% and overall same-store sales grew 9%, which includes the impact of about 1% of our stores being temporarily closed as of the end of Q2 2021.
Pizza Hut also delivered strong product news with the continued success of our iconic stuffed crust pizza and the successful return of a consumer favorite, the Edge Pizza during the quarter.
As for Taco Bell, which accounts for approximately 31% of our divisional operating profit, Q2 system sales grew 24%, driven by a 21% same-store sales growth and 2% unit growth.
For the division, Q2 same-store sales grew 12% on a two-year basis.
The quarter kicked off with the return of the Quesalupa as part of the fan-favorite $5 Chalupa Cravings Box, followed by the relaunch of the iconic Naked Chicken Chalupa.
In May, we launched our first-ever global brand campaign, #ISeeATaco, in which fans could score a free taco when the moon looked like a taco.
We generated over 2 billion impressions and step-change brand awareness, especially in our international markets where we have a tremendous run rate for growth.
And finally, the Habit Burger Grill delivered 31% same-store sales growth and 6% unit growth.
Q2 same-store sales grew 7% on a two-year basis.
Importantly, digital sales continued to mix over 35%, only a modest pullback from Q1, even as dining rooms continued reopening and dine-in sales saw a steady improvement throughout the quarter.
On the innovation front, we introduced the Brunch Charburger during the quarter, a unique all-day breakfast offering that included crisp golden tots, house-made secret sauce and a freshly cracked egg.
In addition to providing customers with a seamless experience to access our brands, we continue to invest in restaurant technology initiatives that make it easier for our team members to operate and run a restaurant.
As previously announced in the quarter, we've agreed to acquire Dragontail Technologies, a cutting-edge restaurant technology company, whose platform is focused on optimizing and managing the entire food preparation process from order through delivery, including automating the kitchen flow, driver dispatch, and customer order tracking.
The acquisition is subject to various approvals and we expect to close by the end of the third quarter.
An important factor of RED Brands is having a positive impact and the desire to make good easy for customers.
Our Recipe for Good framework focuses on our commitment to investing in the right recipe today.
We were proud to publish our 2020 Recipe for Good report this week, which highlights our strategic investments in socially responsible growth and sustainable stewardship of our people, food and impact on the planet.
The report includes updates on our key commitments on critical issues like climate change and equity and inclusion.
I'm confident that our plans in these areas have the right ingredients for us to succeed and make a positive impact for our people, franchisees, customers, and communities.
Now to unrivaled culture and talent.
Two of our key assets are our iconic brands and the people that bring our brands to life around the world every day.
As I've mentioned in previous quarters, COVID has further strengthened the collaboration partnership across our entire system.
A great example of this is our relationship with our independent supply chain purchasing co-op in the U.S., RSCS.
Many of you probably saw the recent announcement that the CEO of RSCS, Steve McCormick has made the decision to retire in early 2022 and that RSCS Chief Operating Officer, Todd Imhoff, was unanimously selected to succeed Steve in the role of CEO.
Steve has had a tremendous and positive impact on our business for nearly a decade and our entire system is grateful for his leadership.
At the same time, Todd is the right leader to step into this role and lead the RSCS moving forward as it continues to provide a true competitive advantage for our entire U.S. business.
Our unrivaled culture and talent has always been a towering strength of Yum!
and I'm incredibly proud of our ability to bring our brands and people together in ways we haven't in the past.
During the quarter, we hosted several virtual meetings where we fostered collaborations on a global scale for our franchisees and teams, including marketing, planning meetings, ops, development programs, a global finance summit, leaning with leaders sessions, and companywide chats just to name a few.
It's during these meetings that we realize we are all more alike than we are different and the power that our brands and our culture have to bring people together.
To wrap up, I'm pleased with the sustained momentum in our business and the agility we've shown in the last year and I'm optimistic that we are set up to win.
Our results demonstrate the resilience of our diversified global business and confidence in our strategies, which are fueled by the underlying health of our franchise system.
We are poised to accelerate growth and maximize value creation for all our stakeholders for years to come.
With that, Chris, over to you.
Today, I'll discuss our second quarter results, our unmatched operating capability, and Bold Restaurant Development growth drivers, and our solid liquidity and balance sheet position.
To begin, let's discuss Q2.
system sales grew 26%, driven by 23% same-store sales growth.
On a two-year basis, same-store sales grew 4%, which includes the negative impact of about 1% of our stores being temporarily closed due to COVID as of the end of Q2 2021.
We delivered 2% unit growth year-over-year, which included a Q2 record of 603 net new units.
EPS, excluding special items, was $1.16, representing a 41% increase compared to ex-special earnings per share of $0.82 in Q2 2020.
Core operating profit grew 53% in the second quarter, driven by accelerated same-store sales growth in several developed markets at KFC, the combination of strong sales and restaurant margin growth at Taco Bell and a year-over-year benefit associated with reserves for franchisee accounts receivable.
At Taco Bell, company restaurant margins were 25.9%, 1.4 points higher than prior year.
Favorable sales flow-through was partially offset by labor and commodity inflation, as well as increasing semi-variable costs as we return to normal operations.
As mentioned on our previous call, we expect these margins to return closer to historical pre-COVID levels later this year given inflationary pressures, along with increased staffing at our restaurants as a result of increases in dining room patronage and a return toward our historical daypart mix.
During Q2, we continued to see recoveries of amounts past due, primarily led by KFC International.
These recoveries resulted in a $4 million net benefit to operating profit related to bad debt during the quarter, representing a $17 million year-over-year tailwind to operating profit growth as we lapped $13 million of expense in Q2 2020.
As a reminder, we ended 2020 with $12 million of full-year bad debt expense with large quarterly swings due to COVID.
As such, we expect year-over-year operating profit growth to be negatively impacted in the second half as we lap bad debt recoveries of $21 million and $8 million in Q3 and Q4, respectively.
While difficult to forecast, at this point, we still don't expect bad debt to significantly impact our year-over-year operating profit growth on a full-year basis.
General and administrative expenses were $230 million.
Full-year 2021 G&A is expected to be back-end weighted, as it has been historically.
We now estimate that our consolidated G&A expenses will be approximately $1 billion for the full year 2021, a slight increase from our Q1 estimate attributable to increased incentive-based compensation.
Our commitment to be an efficient growth company that leverages fixed costs with our unique scale benefits is unchanged and we expect our G&A to system sales ratio to move back toward our historic ratio as sustained growth continues.
Reported interest expense was $159 million, an increase of 21% compared to Q2 2020, driven by a special item charge of $34 million related to early redemption of restricted group bonds during the quarter.
Interest expense, ex-special, was approximately $125 million, a decrease of 5%, driven by recent refinancing actions and the elimination of revolver balances held in the prior year.
We still expect our 2021 interest expense to be approximately $500 million, excluding the previously mentioned $34 million special item charge similar to 2020.
We plan to continue to take advantage of favorable market conditions to refinance debt at attractive rates.
As a reminder, this will result in higher one-time expenses that will be favorable to interest expense going forward.
Capital expenditures, net of refranchising proceeds, were $16 million for the quarter.
As we've discussed on prior earnings calls, we believe roughly $250 million in annual gross capex appropriately balances the inherent needs of the business, with opportunities to invest in technology initiatives and strategic development of equity stores.
We still anticipate at least $50 million in annual proceeds from refranchising, which will fund the strategic equity store investments.
Now on to our unmatched operating capability growth driver.
Our restaurants are operated by world-class franchisees who are experienced and competing and winning in any environment.
It's well known that the U.S. is facing a competitive labor market, which is more pronounced relative to other markets across our diverse global footprint.
We and our franchisees are leaning into our unrivaled culture, which differentiates our brands to compete in a tight labor market with a focus on retention and recruiting.
I'll add some color by sharing examples from our Taco Bell company restaurants.
I'll start first with recruitment.
We posted hiring parties, which have led to a significant uptick in employee hires.
We also launched a fast apply option to make the application process easier and more efficient by reducing the application time from eight minutes to two minutes.
On the retention front, we've supported and rewarded our team members by offering a variety of incentives, including paid time off, free family meals, and increased employee development activities to name a few.
We've always prioritized investing in our people and we recognize the importance now more than ever to ensure we maintain focus on our unmatched operating capability to deliver a RED customer experience.
At the same time, our system is well positioned to sustain strong unit economics while managing the inflationary environment related to labor market dynamics and commodity cost trends.
On the commodity front, there is no one better equipped to navigate this environment, given our massive cross-brand purchasing scale through our domestic supply chain co-op RSCS, that gives our franchisees many benefits, including advantaged end to end sourcing and supply chain costs.
We are also confident in the pricing power of our brands and partner closely with our franchisees as they make strategic pricing decisions in their respective markets to deal with cost pressures while still providing customers with relevant value and distinctive products.
As David mentioned earlier, we are also prioritizing investments in restaurant technology initiatives that make it easier for our team members to operate a restaurant while also providing an enhanced customer experience.
As an example, Pizza Hut International continues to demonstrate significant momentum on this front, as evidenced by increased customer satisfaction metrics.
Their improvements are fueled by continued adoption of frictionless restaurant technology, including our in-house intelligent coaching app called HutBot that launched at the end of 2020 and is now live in 40 markets, covering 4,000 restaurants.
HutBot eases the daily management of our stores with the RTM, leading to a better customer experience.
At Taco Bell, we've continued excelling at serving more customers through our drive-thrus.
We had our sixth consecutive quarter of under four-minute drive-thru order to delivery time.
Speed for Q2 was six seconds faster than Q2 2020 and our teams served 4 million more cars compared to the same quarter last year.
A huge shout out to our operators and team members for continuing to break records in speed with the increased demand in off-premise.
The drive-thru experience is an increasingly critical competitive advantage for our brands.
So these improvements position us well to win going forward.
That's a perfect segue to our Bold Restaurant Development growth driver, which I'm particularly thrilled to speak about today.
Our net new unit growth of 603 during the quarter was broad based across brands and geographies, making this not only a record quarter, but also capping a record first half.
These results speak to the strength of our iconic brands in growing food categories supported by a healthy, well capitalized franchise system primed for sustained growth.
Most notably, KFC opened 428 net new units during the quarter with significant builds in China, Russia, India, Latin America, and Thailand, contributing to 5% unit growth year-over-year.
As many of you know, KFC has the first-mover advantage in several emerging markets with a strong domestic footprint upon which to grow.
This impressive development quarter from KFC speaks to the power of this global brand and the unit economics that underpin it.
Pizza Hut has sustained its positive 2021 development momentum, delivering 1% unit growth relative to Q1, underpinned by the strength in gross openings and moderating store closures.
Pizza Hut opened 99 net new units during the quarter, led by strong development in China, India, and Asia.
Taco Bell opened 74 net new units and we're excited to share that Taco Bell International had its best development quarter ever, opening 30 net new units led by Spain and the U.K. In the U.S., we opened our flagship Taco Bell Cantina in Times Square, with a digital forward footprint and personalized experience.
Overall, we are pleased with the momentum in the first half of the year and we're extremely proud to announce 4% to 5% unit growth guidance, led by development from all four brands across our footprint.
Next I'll provide an update on our balance sheet and liquidity position and priorities for capital allocation.
We ended Q2 with cash and cash equivalents of approximately $552 million, excluding restricted cash.
The strong recovery in EBITDA during Q2 drove our consolidated net leverage down to approximately 4.5 times, temporarily below our target of approximately 5 times.
During the quarter, we repurchased 2.1 million shares, totaling $255 million at an average price per share of $119.
Year-to-date, we've repurchased $530 million of shares at an average price of $112.
Finally, our capital priorities remain unchanged: invest in the business, maintain a healthy balance sheet, pay a competitive dividend, and return the remaining excess cash flows to shareholders via repurchases.
Overall, I'm extremely proud of our Q2 results, the resilience of our business model, and the agility of our teams.
With that, operator, we are ready to take any questions. | q4 adjusted earnings per share $3.64.
board of directors has authorized a new $500 million stock repurchase program to commence in q1.
expect 2022 to be another strong year. | 0 |
First, I hope everyone is safe and healthy given the virus is going on.
But this is Al Nahmad, Chairman and CEO, and with me is AJ Nahmad, President; our two Executive Vice Presidents, Paul Johnston and Barry Logan; and Rick Gomez, Vice President.
Now, I'm pleased to share that Watsco delivered another record quarter.
New records were achieved in virtually every performance metric.
Earnings per share jumped 31% to a record $3.62 per share on a 32% increase in net income.
Sales grew 16% or nearly $250 million during the quarter to a record $1,780 million.
Gross profit increased 29% with gross margins expanding 280 basis points.
Operating income increased $50 million or 32% to a record $207 million.
Operating margins expanded 100 basis points to a record 11.6%, and cash flow for the quarter was a record $238 million.
Today's results are all the more positive when considered against last year's record results and in light of the industry wide supply challenges that are still going on.
Our teams throughout all of Watsco are doing an extraordinary job taking care of customers and that has made a big difference.
We also ended the quarter with a strong balance sheet with virtually no debt and cash for $137 million.
This financial strength provides us the flexibility to invest in most any size opportunity.
An important fundamental is Watsco geographic coverage and our large number of locations across many markets.
The diversity and markets we serve reduces volatility and provides stability during a difficult operating environment such as the one we are witnessing.
Also our large and growing customer base is increasingly equipped with our state-of-the-art technology that helps our customers grow their business and purchase more from us.
Another advantage now and in the future is our offerings of the broadest variety of products and brands in the industry, the depth and diversity of our product offerings to continue to serve us well.
We're optimistic about current market conditions, let me say that again optimistic about current market conditions and recent trends and market demand remain strong and we see signs of improvement in our OEM's ability to help us to fulfill that demand.
Looking ahead, the industry will experience more change in the years to come as minimum SEER standards rise, that's normally will -- done by the federal government by the way and refrigerant changes that take shape in the coming years.
And with changes come opportunities.
We believe that our long-term focus are scale, speed to market, relationship with OEMs, technology offerings position us better than anyone to capitalize on these upcoming changes.
We are living in unusual times but could not be more positive and excited about the future of the industry and our role in it.
Now let's go on to our Q&A. | watsco q3 earnings per share $2.76.
watsco earnings per share jumps 25% setting new records for sales, operating profit, net income and operating margins during third quarter.
q3 earnings per share $2.76. | 0 |
During today's call, we will also reference non-GAAP metrics.
I hope that all of you and your families are staying safe as we deal with these unprecedented times.
One thing the pandemic has brought to light is the hard work of everyday heroes.
So I want to express our profound appreciation for the frontline workers that keep the world moving forward and that includes thousands of Donaldson employees.
I'm always impressed by our employees.
But I'm particularly proud of their performance during the pandemic.
Every day, they show up with relentless customer-first attitude, which is more important than ever as we support critical markets like agriculture, transportation, and food and beverage.
Since the outbreak began, our decision making has been guided by three priorities, supporting the health and safety of our employees, delivering on our customer commitments and doing our part in reducing the transmission of the virus.
Providing a safe work environment is always a top priority, but we intensified our efforts.
We have significantly limited business travel, implemented a thorough cleaning regimen in factories and office spaces, instituted remote work policies for all that are able and introduced COVID-related paid leave while promoting existing employee assistance programs.
Our crisis response team reviews these protocols regularly and we adjust when appropriate.
Social distancing practices and enhanced cleaning schedules will be in place for the foreseeable future and we are reopening our offices in various locations around the world.
The pace of bringing our employees back to the office will be dictated by guidance from health experts along with our own assessments of workplace readiness.
We are taking a cautious approach and we will remain flexible as we execute these plans.
I also want to provide an update on the status of our operations.
Overall, we're in a good position and have not experienced meaningful disruption.
Our success can be attributed to a handful of factors, starting with our footprint.
We have a region to support region production strategy and that allows us to be nimble and flex appropriately based on local conditions.
That has been incredibly valuable as the pandemic affected different parts of the world in different ways, at different times.
Additionally, our defense -- our diverse portfolio of businesses is heavily biased toward replacement parts and essential or critical markets giving us the opportunity to continue production during government-mandated shutdowns.
These structural benefits have been brought to life by our excellent team.
There has been an unprecedented level of collaboration and coordination among us, our suppliers and our customers, and our teams are acting quickly and decisively to mitigate risks and deliver on our commitments.
Of course, things are still uneven.
So I want to provide a run down of our operational situation today.
The Asia-Pacific region is in recovery mode with China furthest along.
Conditions in India are still tighter than other countries, but that has been loosening, and we are on a good path.
Europe is in various stages of reopening and our supply chain risk has gone down over the past month.
The temporary shutdowns due to government mandates have been lifted and we are stabilizing rapidly.
The Americas are further behind on the recovery curve with varying degrees of lockdowns continuing in South America, while large customers in North America only recently began reopening their factories.
The global situation has been improving in recent weeks.
All our critical suppliers are online and our production employees are at work and engaged.
Based on these factors, I am confident we can continue supporting our customers around the world.
I'm going to turn now to a brief overview of our third quarter sales, which were slightly better than we expected based on a strong finish in April.
Total sales for the quarter were down 11.7% from the prior year, or 9.7% without the currency headwind.
Engine segment sales were down 14%, reflecting a sharp decline in our first-fit businesses.
While it is impossible to precisely estimate the impact of COVID-19 on our results, our first-fit businesses were clearly under pressure as many large customers stopped producing equipment during the quarter.
In our On-Road, sales were down 47% as customer shutdowns were compounded by an already weak truck market in the US and China.
As a reminder, our first-fit On-Road business is only about 5% of total revenue.
So our aggregate exposure to the truck market is limited.
In the US, which is the largest portion of our On-Road business, third-party data indicates that our sales fared better than total Class 8 truck production.
Based on our track record of program wins, we are well positioned to have a strong performance when this market recovers.
Third quarter sales of Off-Road products were down 25%, with more than half the decline coming from Exhaust and Emissions.
We are comparing against a large increase in Europe last year related to pre-buys for an upcoming regulatory change.
So we expected pressure this fiscal year.
As a side note, we continue to work on the transaction related to the sale of our Exhaust and Emissions business to Nelson Global Products.
We will provide more details as we have them, but for now, I want to reiterate our commitment to the strong relationships we have with our employees, customers and suppliers.
Excluding Exhaust and Emissions, third quarter sales of our filtration-related Off-Road products were down in the mid-teens.
On a relative basis, products for the agriculture market performed better than the construction and mining markets, and overall global demand for new equipment remains under pressure.
Engine Aftermarket performed much better than our first-fit businesses in the quarter and results were mixed by channel and region.
The total aftermarket decline of 8% was primarily due to a low double-digit decline in sales through the independent channel.
The pandemic is contributing to lower equipment utilization and that impact was compounded in the US by the collapse of the oil and gas market.
Economic and geopolitical uncertainty in Latin America added to the pressure, but share gains in Eastern Europe and China were notable offsets as we build our presence in these markets.
Sales through the OE channel of Aftermarket were down only slightly in the quarter and up in local currency.
We believe a portion of the demand was from large OE customers buying inventory ahead of need, so we expect additional volatility in future periods.
Rounding out the Engine segment, sales of Aerospace and Defense were about flat with last year.
As expected, the commercial fixed-wing market is under pressure, but we were able to largely offset the impact with growth in filters for ground defense vehicles and helicopters.
Turning to the Industrial segment, sales were down 6% in third quarter, driven by a 12% decline in Industrial Filtration Solutions or IFS.
Our dust collection business, which makes up 60% of IFS, was hit hard by the pandemic.
Our quoting activity and replacement demand were under pressure as economic uncertainty went up and global industrial production dropped.
We remain confident in our value proposition and expect that quoting will go back up as the economy reopens, but it is too soon to say how long that will take.
But, we are not just waiting for the recovery.
Our industrial air filtration team has done an excellent job, engaging our customers with things like virtual trainings, reinforcing our brand as a strategic and supportive partner.
The pandemic has also given us an opportunity to demonstrate our value proposition in Process Filtration.
Sales in Europe and the US, our two largest markets, were both up year-over-year, and in local currency.
Sales for all Process Filtration were up in the low single digits.
We continue to expand our share in the food and beverage market and this business remains a strong contributor to our future growth and profit margin expansion.
Third quarter sales in Gas Turbine Systems or GTS were up 6% driven by strong sales for retrofit projects.
Like the large turbine projects, retrofit sales can be lumpy.
We had a solid performance last quarter and we remain very proud of the improved profitability in GTS.
Special Applications' sales were up 5% in the third quarter, driven by strong growth in Disk Drive and Venting Solutions.
Our Disk Drive business continues to benefit from share gains and increased expansion of nearline storage for the cloud and growth in venting is related to value-added solutions for batteries and powertrains in passenger cars.
Given the state of the auto industry, the venting performance was particularly impressive.
We are leveraging our technology and pressing into a new market to meet an expanding need.
There are powerful examples across the company of how innovation is driving results and the pandemic has not changed our long-term priorities.
I'll talk more about that later.
Before turning the call to Scott, I want to provide a few comments on trends in May.
Total sales for the month are expected to be down about 24% from last year.
Many of our large OE customers reopened facilities in the month, but we did not see much of a rebound, which may relate to the inventory building that occurred during our third quarter.
On a regional basis, sales trends are consistent with what we saw in third quarter.
Asia-Pacific is performing the best, while sales in the Americas are the weakest.
Sales in China were up in the month, which is the best performance we've seen in a while, but there is also quite a bit of uncertainty related to the durability of the increase.
So we are more cautious than optimistic at this point.
The situation in both North and South America remains challenging and it is hard to find bright spots in those geographies today.
In terms of product sales, replacement parts are predictably doing better than new equipment.
Businesses like Engine Aftermarket and Process Filtration offer a bit of relative stability, while new equipment production for engine-related products and capital investment for dust collection systems were still under pressure.
While we would not typically go into detail on the current quarter trends, we felt it was important to give a little more context, given the extraordinary pace of change.
As we contemplate the final two months of this fiscal year and our plans for fiscal '21, we will remain focused on executing those things under our control, including promoting the safety and well-being of our employees, maintaining tight control on discretionary expenses, making targeted investments to support near and long-term growth priorities and protecting the strength of our financial position.
I want to echo Tod's sentiment.
Donaldson has great employees.
The way we work has changed rapidly during the pandemic and our teams have stayed connected, remained productive and delivered results.
As predicted, third quarter was a volatile period, the demand environment deteriorated per month demand and things became more uncertain as COVID-19 spread broadly.
Unfortunately, the situation is still unclear.
Economic conditions are varied by region and market, resulting in an uneven and unpredictable demand.
Given that, we feel it's prudent to continue to withhold fiscal '20 and '21 guidance for our key financial metrics.
I will however talk about some general expectations during my remarks, so I'll turn now to a recap of third quarter performance.
All things considered, we are in a good position today.
Despite a sales decline of 12%, our third quarter EBITDA margin was flat with the prior year.
Additionally, our decremental margin was about 19%, which is significantly better than our historic average in the mid to high 20% range.
The favorability was due in part to the product mix and lower incentive compensation.
So let me take you through some of the puts and takes.
Third quarter operating margin was 13.4% compared with 14% in the prior year.
Loss of leverage on lower sales was a primary driver of the decline and that impact was compounded by higher depreciation related to our capacity expansion projects.
Based on the nature of these investments, the third quarter depreciation impact was skewed toward gross margin in the Engine segment.
Overall, our teams are doing an excellent job mitigating the pressure created by lower sales.
In terms of gross margin, plant managers are quickly adjusting labor to account for changes in demand and our procurement and supply chain teams continue to drive optimization initiatives that will have long-term benefits.
These efforts, combined with favorable mix of sales and lower raw material costs, narrowed the third quarter gross margin decrease to 60 basis points.
Additionally, we had strong operating expense performance in the third quarter.
On a dollar basis, operating expenses were at the lowest level in three years, which comes at the three years of incremental investments related to our Advanced and Accelerate portfolio and R&D capabilities.
I want to add that we are not pausing investments in these initiatives, which are critical to our long-term growth plans.
As a rate of sales, third quarter operating expenses were up only slightly from the prior year.
We had favorability from incentive compensation, which was down nearly $6 million and discretionary expenses were significantly reduced in relation to COVID-19.
Despite the near-term pressures from the pandemic, we are pushing forward on our margin initiatives.
New capacity that brings a lower cost to manufacturers coming online, we are steadily adjusting the supply chain, our procurement teams are driving cost reductions and our commercial teams continue to manage pricing.
The list is the same as what we have been sharing for more than a year.
These are our top priorities, and regardless of the macro backdrop, we feel confident in our ability to continue making progress.
We also feel confident in our financial position.
At the end of the third quarter, our leverage ratio was 1.0 times net debt to EBITDA, which is where we were at the end of the second quarter and right in line with our long-term target.
Working capital was down from the prior year, driven by reductions to receivables and inventories and our cash conversion in the quarter was 98%.
We continue to work with our suppliers and customers to manage credit and supply chain risk and we are also working with our valued banking partners to further bolster our liquidity position.
Out of an abundance of caution, we drew an additional $100 million from our revolving credit facility during third quarter.
Then, later in May, we entered into an additional 364-day credit agreement that gives us access to another $100 million.
At the same time, our pace of capital expenditures has decelerated.
Third quarter capex declined by more than 40% and the spend trajectory is consistent with what we communicated previously.
Importantly, the projects were already in various stages of completion as COVID-19 spread.
So we could finish these projects without putting our financial position at risk.
Although the demand environment today is materially different than it was a year ago, we still feel confident that these projects will improve our cost structure, strengthen our customer service at local level and position us to grow in strategically important markets and geographies.
Let me share a few examples of what we're working on.
We are setting up our first PowerCore line in China to support new program wins with local manufacturers.
We doubled the production cap capacity for Process Filtration, position us for larger presence in the food and beverage industry, and new capacity in the Americas and Europe allows us to optimize the point of manufacturer for Engine-related projects.
We still have a little work to do, but our teams are working hard to get them online soon.
Returning cash to shareholders is another important part of our capital deployment priorities.
We are committed to the quarterly dividend, which has been paid every year for more than 60 years and increased annually for 24 years in a row.
As I said to many of you, that's an awesome track record and I don't want to be the person that messes it up.
Share repurchase has always been the more variable component of our capital deployment.
We have been regularly repurchasing our shares for decades and we know that's a valuable activity to many of our shareholders.
We take a thoughtful and measured approach in the execution of our share repurchase plans.
Our minimum objective in any given year is to offset the dilution related to stock-based compensation, which is about 1% of shares.
The level of repurchase beyond that amount is governed by our balance sheet and other opportunities to deploy capital.
We repurchased 1.6% of outstanding shares so far this year.
Based on the uncertainty created by the pandemic, we do not expect additional share repurchase in fourth quarter.
As the situation of the pandemic evolves, we will continue to prioritize a strong financial position and remain focused on executing our strategic priorities.
That has been our approach for a very long time, and we believe it will serve us well for a long time to come.
Donaldson Company turns 105 this year.
We have experience with every type of economic environment and we have always emerged to become an even stronger company.
Our playbook is simple and consistent.
We leverage our deep technical expertise to build a portfolio of filtration capabilities that we deploy into a diverse set of markets.
We are a returns-focused company.
We think long term, while maintaining a clear focus on those things we control in the near term.
The pandemic has no impact on this playbook or our strategic priorities, which always starts with technology.
Along those lines, I'm very excited to share that our new Material Research Center is nearing completion.
This R&D facility is a $15 million investment in building our material science capabilities.
We leveraged some of this know-how in our Process Filtration business today, but the new facility is going to give us significantly stronger platform.
We plan to further penetrate the food and beverage market followed by future expansion in specialty chemicals, electronics, and eventually life sciences.
These markets are less cyclical, highly technical, and therefore highly profitable, making them an attractive complement to our strong Engine business.
Technology remains a core part of our Engine strategy as well.
We want to win new business with products that drive aftermarket retention.
While the pandemic has created uncertainty, we are still working with large OE customers on new programs and their demand for proprietary products is going up as they look to grow their parts business.
Through our technology, Donaldson becomes a core part of the customers' growth strategy, giving us a wide competitive mode.
The value of these products to our company has been demonstrated year after year, so we continue to make investments.
We recently introduced the new generation PowerCore filter called PowerCore Edge.
It has the smallest footprint of any generation yet and our world-class media makes it an excellent solution for Off-Road applications that face heavy dust environments.
PowerCore Edge will be another powerful tool for driving long-term share gains in our core markets.
Additionally, we are building our first PowerCore line in China.
As large Chinese manufacturers move up the technology curve, a couple of things happened that create opportunity for us.
First, a higher performing piece of equipment requires more advanced filtration.
With our strong global brand, decade-long presence in the country, and significant experience supporting world-class OEMs, we are a natural partner for the Chinese manufacturers.
Second, when end users buy a more expensive piece of equipment, they are more likely to maintain it properly.
That makes PowerCore particularly interesting.
As the replacement cycle is created in China, retaining the parts business is now valuable to those manufacturers.
Advancing our R&D capabilities and growing our portfolio of innovative products are what we would consider standard work at Donaldson.
As I mentioned, we think long term and we are committed to creating value for all our stakeholders.
I am confident we can deliver on that commitment because we have dedicated, talented and incredibly smart teams in every part of our company.
I'm proud to be on the team with them. | withdrew financial targets for fy 2020 and 2021.
expects may 2020 sales to be down about 24%.
donaldson company - continues to work through process of the binding offer received from nelson global products. | 1 |
We appreciate your interest in Vulcan Materials Company, and hope that you and your families continue to be safe and healthy.
This is our first earnings call since closing the U.S. Concrete acquisition in late August.
Therefore, Id like to begin by welcoming the former U.S. Concrete employees and customers to our Vulcan family.
Despite these challenges, our team managed our controllable costs, move pricing higher in all segments and importantly, expanded our aggregates unit profitability for the 13th consecutive quarter.
We generated $418 million of adjusted EBITDA this quarter, an increase of 4% as compared to last year.
Profitability for the quarter was held back by factors I mentioned earlier, energy inflation was a significant $30 million headwind.
Unit diesel prices were up over 50%, leading to $14 million of additional expense.
The cost of liquid asphalt was over $100 per ton higher than last year.
This sharp increase impacted our results by $16 million.
And finally, labor constraints, especially for truck drivers, have caused delays and inefficiencies in our operations as well as those of our customers.
Even with these headwinds, we improved our aggregate cash gross profit per ton by 3% and to $7.74.
This was achieved through consistent execution of our four strategic disciplines which helped to drive volume growth, higher pricing and improved operating efficiencies.
This strong performance and the momentum it provides sets us up well for 22, especially with respect to pricing.
Total aggregate volume, including U.S. Concrete, increased by 8% versus last years quarter.
On a same-store basis, volume was up 5%.
This reflects continued improvement in demand across all end markets.
The pricing environment in aggregates continues to be very positive across our footprint.
Same-store prices were up 3.1% in the quarter and mix adjusted prices increased by 3.5%.
We saw our early price increases gain traction and as a result, year-over-year average selling prices improved sequentially each quarter this year.
Although inflationary pressures can create short- to medium-term headwinds, the combination of inflation and improving visibility to demand has and will continue to create a favorable environment for price increases.
Operating efficiencies and disciplined cost control helped to offset some of the higher input costs we experienced.
On a same-store basis, our aggregates unit cost of sales in the quarter increased by only 1.7% as compared to last year.
Now excluding the diesel effect, unit cost of sales actually decreased by 1%.
While costs will be lumpy, we have delivered comparable results for the trailing 12-month period.
This solid performance in aggregates helped to more than offset reduced profitability in non-aggregates segment.
Our Asphalt business was notably affected by both higher energy costs and wet weather.
Quarterly gross profit in the segment fell from $30 million to $7 million.
Higher liquid asphalt costs accounted for $16 million of this difference.
We also experienced a rise in natural gas prices, which in turn impacted our plant production costs.
Asphalt volume declined by 8% as volume growth in California was more than offset by lower Arizona volumes due to extremely wet weather.
Average selling prices improved by almost 2% year-over-year and better than 2% sequentially, evidence that pricing actions are beginning to ease some of the illiquid asphalt inflation.
I would expect continued price improvement as we pass along higher costs.
In the Concrete segment, gross profit increased by 18%, reflecting our ownership of U.S. Concrete for one month.
Same-store volumes declined by 7% due to the completion of large projects in Virginia and the availability of drivers to make up for any lost shipping days.
For the quarter, same-store prices increased by 2%.
Turning now to the demand picture.
The story is relatively unchanged from the second quarter.
Demand has improved across all of our major end markets as well as geographies.
The residential end-use has shown continued strength with solid starts in single-family housing.
Multifamily starts have also performed well.
With respect to the nonresidential end market, improvement continues at a number of leading indicators we track.
From its low point early this year, starts have consistently improved, returning to growth in recent months.
The level of highway starts are up as states have moved back to more normal funding levels with Vulcan markets outpacing other markets.
We look forward to the enactment of the bipartisan infrastructure bill and the significant impact on volumes for years to come.
Now looking forward, I want to briefly touch on our growth strategy and give a very preliminary view of 2022.
As we shared on past calls, we have three paths to growth.
These three are organic growth, M&A and greenfields.
Earnings growth in the underlying business is at the core of our growth strategy because it provides the most attractive and compelling value proposition on a risk-adjusted basis.
The benefits of this focus are clear as we expand our industry-leading unit profitability despite the macro challenges we may face from time to time.
We look for strategic opportunities that naturally complement our principal aggregates business.
Given our leading market position, we have visibility to all deals that come to the market.
The key is for us to be disciplined as we consider which deals to pursue.
All opportunities are not created equal, and we want to do the deals that create the most value over time.
And as the final pillar to our growth strategy is the development of greenfield sites.
There are times when an acquisition target is not available in a particular growth quarter.
If that is the case, we turn to new greenfield sites, and we have a long successful history of developing them.
During this quarter, we completed the U.S. Concrete acquisition and were excited about the strategic fit and how it naturally complements our principal aggregates business in California, Texas and Virginia and gives us access to new platforms in New York and New Jersey.
Already, our teams are working together to identify strategic opportunities.
As you would expect, we are taking a thoughtful approach to integration to ensure that we capture all available synergies.
Its still early days on the integration.
We intend to give you a more detailed briefing in February, but were pleased with the wins weve seen so far.
We are confident in our ability to generate at least $50 million of synergies on a 12-month run basis beginning midyear next year, when most of the integration is complete, but more to come.
Suzanne will cover some additional highlights of the quarter and share our latest financial view on how we expect to finish 2021.
The 2021 demand and inflationary environment sets us up well as we head into 2022.
A key to our pricing strategy, were starting early in the spring with announced price increases.
In certain markets, we launched further increases.
These increases are evident in our sequential quarterly pricing growth.
Already, we are discussing 2022 pricing expectations with customers.
Clearly, we need to see where those conversations lead.
But at this stage, I would be surprised if next years price increases are not at least 5%.
The demand picture also looks good leaning into 2022, although we are watching the labor situation closely.
If labor constraints do continue, its important to remember that the work is still there.
It may just proceed at a slower pace.
Effectively, extending the recovery and allowing us the opportunity to compound price, control costs and still grow earnings.
Weve covered the key financial and operational highlights already.
So Id like to speak to the following topics: First, our balance sheet strength and capital allocation priorities; second, our return on invested capital; and finally, our financial guidance for 2021.
With respect to the balance sheet, we will continue to prioritize sensible leverage and financial flexibility in order to support our capital allocation strategy and maintain our investment-grade rating.
The structure of our debt is sound with long maturities that make sense for our business.
Due to our strong cash generation, we were able to reduce our net debt-to-EBITDA leverage ratio to 2.7 times following the U.S. Concrete acquisition.
This is just above our stated range of two to 2.5 times and we will be focused on getting back within that range in the near term.
Our capital allocation priorities remain unchanged and the consistent application of those while maintaining a sensible leverage range has allowed us to improve our return on investment over the past three years.
For Legacy Vulcan, the return was 14.7%, up 240 basis points from three years ago, with the inclusion of one month of U.S. Concrete earnings, and a 1-quarter impact of the acquisition on average invested capital, our return was 14.2%.
Well continue to focus on the sequential improvement of returns.
Our guidance incorporates U.S. Concretes expected EBITDA contribution since acquisition as well as recent trends in demand, price and costs.
Our adjusted EBITDA guidance range for the full year is now $1.43 billion to $1.46 billion.
This includes $50 million to $60 million of EBITDA from the acquisition, but excludes $115 million gain on a land sale completed in the first quarter.
Im sure there will be a number of questions on business trends and the outlook in the Q&A section.
Our people are what makes Vulcan better every day.
We have and will always operate Vulcan for the long term.
This means a strong emphasis on keeping our people safe and continuously improving our already strong culture.
Local execution is key to driving improvements in our business, particularly around our strategic disciplines.
As we move forward, we will seek to maximize synergies with U.S. Concrete.
As always, for Vulcan, we will maximize unit margin expansion through our four strategic disciplines.
And remember, improving financial returns is of paramount importance. | qtrly total revenues $1,309.9 million versus $ 1,418.8 million.
expect full-year 2020 adjusted ebitda of $1.285 billion to $1.315 billion. | 0 |
This is Ramesh Shettigar, Vice President of Investor Relations and Corporate Treasurer.
On the call today to present our second quarter results are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer; and Sam Hillard, Senior Vice President and Chief Financial Officer.
These statements speak only as of today, and we undertake no obligation to update them.
Glatfelter delivered positive overall results versus expectations despite entering the quarter anticipating softer demand and market-related downtime associated with customer destocking for the Airlaid segment.
These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly.
Also, consistent with the execution of our ongoing transformation and growth strategy, we announced the pending acquisition of Jacob Holm, a leader in the nonwoven sector.
I'll provide more details about this important acquisition throughout the call.
As for second quarter results, we reported adjusted earnings per share of $0.18 and adjusted EBITDA of $28 million.
slide three of the investor deck provides the highlights for the quarter.
Airlaid Materials performed above expectations driven by a rebound in the tabletop category as in-person dining began to recover globally.
Mount Holly contributed favorably to the quarterly results following the team's excellent execution in closing the transaction, standing up a new integrated system and restarting production and shipping, all within 48 hours after closing.
We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Glatfelter portfolio.
While overall volume growth was healthy, we did experience lower-than-anticipated demand in hygiene products as customers continued to destock from elevated inventory levels maintained during the pandemic.
We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year.
Composite Fibers results were below expectations as unfavorable mix and higher-than-anticipated energy prices negatively impacted profitability.
And while shipping volume was up meaningfully, inflationary headwinds proved to be challenging for this segment.
The pricing actions announced in the first quarter helped to address some of the raw material input cost pressures, but not enough to offset the higher-than-anticipated energy prices and logistics costs during the second quarter.
We expect a more meaningful benefit from the price increases to take effect in the third quarter.
At an enterprise level, our focus remains on the health and safety of Glatfelter people.
Our efforts continue to keep all facilities operational as they did in the quarter, while ensuring uninterrupted supply of essential products to our customers despite the current evolving nature of the pandemic.
It goes without saying that 2021 has been a momentous year thus far in executing Glatfelter's ongoing transformation and growth strategy.
In May, we closed on the acquisition of Mount Holly, which has strategically positioned us to more fully benefit from the long-term growth in the health and hygiene category, while also being immediately accretive to earnings.
I'll provide additional commentary on the Jacob Holm acquisition after Sam completes his review of our second quarter results.
Second quarter adjusted earnings from continuing operations was $8 million or $0.18 per share, a decrease of $0.04 versus the same period last year driven by pandemic-related softness in our Airlaid Materials segment reflected in our guidance last quarter.
Also noteworthy is that Q2 results include the acquisition of Mount Holly, reflecting six weeks of ownership during the quarter.
slide four shows a bridge of adjusted earnings per share of $0.22 from the second quarter of last year to this year's second quarter of $0.18.
Composite Fibers results lowered earnings by $0.01 driven by higher inflation in raw materials and energy.
Airlaid Materials results lowered earnings by $0.06 primarily due to softness in the hygiene category and lower production as customers continued to destock from pandemic-driven elevated inventory levels.
Corporate costs were $0.03 favorable from ongoing cost control initiatives.
And interest, taxes and other items were in line with the second quarter of last year.
slide five shows a summary of second quarter results for the Composite Fibers segment.
Total revenues for the quarter were 7.1% higher on a constant currency basis driven by higher selling prices of $2 million and the near doubling of our wallcover volume from the trough of the pandemic in 2020.
Excluding metallized, shipments in the quarter were approximately 26% higher driven by strong growth in wallcover, technical specialties and composite laminates.
The food and beverage category, however, was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter.
The strong demand overall required increased levels of production, driving a $3 million benefit to earnings.
Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for this segment.
We continue to implement announced pricing actions, but during the quarter, selling price realization only partially offset the higher input costs.
And currency and related hedging activity unfavorably impacted results by $600,000.
Looking ahead to the third quarter of 2021, we expect shipments in Composite Fibers to be 2% to 3% higher sequentially, favorably impacting results by approximately $400,000.
We expect higher selling prices to fully offset raw material, energy and logistics inflation when compared to the second quarter.
And operations are expected to be in line with the second quarter.
Slide six shows a summary of second quarter results for Airlaid Materials.
Revenues were up 5% versus the prior year quarter on a constant currency basis, supported by the addition of Mount Holly and a strong rebound in tabletop demand as in-person dining began to recover globally.
Demand for hygiene products, however, was lower for the quarter as customers continued to destock from high inventory levels maintained during the pandemic.
As previously stated, we believe this decline is transitory.
And as a result, we are projecting meaningful growth in Q3 in all product categories.
As evidence, demand for wipes has picked up materially in July, and hygiene has started to improve.
We expect more normalized buying patterns in all of our categories to return in the second half of the year.
Selling prices increased from contractual cost pass-through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800,000.
Operations lowered results by $1.9 million mainly due to lower production in the quarter to manage inventory levels and better align with customer demand.
And foreign exchange was unfavorable by $300,000 versus the second quarter of last year.
For the third quarter of 2021, we expect shipments in Airlaid Materials to be approximately 15% to 20% higher.
Selling prices and input prices are both anticipated to be higher, but fully offsetting each other.
Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrade.
The increased production is expected to favorably impact operating profit by approximately $1 million to $2 million sequentially in addition to the increased volume.
slide seven shows corporate costs and other financial items.
For the second quarter, corporate costs were favorable by $1.9 million when compared to the same period last year driven by continued spend control.
We expect corporate costs for full year 2021 to be approximately $23 million, which is an improvement from our previous guidance of $25 million to $26 million.
Interest and other income and expense are now projected to be approximately $11 million for the full year, lower than our previous guidance of $12 million.
Our tax rate for the quarter was 33%.
And full year 2021 is estimated to be between 38% and 40%, lower than our previous guidance of 42% to 44%.
The lower overall tax rate is driven by changes in the jurisdictional mix of pre-tax earnings, slightly offset by an increase in the U.K. rate.
slide eight shows our cash flow summary.
Second quarter year-to-date adjusted free cash flow was lower by approximately $6 million mainly driven by higher working capital usage after adjusting for special items.
We expect capital expenditures for the year to be between $30 million and $35 million, with the reduction being driven largely by our better-than-anticipated execution on Mount Holly integration costs.
Depreciation and amortization expense is projected to be approximately $60 million.
slide nine shows some balance sheet and liquidity metrics.
Our leverage ratio increased to three times at June 30, 2021, mainly driven by the Mount Holly acquisition we completed in May 2021, which increased our net debt by approximately $175 million.
Even after this acquisition, we continue to maintain liquidity of approximately $200 million.
These figures do not include the recently announced pending acquisition of Jacob Holm, which Dante will cover more shortly.
We also have additional financing details located in the appendix of our investor deck.
Looking ahead, we remain very optimistic about the prospects for the second half of the year and beyond as we continue building momentum for the company.
Demand for Composite Fibers products is robust, and we expect that to continue for the foreseeable future.
Our pricing actions are taking hold and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures.
We will continue to work to mitigate the effects of input cost inflation and global supply chain constraints in order to optimize operations and deliver on strong customer demand.
Airlaid Materials demand is strengthening across all categories.
Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in-person dining.
July was very strong for wipes, and we believe we are exiting the period of demand weakness associated with destocking that took place during the first half of the year.
Additionally, demand in the hygiene category is beginning to recover with the second half of the year expected to return to more normalized levels.
Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.
And Glatfelter people are performing exceptionally well, responding to challenges, seeking new opportunities for growth and delivering on the Mount Holly integration and synergy realization.
From a strategic perspective, I'm pleased with the accelerating pace of execution of our business transformation and growth initiatives.
As noted, we signed a definitive agreement to purchase Jacob Holm for $308 million.
We're very excited about this new addition to the portfolio, which will add meaningful scale, new technologies and product diversification and will expand Glatfelter's growth platforms and global footprint.
Jacob Holm is a leading producer of spunlace materials and sustainable nonwoven fabrics, providing access to new customers in the personal care, hygiene, industrial and medical categories.
Headquartered in Basel, Switzerland, the company has four manufacturing facilities, two in the United States and one each in France and Spain.
The company is organized in three operating units: Sontara Professional, a former DuPont business; Health & Skin Care and Personal Care.
As you can see from slide 12, their operating units offer an expansive product portfolio, covering diverse applications with a prominent customer base.
In the 12 months ending June 30, the Jacob Holm business generated revenue of approximately $400 million and EBITDA of approximately $45 million.
Of these earnings, we believe $10 million to $15 million could be attributed to COVID-driven demand that is expected to normalize.
We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all Glatfelter stakeholders.
Through product line optimization, operational improvements, strategic sourcing savings and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing.
The estimated cost to achieve these synergies is $20 million.
The acquisition is subject to customary antitrust regulatory review and is expected to close later this year.
While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond.
With the Jacob Holm transaction, Glatfelter's net leverage is expected to increase from approximately three times to four times pro forma at closing when reflecting the COVID-adjusted EBITDA and synergies.
This acquisition will create an exceptional portfolio of premium quality, sustainable engineered materials with opportunities for the long-term growth that aligns well with post-COVID lifestyle changes.
It will also increase Glatfelter's global scale with pro forma annual sales of approximately $1.5 billion.
As you can see, these are exciting times at Glatfelter.
slide 13 provides a brief snapshot of the breadth and depth of the company's evolution and recent transformation actions and outcomes.
Our near-term priorities and value creation focus will be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging; accelerating innovation by fully utilizing our growing portfolio of technologies, assets and intellectual property; and exploring the next wave of growth investments, both organic and inorganic with continued balance sheet discipline.
We are truly generating momentum and accelerating the pace of execution as we build a new Glatfelter.
This concludes my closing remarks. | compname posts q2 earnings per share $0.03.
q2 earnings per share $0.03. | 1 |
As Tekilamentioned, I'm Christine Cannella, vice president, investor relations with Fresh Del Monte Produce.
Joining me in today's discussion are Mohammad Abu-Ghazaleh, chairman and chief executive officer; and Eduardo Bezerra, senior vice president and chief financial officer.
You may also visit the company's website at freshdelmonte.com for a copy of today's release as well as to register for future distribution.
In the first quarter of 2021, we delivered strong profits across all of our business segments while net sales were slightly lower year over year.
Gross profit increased 53% from last year's first quarter.
Net income increased 228% to $43 million or diluted earnings per share of $0.90, compared with net income of $30 million or diluted earnings per share of $0.27 a year ago.
We believe that these results reflect the resilience of our company and are a demonstration of the initiatives we implemented in 2020 to further strengthen our operating model and improve working capital.
I assume you all know what is happening in the global markets.
The structure of the economy has changed.
We recognize the new economic reality and market challenges we face.
Specifically, the inflationary pressure we are facing on all fronts which is forcing us to increase our prices.
We intend to continue to proactively manage and anticipate these challenges as we have done in the past by taking decisive actions to counterbalance any adverse conditions to our business.
As we move forward, we intend to continue to operate with agility so that we can quickly respond to market changes as they come.
What you see today is only the beginning of our potential.
We also dealt with rising inflationary pressures during the first quarter.
Now let's review our first quarter of 2021 results.
Net sales decreased $29.7 million or 3% to $1.88 billion, compared with the prior year period with favorable exchange rates benefiting net sales by $16 million.
The decrease was primarily attributable to lower net sales in our fresh and value-added and banana business segments.
Adjusted gross profit increased 39% to $107 million, and our adjusted gross profit margin increased to 10%, compared with 7% in the prior year period.
We benefited from increased profitability in our fresh and value-added business segment, partially offset by higher fruit production, procurement, and distribution costs.
However, I would like to point out that if you apply the adjusted gross profit margin for the fresh and value-added produce segment of 8.7% to the $19 million of net sales impacted by COVID-19 in this segment, we estimate we would have delivered an additional $1.7 million in adjusted gross profit.
Adjusted operating income increased 140% to $58 million compared with the prior year period, mostly driven by increased gross profit.
And adjusted net income increased 154% to $42 million compared with the prior year period.
We achieved a diluted earnings per share of $0.90, compared to diluted earnings per share of $0.27 in the prior year period.
Excluding nonoperational and nonrecurring items, we delivered adjusted diluted earnings per share of $0.88, compared with adjusted diluted earnings per share of $0.34 in the prior year period.
Adjusted EBITDA increased 61%, and adjusted EBITDA margin increased 300 basis points when compared with the prior year period.
Let me now turn to segment results, beginning with our fresh and value-added produce segment.
For the first quarter of 2021, net sales decreased $30 million or 5% compared with the prior year period.
The primary drivers of the variance were lower sales volumes of melons as a result of the hurricanes in Guatemala; the impact of COVID-19 to net sales in January and February in our fresh-cut vegetable and vegetable product lines; an increase in avocado volume, which was offset by lower per unit sales price that impacted the industry; an increase in pineapple volume in most of our regions; and an increase in net sales in our prepared food products line due to higher per unit sales prices.
For the quarter, adjusted gross profit in our fresh and value-added product segment increased 9% to $55 million, and adjusted gross profit margin increased 100 basis points.
During the quarter, we began to benefit from the actions we took in 2020 to optimize our operations, primarily in the following product lines: fresh-cut fruit, melon, avocados and our prepared food products.
Fresh-cut fruit margins recovered back to double digits.
Rationalization in our domestic melon operations and higher per unit sale prices helped offset the damage from the hurricanes.
Avocado gross profit margin doubled during the quarter and achieved the double digits.
Prepared food products margins achieved the high teens.
We also pursued volume expansion during the quarter in the following product lines: pineapple volume increased 22% and avocado volume increased 12%.
Gross profit in our non-tropical product line decreased primarily in rates as a result of damage caused by severe rainstorms to some of our farms in Chile, which resulted in a $3.1 million inventory write-off.
Our Mann Packing business was impacted by lower sales volume in our food service distribution channels, which drove higher per unit product costs.
Net sales in our banana segment decreased $9 million to $418 million while adjusted gross profit increased 93% or $23 million during the quarter, primarily driven by lower net sales in North America and the Middle East, mainly as a result of decreased sales volume, partially offset by strong demand in Asia.
Overall volume decreased 8%.
Pricing increased 7%, which offset an increase in production and procurement costs due to the impact of hurricanes Eta and Iota in Guatemala as well as inflationary pressure on cost of goods sold.
Now moving to selected financial data.
Selling, general, and administrative expenses decreased $4 million to $49 million, compared with $53 million in the prior year period.
The decrease was primarily due to cost-saving initiatives in our North America region that resulted in reduced promotional expenses and lower selling and marketing costs.
The foreign currency impact at the gross profit level for the first quarter was favorable by $13 million, compared with an unfavorable effect of $6 million in the prior year period.
Interest expense net for the first quarter at $5 million was in line with the prior year period.
The provision for income taxes was $11 million during the quarter, compared with the income tax of $300,000 in the prior year period.
The increase in the provision was due to -- sorry, the increase in the provision for income tax of $10.7 million is primarily due to increased earnings in certain jurisdictions.
During the quarter, we generated $47 million in cash flow from operating activities, compared to $2 million in the prior year period.
The increase was primarily attributable to higher net income and higher balances of accounts payable and accrued expenses, principally due to our optimization efforts associated with working capital.
As it relates to capital spending, we invested $34 million in the first quarter, compared with $17 million in the prior year period.
Our investments were mainly related to our new refrigerated container ships, one of which was received during the first quarter and expansion and improvements to facilities in North America and Asia.
As of the end of the quarter, we received cash proceeds of $42.4 million in connection with our asset sales under the asset optimization program of which approximately $40 million was received in 2020.
The gain during the first quarter of 2021, primarily related to a gain on the sale of a refrigerated vessel.
We believe we're on track to achieve the $100 million program by the first quarter of 2022.
We paid down our long-term debt by $8 million, resulting in a total debt balance of $534 million.
And based on our trailing 12 months, our total debt to adjusted EBITDA ratio stands at 2.4 times.
This concludes our financial review. | q1 adjusted earnings per share $0.34.
expects volatility in supply & demand,reduced demand in foodservice distribution will adversely impact q2. | 0 |
For financial information that has been expressed on a non-GAAP basis.
We've included reconciliations to the comparable GAAP information.
At our Securities Analyst Meeting last month, we shared our plans to continue building a stronger HP, one that deliver sustained revenue, operating profit, earnings per share and free cash flow growth.
This quarter's results reflect our continued momentum against this plan and they give us great confidence in our future.
Let me talk through the details.
In Q4, revenue grew 9% to $16.7 billion.
Non-GAAP earnings per share grew 52% to $0.94 and we generated more than $900 million of free cash flow, while returning $2 billion to shareholders through share repurchases and dividends.
Our Q4 results are a great finish to an exceptional year.
For the full year, we grew revenue 12% to $63.5 billion and generated $1.7 billion of incremental non-GAAP operating profit.
Non-GAAP earnings per share grew 66%.
This means that we exceeded our value creation plan target for non-GAAP operating profit and EPS, a full year ahead of plan.
And we returned a record $7.2 billion to shareholders, while continuing to invest in strategic growth opportunities across the business.
Our Q4 and full year performance shows our company on its front foot and hitting its stride.
Long-term, secular trends such as hybrid play to our competitive strength.
Our leadership across our market and the innovation agenda we are driving are enabling us to turn these trends into tailwinds.
We are making organic and inorganic investments to drive profitable growth.
We are accelerating our transformation, building new digital capabilities while also reducing structural cost and driving efficiencies.
The progress we are making against our priorities is creating a more growth-oriented portfolio.
At our Analyst Day, I shared that we expect our five key growth areas to grow double-digit and generate over $10 billion in revenue in fiscal '22.
These businesses collectively grew 12% this quarter.
This includes more than 30% growth for our Instant Ink business, as well as more than 20% growth for our industrial graphics portfolio.
We see our key growth areas becoming a bigger part of overall revenue and profit mix moving forward.
We are driving this growth, even as we continue to navigate a complex and dynamic operational environment that include robust demand and persistent supply constraints.
The actions we have been taking to mitigate industrywide headwinds are paying off.
There is no quick fix, but we are strengthening our operational execution and making continued progress quarter by quarter.
And I just want to say how proud I am of the way our teams are stepping up.
It has not been easy, but the challenges we have faced have not deterred us from driving our business forward.
And the fact that we delivered double-digit revenue and profit growth for the year gives us confidence as we enter 2022.
Let me now talk about the strength we see across each of our business units.
In Personal Systems, there continues to be very strong demand.
Year revenue and operating profit each grew double-digit in Q4.
And our discipline execution and pricing strategy allowed us to effectively manage cost and component headwinds.
A big part of our success is the improved mix we are driving given our leadership in the commercial PC market.
As more offices reopen, we led our shift toward Windows based commercial products where we saw the strongest demand and highest profitability.
We continue to see a significantly elevated order backlog.
As I shared last month, we expect component shortages, particularly in IC to persist into at least the first half of '22.
The operational actions we outline in our Q3 call are generating positive results.
We continue to increase our direct engagement with Tier 2 and Tier 3 suppliers.
We have expanded long-term agreements to secure capacity and our digital transformation initiatives are enabling greater real-time visibility to optimize our speed, agility and mix.
This work remains a daily priority and we expect our trajectory to continue to improve.
We're also creating important innovation that we design for all team's hybrid.
This includes a new lineup of Windows 11 devices that enable premium computing experiences for work and home.
We are also expanding into valuable adjacencies.
Last quarter, we introduced HP Presence, the world's most advanced video conferencing system.
This is a large opportunity that will continue to grow as our digital and physical worlds converge.
Seven out of 10 companies are already investing in technologies that improve hybrid work experience for their employees.
HP presence combined our hardware, software, imaging and peripheral capabilities to create a more immersive experience, so that distributed teams can truly feel they are in the same room even if they are not.
You will see us continuing to innovate and expand our presence in the growing highly collaboration space.
We also delivered another quarter of double-digit device as a service revenue growth.
This included the launch of new digital services to help commercial customer simplify the complexity of hybrid IT environment.
And following the close of our Teradici acquisition, we launched our lineup of new Z by HP, Teradici, and NVIDIA Omniverse subscription offers to enable high performance remote collaboration.
Turning to Print, we grew revenue 1% in the quarter.
This was primarily driven by our disciplined pricing strategy, as well as our continued growth in services and subscriptions, which offset expected volume declines, driven by limited supply.
Like others in the industry, we continue to operate in a supply constrained environment, driven by COVID-related disruption and other logistics issues.
Against this backdrop, demand for our print hardware and supplies remained strong.
The fact is we had more hardware orders that we could fulfill in the quarter.
And as we said last month, we expect this to impact Print growth in fiscal year '22.
This is not stopping us from advancing our strategic priorities.
We continue to grow our HP+ Plus portfolio globally, including a rollout to our Envy in 5000 -- 7000 series that is designed for families working, learning and creating new memories from home.
Importantly, it is built with sustainability in mind and made from over 45% recycled plastic content.
We are also growing our digital services to enable hybrid office printing.
Our great example is this quarter's launch of HP Managed Print Flex, our new cloud first MPS subscription plan for hybrid work environment.
In Q4, we drove double-digit growth of MPS revenue and total contract value and this supports our Workforce Solutions momentum.
We're increasingly integrating our offerings across Print and Personal Systems to meet new customer needs and unlock new growth opportunities.
Our recently launched HP work from home service is a great example of how we are leveraging our diverse portfolio to win in the hybrid office.
As I mentioned earlier, we are also driving industrial graphics and 3D printing growth.
In industrial graphics, we drove double-digit revenue growth in the quarter and have built a healthy backlog of industrial presence.
This continues a positive recovery trend from prior-year quarter.
We also continue to see a mix shift toward more productive industrial process with significant growth in labels and packaging.
And in 3D, our focus on high-value end-to-end applications is paving the way for entirely new growth businesses.
Our molded fiber, footwear and orthotics initiatives are on track.
Our progress against our strategic priorities is also driving strong cash flow and we continue to be disciplined toward of capital.
We have our robust returns based approach that we are applying to every aspect of our capital allocation.
We will continue to invest in areas where we see growth opportunities, while continuing to return capital to our shareholders.
We believe our share remains undervalued and we are committed to aggressive reported levels of at least $4 billion in fiscal year '22.
We also expect M&A will continue to play an important role.
Specifically, we plan to pursue deals that accelerate our strategies and drive profitable growth.
And we are making ongoing progress against our sustainable impact agenda.
ESG is a driver of long-term value creation for all stakeholders.
And we continue to pursue an ambitious agenda.
The latest example is our expanded partnership with World Wildlife Fund.
We are working to restore, protect and improve the management of nearly 1 million acres of forest landscape.
This supports our focus on making every page printed forest positive [Phonetic].
To sum up, our portfolio is innovative and resilient.
Our strategy is driving sustained revenue, operating profit, earnings per share and free cash flow growth.
We are returning highly attractive levels of capital to shareholders and we are confident in the fiscal year '22 guidance that we shared at our Analyst Day.
We are entering the new year from a position of great strength and I look forward to continuing to share our progress.
Marie, over to you.
It's good to be back together and it was great to connect with so many of you following our Analyst Day.
I want to start by building on something Enrique said a moment ago.
Q4 was a strong finish to a very strong year.
It builds on our proven track record of meeting or exceeding the goals we set and it underscores our confidence in our FY '22 and long-term financial outlook.
Let me begin by providing some additional color on our results, starting with the full year.
Revenue was $63.5 billion, up 12%.
Non-GAAP operating profit was $5.8 billion, up 42%.
We grew non-GAAP earnings per share even faster, up 66% to $3.79.
This continues our trend of growing non-GAAP earnings per share every year since separation.
Our $4.2 billion of free cash flow was consistent with our full year guidance and adjusting for the net Oracle litigation proceeds and we returned a record $7.2 billion to shareholders.
That's a 172% of free cash flow.
What's especially important to note is how well balanced our performance is.
We are growing our top and bottom line.
We are returning capital to shareholders and investing in the business.
We are accelerating new growth businesses and driving efficiencies.
This reflects the company geared toward both short and long-term value creation as we enter a new period of growth for HP.
This is supported by our Q4 numbers.
Net revenue was $16.7 billion in the quarter, up 9% nominally and 7% in constant currency.
Regionally, in constant currency: Americas declined 4%, EMEA increased 15% and APJ increased 18%.
As Enrique mentioned, supply chain constraints continue to impact both Print and Personal Systems revenue and this was particularly impactful to our print hardware results this quarter.
That said, demand remain strong as hybrid work creates sustained tailwinds.
Gross margin was 19.6% in the quarter, up 2 points year-on-year.
The increase was primarily driven by continued favorable pricing including currency, partially offset by higher costs.
Non-GAAP operating expenses were $1.9 billion or 11.5% of revenue.
The increase in operating expenses was primarily driven by increased investments in go-to-market and innovation.
Non-GAAP operating profit was $1.3 billion, up 28% and non-GAAP net OI&E expense was $64 million for the quarter.
Non-GAAP diluted net earnings per share increased $0.32, up 52% to $0.94 with a diluted share count of approximately 1.1 billion shares.
Non-GAAP diluted net earnings per share excludes Oracle litigation gains, defined benefit plan settlement gains, non-operating retirement related credits, partially offset by restructuring and other charges, amortization of intangibles, acquisition-related charges, other tax adjustments.
As a result, Q4 GAAP diluted net earnings per share was $2.71.
Now, let's turn to segment performance.
In Q4, Personal Systems revenue was $11.8 billion, up 13% year-on-year.
Total units were down 9% given the expected supply chain challenges and lower chrome mix.
The fact we still grew revenue double digits in this environment reflected the strength of demand and positive impact of our big shift toward mainstream and premium commercial.
Drilling into the details, Consumer revenue was down 3% and commercial was up 25%.
By product category, revenue was up 13% for notebooks, 11% for desktops and 39% for workstations.
We also continue to drive double-digit growth across peripherals and services.
Personal Systems delivered $764 billion in operating profit with operating margins of 6.5%.
Our margin improved 1.4 points, primarily due to continued favorable pricing, product mix and currency, partially offset by higher cost including commodity costs and investments in innovation and go-to-market.
In Print, our results reflected continued focus on execution and the strength of our portfolio as we navigated the supply chain environment.
Q4 total print revenue with $4.9 billion, up 1%, driven by favorable pricing in hardware and growth in services, partially offset by a decline in supplies.
Total hardware units declined 26% due to consumer replenishment last year in Q4 and increased manufacturing and component constraints.
We expect these Print hardware constraints to extend at least into the first half of 2022.
By customer segment, consumer revenue was down 6%, with units down 28%.
Commercial revenue grew 19%, with units down 12%.
Consumer demand remain solid.
However, revenue across both home and office was constrained by the current supply and factory environment.
The commercial recovery should further progress with a double-digit hardware revenue growth with triple-digit increases in Industrial printing hardware.
We expect to see a continued gradual and uneven recovery in commercial extending into FY '22.
Supplies revenue was $3.1 billion, declining 2% year-on-year, driven primarily by prior year channel inventory replenishment.
We also saw steady normalization of ink and toner mix, partially offset by favorable pricing.
We saw continued momentum in our contractual business.
As we discussed at our Analyst Day, this is a key part of our broader services strategy.
Instant ink delivered double-digit increases in both cumulative subscriber growth in revenue.
We also drove growth in managed print services revenue and total contract value with strength in both renewals and new TCV bookings.
Print operating profit increased $117 million to $830 million and operating margins were 17%.
Operating margin grew 2.2 points, driven primarily by favorable pricing and improved performance in industrial including graphics 3D, partially offset by unfavorable mix at higher cost including commodity costs and investments in innovation and go-to-market.
Now let me turn to our transformation efforts.
As we completed the second year of our cost savings program, we have now delivered more than 80% of our $1.2 billion gross run rate structural cost reduction plan and we continue to look at new cost savings opportunities.
Transformation is not only about cost savings, but about also creating new capabilities and long-term value creation.
I'd like to highlight is our ongoing digital transformation.
By leveraging our new digital platforms, we are enhancing our capabilities and transforming the way we operate to deliver new solutions to our customers.
With this capability, we recently launched Wolf Pro Security, a new subscription service that enables customers to digitally manage their software on an annual subscription basis.
The structural cost savings with our transformation efforts are enabling us to invest in these types of strategic growth drivers and we see many more opportunities like this to drive business enablement through additional software services and solutions offerings.
Let me now move to cash flow and capital allocation.
Q4 cash flow from operations was $2.8 billion and free cash flow was $0.9 billion after the additional adjustment for the net Oracle litigation proceeds of $1.8 billion.
The cash conversion cycle was minus 25 days in the quarter.
This deteriorated 4 days sequentially as lower days payable outstanding and higher days sales outstanding was only partially offset by the decrease in days of inventory.
For the quarter, we returned a total of $2 billion to shareholders, which represented 210% of free cash flow.
This included $1.75 billion in share repurchases and $219 million in cash dividends.
For FY '21, we returned a record $7.2 billion to shareholders or a 170% of free cash flow.
Looking ahead to FY '22, we expect to continue aggressively buying back shares at elevated levels of at least $4 billion.
Our share repurchase program, combined with our recently increased annual dividend of a $1 per share, has us on track to exceed our $16 billion return of capital target set in our value creation plan.
Looking forward to Q1 and FY '22, we continue to navigate supply availability, logistics constraints, pricing dynamics and the pace of the economic recovery.
In particular, keep the following in mind related to our Q1 and overall fiscal 2022 financial outlook.
For Personal Systems, we continue to see strong demand for our PCs, particularly in commercial, as well as favorable pricing.
We expect solid PS revenue growth to continue into fiscal '22 with the shift to higher growth categories, including commercial, premium and peripherals.
We expect PS margins to be toward the high-end of our 5% to 7% long-term range.
In Print, we expect solid demand in consumer, a continued normalization in mix as commercial gradually improves through 2022 and disciplined cost management.
We expect Print margins to be toward the high end, about 16% to 18% long-term range.
For Personal Systems, we expect the component shortages, as well as manufacturing port and transit disruptions will continue to constrain revenue due to the ongoing pandemic in many parts of the world.
In Print, we expect similar, but more acute challenges, particularly with regard to factory disruptions and component shortages.
We expect these challenges across PS and Print to persist at least through the first half of 2022.
Furthermore, normal sequential seasonality doesn't apply for FY '22 and we expect our revenue performance to be more linear by quarter, particularly driven by PS.
In addition, we expect a slight headwind year-on-year, approximately $20 million per quarter from corporate Investments and other.
Taking these considerations into account, we are providing the following outlook: we expect growth quarter non-GAAP diluted net earnings per share to be in the range of $0.99 to $1.05 and first quarter GAAP diluted net earnings per share to be in the range of $0.92 to $0.98.
We expect full year non-GAAP diluted net earnings per share to be in the range of $4.07 to $4.27 and FY '22 GAAP diluted net earnings per share to be in the range of $3.86 to $4.06.
For FY '22, we expect free cash flow to be at least $4.5 billion.
Overall, I feel very good about our performance and our outlook.
So let me hand it back to the operator. | q4 non-gaap earnings per share $0.94.
q4 gaap earnings per share $2.71.
q4 revenue rose 9.3 percent to $16.7 billion.
sees q1 gaap earnings per share $0.92 to $0.98.
sees q1 non-gaap earnings per share $0.99 to $1.05.
sees fy 2022 non-gaap earnings per share $4.07 to $4.27.
sees fy 2022 gaap earnings per share $3.86 to $4.06. | 1 |
Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.
We encourage you to read the risks described in the Company's public filings and reports, which are available on SEC or the Company's corporate website.
Now I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.
I'll begin with a summary of our key first quarter performance drivers and initiatives.
Brian will then walk you through our financials and updated full-year 2021 business outlook in greater detail.
Our first quarter consolidated net sales were strong, growing 22.6% year-over-year to $347.6 million on significantly higher sales volumes.
Our gross margin expanded to 46.7% from 45.7% in the prior year quarter, primarily due to lower labor, factory, warehouse and shipping costs, which were partially offset by higher material costs.
Our solid gross margin, combined with our diligent expense management and reduced costs due to COVID-19, drove a significant year-over-year increase of 38.6% in our income from operations to $68.4 million and an increase of 39.8% in our earnings per diluted share to $1.16.
The increase in sales volume we experienced in the first quarter was primarily a result of the continued momentum in the home center distribution channel, where sales increased over 60% compared to the prior year period.
As a reminder, the home center distribution channel includes both our home center and co-op customers and is where we see much of our repair and remodel business.
We are continuing to see increased activity in the repair and remodel space likely as a result of the ongoing pandemic as consumers continue home renovations.
Lowe's contributed significantly to the channel growth compared to the first quarter last year, due to their return as a home center customer in the second quarter of 2020.
Our sales further benefited from solid trends in U.S. housing starts.
As we generally experience a multiple month lag in demand from the time of the start, in the first quarter, we benefited from strong fourth quarter 2020 housing starts, which grew over 10% year-over-year.
In addition, housing starts in the markets where we sell the most content continued to surpass the broader U.S. housing starts, especially in single-family space and in the western and southern regions of the U.S. While adverse weather conditions in the month of February resulted in certain supply chain interruptions, most notably in Texas, we have since addressed any back order demand and did not record a material impact to our first quarter performance.
Now let's turn to Europe.
Our first quarter sales improved over the prior year on local currency basis, given strong demand trends and our ability to continue meeting our customers' needs due to our solid inventory management practices amid broader supply chain shortages.
As a reminder, net sales in the first quarter of 2020 were negatively affected by weaker conditions in Europe due to COVID-19 when two of our larger European operations in the United Kingdom and France were ordered to cease operations in late March.
As of today, all of our major production and distribution facilities remain open and operational in Europe, so we continue to promote remote work from home where possible, such as in our corporate offices to help prevent the spread of COVID-19.
Lastly, I'd like to take a moment to discuss some recent pricing dynamics in the marketplace.
As previously announced in early February, we implemented price increases ranging from 5% to 12% depending on the product mix for certain of our wood connectors, fasteners and concrete products in the U.S. in an effort to offset rising material costs.
These price increases went into effect on April 5, following a 60-day notice period to our customers.
The notification also included a clause that prohibited significant pre-buying ahead of the increases in order for us to properly manage our inventory levels.
As a result, we do not believe we experienced meaningful pre-buying activity related to these increases.
More recently, we announced the second price increase ranging from 6% to 12% primarily for our wood connector products in the U.S. in an effort to further offset rising material costs.
Our customers were notified of this increase on April 16, which will go into effect on June 15.
We expect the impact of these price increases will help support our ability to maintain strong gross profit margins through the end of the year.
I'd now like to turn to a high-level discussion on our key growth initiatives.
As many of you are aware, we held a Virtual Analyst and Investor Day event on March 23 in which we unveiled several growth initiatives that we believe will help us continue our track record of above-market growth through a combination of organic and inorganic opportunities.
Our organic opportunities are focused on expansion into new markets within our core competencies of wood and concrete products.
Our inorganic opportunities will be focused on licensing, purchasing IP and traditional M&A.
As a reminder, our growth initiatives focused on the following markets, which I'll list in no particular order of priority: OEM, original equipment manufacturers; repair remodel, the do-it-yourself market; mass timber, concrete and structural steel.
In order to appropriately grow in the first three markets that being OEM, retail -- R&R as well as the DIY and mass timber, we aspire to be a leader in engineered load-rated construction fastener solutions, given that each of these markets have a broader product opportunity within the fastener solutions.
In addition, we're striving to be a stronger leader in customer-facing technology, which has been a focus of ours for a number of years.
Here I'm referring to software that helps our customers better run their business by providing them with the proper tools to design, select and specify the right Simpson solutions for the job.
We expect technological advancements will drive enhanced growth in all of our key growth initiatives as well as across all of Simpson Manufacturing in general.
We believe our business model will support our ability to be successful throughout each of these areas, given our engineering expertise, our deep-rooted relationship with top builders, engineers, contractors, code officials and distributors, along with our ongoing commitment to testing, research and innovation.
Importantly, we currently have existing products, test results, distribution and manufacturing capabilities for all five of our growth initiatives.
This is also important to note that these initiatives are currently in different stages of development.
Our successful growth in these areas will ultimately be a function of expanding our sales and marketing functions to promote our products to different end-users and distribution channels, expanding our customer base, and potentially introducing new products in the future.
We will keep you appraised of significant updates regarding our key growth initiatives as they arise.
I'd also like to highlight our five-year Company ambitions that we unveiled at our Analyst Investor Day.
First, we want to strengthen our values-based culture.
Barclay Simpson founded our Company on the nine principles of doing business, which continue to guide our organization today.
Our Simpson Strong-Tie employees are our most important asset.
So we spend a significant amount of time communicating with them to ensure a relentless customer focus, involving them in leadership programs and instilling a safety-first culture.
Second, we want to be the partner of choice.
This ambition takes on many meanings.
It means we want to be your solution provider, your trusted brand to provide you a solution and quickly get that product out to your job site and we want to make it easy to do business with us.
We aspire to be the partner of choice in all aspects of our business.
Third, we strive to be an innovative leader in product categories.
If we can accomplish this, we have no doubt we will be able to accomplish ambition Number 4, which is to continue our above-market growth relative to U.S. housing starts.
This we will continue to expand our operating income margin to remain within the top quartile of our proxy peers.
And finally, we will continue expanding our return on invested capital to remain in the top quartile of those peers.
After building our strong foundation through the 2020 plan, we look forward to an even stronger future ahead.
Before I close today, I'd like to briefly touch on our capital allocation strategy.
As our business continues to generate strong cash flows, we remain focused on appropriately balancing our growth and stockholder return priorities.
We will prioritize investing in our growth initiatives in areas such as engineering, talented marketing and sales personnel and testing capabilities.
M&A also remains a key focus in order to expand our product line and develop complete solutions for the markets in which we operate to strengthen our business and improve our market share.
As previously stated, we are leveraging venture capital expertise to help identify potential strategic acquisitions or investments, including innovative technologies of interest in the building space.
In summary, we are thrilled with our strong first quarter performance, despite global macroeconomic turbulence stemming from ongoing pandemic.
We expect the second quarter of 2021 will reflect ongoing sales momentum with strong Q1 housing starts in the areas we primarily serve, which positions us well to continue to benefit from this unique environment.
Our employees have been thoughtfully engaged with our leadership team as it pertains to our Company ambitions and growth initiatives to ensure a collaborative environment and to assist in the execution of our strategy.
We look forward to capitalizing on our growth opportunities in adjacent markets by leveraging our business model, built on engineering, testing and innovation.
I'm pleased to discuss our first quarter financial results with you today.
Now turning to our results.
As Karen highlighted, our consolidated net sales were strong, increasing 22.6% to $347.6 million.
Within the North America segment, our net sales increased 20.7% to $300.6 million, primarily due to higher sales volumes in our home center distribution channel, which includes our home center and co-op customers.
Sales volumes were supported by the return of Lowe's, along with increased repair and remodel activity.
We also continue to benefit from solid demand trends in other distribution channels, which are experiencing increased demand from new housing starts and repair and remodel activity.
In Europe, net sales increased 35.3% to $44.3 million, primarily due to higher sales volumes in local currency.
Europe's sales also benefited by approximately $3.6 million of positive foreign currency translations resulting from some Europe currencies strengthening against the United States dollar.
Wood construction products represented 87% of total sales, compared to 86% and concrete construction products represented 13% of total sales compared to 14%.
Consolidated gross profit increased by 25.2% to $162.3 million, which resulted in a stronger Q1 gross margin of 46.7% compared to last year.
Gross margin increased by 100 basis points, primarily due to lower labor, factory, warehouse and shipping costs, which were partially offset by higher material costs.
On a segment basis, our gross margin in North America increased to 48.5% compared to 47.7%, while in Europe, our gross margin increased to 34.4% compared to 32.7%.
From a product perspective, our first quarter gross profit margin on wood products was 46.6% compared to 45.4% in the prior year quarter and was 42.5% for concrete products, the same as the prior year quarter.
Now turning to our first quarter costs and operating expenses.
Research and development and engineering expenses increased 9% to $14.6 million, primarily due to increases in personnel costs, professional fees and patent costs.
Selling expenses increased 8% to $30.8 million due to increases in stock-based compensation, personnel costs and professional fees, offset by a decrease in travel-related costs.
On a segment basis, selling expenses in North America were up 9.1% and in Europe, they were up 2.8%.
General and administrative expenses increased 26.2% to $48.6 million, primarily due to increases in stock-based compensation, personnel costs and professional fees and amortization and depreciation expense, offset by a decrease in travel-related costs.
Total operating expenses were $94.0 million, an increase of $13.6 million or approximately 16.9%.
As a percentage of net sales, total operating expenses were 27%, an improvement of 130 basis points compared to 28.3%.
Our solid topline performance combined with our stronger Q1 gross margin and diligent expense management helped drive a 38.6% increase in consolidated income from operations to $68.4 million compared to $49.4 million.
In North America, income from operations increased 29.5% to $69.4 million, primarily due to increased gross profit, partly offset by higher operating expenses.
In Europe, income from operations increased 35.3% to $2.3 million, primarily due to increased gross profit.
On a consolidated basis, our operating income margin of 19.7% increased by approximately 230 basis points.
Our effective tax rate increased to 24.3% from 21.3% due to a lower windfall tax credit on the vesting of restricted stock units.
Accordingly, net income totaled $50.4 million, or $1.16 per fully diluted share compared to $36.8 million or $0.83 per fully diluted share.
Now turning to our balance sheet and cash flow.
Our balance sheet remained healthy with ample liquidity to operate our day-to-day operations.
At March 31, cash and cash equivalents totaled $257.4 million, a decrease of $44.3 million compared to March 31, 2020.
As of March 31, 2021, the full $300 million on our primary line of credit was available for borrowing and we remain debt-free with a small portion of capital leases, mostly unchanged from year-end.
Our inventory position of $296.8 million at March 31 increased by $13 million from our balance at December 31, as we continue to see higher levels of construction activity and raw material prices along with the unprecedented demand we've experienced throughout the pandemic.
We continue to carefully manage raw material inventory purchases in this environment of rising costs and limited supplies, all while striving to maintain our high levels of customer service and on-time delivery standards.
As a result of our improved profitability and effective working capital management, we generated strong cash flow from operations of $18.5 million for the first quarter of 2021, an increase of $5.8 million or 45.5%.
We used approximately $10.5 million for capital expenditures during the quarter.
In regard to stockholder returns, we paid $10 million in dividends during the first quarter.
As of March 31, 2021, we had the full amount of our $100 million share repurchase authorization available, which will remain in effect through the end of 2021.
Given our confidence in our business and our expectation that our strategic initiatives will continue to drive improved operational performance and a higher return on invested capital, we expect we'll remain both active and opportunistic as it relates to share purchase activity.
Our next Board meeting is scheduled to take place in early May, where we will review our capital allocation priorities in greater detail.
Based on business trends and conditions as of today, April 26, we are updating certain elements of our guidance for the full year ending December 31, 2021 as follows.
We're updating our operating margin outlook to now be in the range of 19.5% to 22%, compared to our original estimate of 16.5% to 18.5%.
We're increasing the range to reflect the impact of our recent price increase announcements, as well as the stronger-than-anticipated demand trends we've been experiencing in 2021.
While we are very pleased to increase our outlook for operating margins in fiscal 2021, it's important to note that based on our current expectations, we are anticipating raw material costing pressure in late 2021 and into fiscal 2022.
Our gross margins in the first half of 2021 will reflect an average cost of steel sourced prior to or early into the surging steel market together with steel purchased more recently at substantially higher prices.
As we work through our on-hand inventory and continue to buy raw material at these higher prices, our anticipated cost of goods sold are expected to increase significantly in the latter part of 2021 and 2022 even if prices for raw materials begin to decline, adversely impacting our margins, as the impact from averaging raw material costs typically lags our price increases.
However, as announced during our recent Analyst and Investor Day, the key focus of our five-year Company ambitions will be to expand our operating income margin to remain within the top quartile of our proxy peers, which we plan to achieve through successful execution on our growth initiatives and careful expense management.
In addition, we expect our effective tax rate to be in the range of 25% to 26%, including both federal and state income tax rates.
And finally, we are reiterating our capital expenditure outlook to be in the range of $50 million to $55 million, including approximately $10 million to $15 million, which will be used for safety and maintenance capex.
It's important to note, our elevated capital expenditure spend relative to fiscal 2020 includes carryover projects that we have previously paused due to the pandemic, investments in factory equipment to improve service levels, as well as for safety and maintenance updates.
At this time, only a small amount of our capex spend is related to pursuing our growth initiatives outlined during our Investor and Analyst Day.
In summary, we were very pleased with our strong first quarter financial results and operating performance.
We believe our significant scale, geographic reach and diverse product offerings combined with our strong balance sheet gives us confidence in our ability to maintain operational excellence and support current and future demand trends moving forward. | compname reports q1 earnings per share of $1.16.
q1 earnings per share $1.16.
q1 sales rose 22.6 percent to $347.6 million.
sees fy 2021 operating margin to be in range of 19.5% to 22.0%. | 1 |
What we will say today is based upon the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are happy to report an excellent second quarter.
We earned $0.90 per share despite some revenue headwinds arising from pandemic-related delays in some areas and projects.
Our sequential backlog increased by $180 million this quarter on a same-store basis, and our year-over-year same-store backlog also increased by $200 million.
And this is the first time since the pandemic decline that we have seen a same-store increase in our backlog from the prior year.
These increases support our belief that direct pandemic effects are abating.
Our free cash flow continues to be strong and yesterday we increased our dividend.
Our essential workforce proved its mettle during the recent challenges and they continue to excel as circumstances improve.
We are grateful for their strength and perseverance.
We are optimistic about our prospects for the next several quarters.
We recently announced that Amteck will be joining Comfort Systems USA and that acquisition is expected to close in the third quarter.
Amteck provides electrical contracting solutions and services, including core electric and low voltage systems as well as services for plans of maintenance, retrofit and emergency work.
Amteck is headquartered in Kentucky and focuses on the Southeastern United States, including Kentucky, Tennessee and the Carolinas.
Amteck brings experienced professionals and a fantastic reputation for electrical contracting and services in industrial markets such as food processing.
Amteck will add world-class capabilities in complex projects, deep customer relationships, design build confidence and opportunities for synergy.
Before I review second quarter details, I want to discuss the impact of COVID and how that has affected the composition and timing of earnings and revenues so far this year and in the comparable period last year.
Our first quarter results in 2020 were lowered by COVID.
As we closed that quarter last year in the midst of governmental orders in building and job shutdowns, we were very concerned about how the pandemic and work precautions would affect our productivity.
Accordingly, the judgments we made to close the first quarter last year led us to expect higher cost on jobs and reduced margins and we also reserve certain receivables.
Three months later, by the time we were closing our second quarter, it had become clear that our activities were deemed essential and that we could work at good productivity levels, or would be paid for lost productivity in most cases.
As a result, we reassess some cautious estimates and partially as a result of those judgments the second quarter of 2020 was particularly robust.
We continue to benefit from those factors in last year's order as well and the third quarter of 2020 also benefited from a very discrete gain relating to the settlement of open issues with the IRS for our 2014 and 2015 tax years.
As a result, although underlying trends are strengthening, we continue to face tough comparables in the third quarter.
Now during the first half of this year and a year later, we have good execution and productivity.
However, we have had some revenue softness due to delays in work preparation and pre-construction due to the pandemic.
We are also toward the end of closing out some work that was performed under the worst conditions of the pandemic and so the margins we achieved this quarter reflect a little of that headwind.
Fortunately, those effects are subsiding, and our research and backlog and active pipeline is a sign of good demand and prospects.
And so with that background and context, let me review the numbers in more detail.
Revenue for the 2021 second quarter was $714 million, a decrease of $30 million compared to last year and our same-store revenue declined by $46 million.
Gross profit this quarter was $126 million, lower by $19 million.
And gross profit as a percentage of revenue declined to 17.7% this quarter compared to 19.6% for the second quarter of 2020.
Our gross profit this quarter reflected the headwinds that we are experiencing in construction, particularly in our Mechanical segment.
If you compare the six months period this year to the same period in 2020, gross profit was 18.1% for the first six months of 2021, which is roughly equivalent to 18.2% for the first half of 2020.
SG&A expense for the quarter was $88 million, or 12.3% of revenue compared to $85 million, or 11.4% of revenue for the same quarter in 2020.
On a same-store basis, SG&A was similar to last year with a same-store increase of $1 million.
Our 2021 tax rate was 23.8% compared to 27.6% in 2020.
Our quarterly tax rate benefited from permanent differences related to stock-based compensation, and we expect a more normal rates in the second half of the year.
Net income for the second quarter of 2021 was $33 million, or $0.90 per share.
And that resulted -- that result included $0.10 of income related to the revaluation of our contingent earn-out obligations.
We have four large earn-outs active in 2021 and so we expect more variability than usual in earn-out valuation this year.
Our net income for the second quarter of 2020 was $39 million, or $1.08 per share.
For our second quarter, EBITDA was $55 million and year-to-date we have $106 million of EBITDA.
Free cash flow in the first six months was $101 million as compared to $151 million for the first half of 2020.
The slowdown and some temporary tax benefits created unprecedented cash flow last year.
Our cash flow is very strong through six months.
But as activity levels improve, we are likely to continue deploying some working capital to start new projects in many of our geographies.
Ongoing strong cash flow has allowed us to reduce our debt faster than expected, and also to remain active in repurchasing our stock, and we have reduced our outstanding share count for five consecutive years.
Brian mentioned that we recently entered into an agreement to acquire Amteck, and that transaction is expected to close shortly and during the third quarter.
We have not yet closed Amteck, so no revenue or backlog is yet included.
Amteck will be included in our Electrical segment, and it is expected to contribute annualized revenues of approximately $175 million to $200 million and EBITDA of $14 million to $17 million.
In light of the required amortization expense related to intangibles and other costs associated with that transaction, the acquisition is expected to make a neutral to slightly accretive contribution to earnings per share for the first 12 months to 18 months.
So that's all I have on financials, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021.
New bookings significantly exceeded backlog performed during the second quarter.
Backlog at the end of the second quarter of 2021 was $1.84 billion.
We believe that the business impacts relating to COVID-19 have now stabilized, and as a result same-store backlog increased sequentially by 11% or $180 million.
That is a strong increase, particularly for the second quarter.
The increase is broad based with strength across our markets, most notably, in industrial projects.
Although delays might modestly impact activity levels for the third quarter, we see strong underlying trends in the coming quarters, and we are comfortable with the backlog we have across our operating locations.
Our industrial activities were 42% of total revenue in the first half of 2021.
We think this sector will continue growing as the majority of the revenues at our new companies of TAS and TEC are industrial, and because industrial is heavily represented in new backlog.
Institutional markets, which include education, healthcare and the government, are strong and with 33% of our revenue.
The commercial sector is also solid.
But with our changing mix it is now about 25% of our revenue.
For the first six months of 2021, construction was 77% of our revenue with 46% from construction projects for new buildings, and 31% from construction projects in existing buildings.
Service was a great story this quarter, and service revenue was 23% of year-to-date revenue with service projects providing 9% of revenue, and pure service, including hourly work, providing 14% of revenue.
Year-to-date service revenue is up approximately 12% with improved profitability.
Service is now rebounded to full activity levels.
Profitable small project activity is back and we continue to help customers with their indoor air quality.
Overall, Service was a major source of profit for us this quarter and really help to offset the temporary air pockets in construction.
Our Mechanical segment continues to perform well, despite being most impacted by the pandemic-related air pockets.
Our Electrical gross margins improved from 6.5% in the first six months of 2020 to 14.3% this year.
Our backlog grew this quarter and strength is returning.
Project development and planning activities continue to be strong with our customers.
We are confident in recent acquisitions and are excited about the pending addition of Amteck.
We also continue to invest in our workforce and businesses in order to grow earnings and cash flow.
For the balance of 2021 the pandemic recovery will continue to affect revenue timing and work, and we also faced a tough third quarter comparison as Bill mentioned.
As work picks up, we will be impacted by timing, and we will invest some working capital in order to ramp up.
For the next few quarters, we will have relatively fewer closeouts also.
We are paying more for materials, but so far material availability and increases have been manageable.
We are closely monitoring material shortages and costs, and are taking steps to add additional protections on new work.
All of these considerations make it hard to predict exactly how the next quarter or two will unfold, but the underlying trends and opportunities are very positive.
Despite some moving pieces in carryover effects in the near term, we look forward to continued profitability and our increased backlog and strong pipeline indicate that we can expect stronger activity levels later this year and into 2022.
We are optimistic about finishing 2021 on a strong note, and we are even more optimistic about 2022. | q2 earnings per share $0.90. | 1 |
Neil, you may begin.
We are pleased to kick off earnings season this quarter and glad that you could all join us.
During last quarter's call in late April, all indicators were setting up for a summer of strong leisure travel, and it appears that expectations were appropriately set.
We significantly outperformed our internal forecast for the second quarter on both top line and profitability metrics.
We saw increased demand portfoliowide this quarter and are expecting this trend to incrementally build through the second half of the year.
Property level cash flow sequentially improved from $3.8 million in April to $7.7 million in June.
In June, our 33 hotels generated 59% occupancy at an average daily rate of $220 and comparable GOP margins for the month came in at above 45%.
We are encouraged to see both ADR and GOP profitability metrics begin to approach 2019 levels, well before recovery in business transient and group gets underway in our gateway markets.
Gateway market occupancy will push RevPAR higher from here.
Achieving solid profitability and generating free cash flow a little over a year from the start of the worst crisis in this industry's history is testament to the quality of our hotels, the effectiveness of our cluster operating strategy and our mix of urban and resort markets.
These three advantages are our core pillars of growth for the early stages of this cycle.
Our operating leverage positions us for outsized growth in a stabilizing environment.
We began the second quarter on strong footing as our portfolio RevPAR in April exceeded $100 and was 10% higher than March, which had been elevated due to spring break travel and stimulus spending.
Absolute RevPAR ticked sequentially higher during the balance of the second quarter, growing to $116 in May and exceeding $130 in June, resulting in second quarter RevPAR of $116, more than 50% higher than the first quarter 2021.
Rate integrity was a common concern this time last year.
But compared to prior demand shocks such as the Great Financial Crisis, revenue managers have not sacrificed rate to put heads in beds during this recovery.
In this environment, we've been able to strategically drive rates across our portfolio.
Last quarter, our comparable portfolio ADR grew from $193 in April to $220 in June.
That's just 13% below June 2019 without the core business traveler in the marketplace.
In July, month-to-date, we are actualizing 2019 ADR levels.
Based on pricing power at our resorts and the return of the price elastic business traveler in the fall to boost demand at our urban clusters midweek, we believe elevated ADR will prove sustainable on a portfoliowide basis through the recovery.
Let's start to dig in with the two largest EBITDA-producing assets in our portfolio, the Cadillac Hotel and Beach Club on Miami Beach and Parrot Key Hotel & Villas in Key West.
They led the portfolio again this quarter on sustained demand to South Florida despite what is typically the start of reduced travel to the region.
Back in 2018, we reinvested approximately $74 million in major upgrades of these resorts, and they are now firmly on target to achieve our expected post-renovation ROIs.
At prior peak in 2015, the Cadillac and Parrot Key generated $9.5 million and $7.8 million in EBITDA, respectively.
This past quarter, the Parrot Key and Cadillac generated $3.8 million and $3.2 million in EBITDA, respectively, for the quarter.
And based on current projections, both hotels are expected to surpass prior peak and combine to exceed $20 million in EBITDA generation for the full year 2021.
As the lodging recovery continues to take shape across the next few years, we anticipate meaningful EBITDA contribution from these assets as they ramp toward stabilization.
The Parrot Key was our best-performing asset during the second quarter, generating 92% occupancy on a $454 average daily rate, resulting in a $416 RevPAR, which surpassed second quarter 2019's RevPAR by more than 80%.
The Keys have seen unprecedented demand year-to-date and the Parrot Key's performance has proven it is one of the most sought-after hotels in the marketplace.
Despite inclement weather from tropical storm Elsa deflecting demand a few weeks ago, performance in July remains in line with our forecast at the beginning of the month.
Performance on Miami Beach was similarly encouraging as the Cadillac surpassed 80% occupancy for the quarter on a $235 ADR, which drove 39% RevPAR growth versus the second quarter of 2019.
Demand trends for the third quarter remain robust at our three beach hotels as well as our more business-oriented Ritz-Carlton Coconut Grove, which is beginning to capture corporate business this summer across a variety of industries: financial services, defense, technology, healthcare and advertising, and broke through 2019 levels with 8.7% year-over-year RevPAR growth for the quarter.
Despite August and September being traditionally slower in South Florida, our portfolio is forecasted to meaningfully outperform those periods in 2019 on the heels of continued price-elastic leisure demand and growth from both business transient and group.
There are a number of events, festivals and conventions returning to Miami in the near future.
Miami Beach Pride in September, the South Beach Food & Wine Festival and Art Basel later in the fall and Formula One Grand Prix next year.
Beyond tourism, there remains significant corporate relocations and transportation-related infrastructure growth in the region, leading to robust near-term and long-term demand fundamentals for Miami that will be captured through this recovery.
Our drive-to resorts also continued their recent outperformance during the second quarter as the group generated weighted average occupancy of 72% and ADR growth of 23%, leading to weighted average RevPAR growth of 17% compared to the second quarter of 2019, further proving that the leisure traveler is not price sensitive for high-quality, well-located, differentiated hotels.
The Sanctuary Beach Resort continues to lead our resorts from a rate perspective as its $506 ADR and 82% occupancy resulted in 21% RevPAR growth versus the second quarter of 2019.
Our Hotel Milo down in Santa Barbara reports 77% occupancy at a $333 ADR, and a very similar 21% RevPAR growth versus prior year.
We anticipate these resorts, in addition to our Ambrose in Santa Monica, will continue to garner robust occupancies and rates in the third quarter as travelers flock to the California coast.
Back East, our Annapolis Waterfront Hotel occupies an irreplaceable position on the Chesapeake Bay.
And after a significant renovation of the hotel, we are driving rates and occupancy.
We recorded a 77% occupancy and an average daily rate of $294 last quarter, which led to 7% RevPAR growth over the period.
Annapolis in the summer is primarily leisure transient, but social and sports groups provide a strong base of business to kick off the season.
Looking further out toward the end of the third quarter, the hotel has several rebooked corporate and retreats that are helping to drive 15% ADR growth for Q3 versus 2019.
Our Marriott in Mystic, Connecticut is also on pace to achieve peak summer leisure demand from weddings, leisure travelers and rebooked corporate and government groups during the third and fourth quarter at a better pace than was anticipated.
Across the quarter, we saw cities and states reopen their local economies and remove restrictions for gatherings and experiences, enabling the surge that we are seeing in domestic leisure travel today.
This fall, we expect to see the next inflection in demand growth as large employers return to the office and encourage travel, and our cities begin to host conventions and major citywide events.
Gateway urban markets have been more impacted by the pandemic than any other segment and offer the longest runway for growth as we look forward to the next several years of the cycle.
With summer travel underway, demand across the portfolio continues to be heavily weighted on weekends versus weekdays, but weekdays have shown a noticeable increase compared to just 90 days ago.
Month-to-date results in July for our portfolio versus March show average weekday occupancy growth of more than 1,200 basis points, leading to RevPAR growth of approximately 55%.
Removing our resort markets, our urban cluster saw weekday RevPARs grow more than 100% over that same period, indicating our gateway cities remain attractive to all segments of the traveler.
When the higher-rated business traveler returns and replaces primarily leisure business, we would expect a meaningful increase in weekday ADRs.
During the second quarter, we began to see traditional business travelers return to our hotels from one and two night stays to corporate groups.
At the Philadelphia Westin, we saw transient business from many pharmaceutical companies, in addition to Accenture and Deloitte employees.
Our West tech-related businesses are beginning to return with corporate groups from both Google and Facebook booked at our Sunnyvale hotels during the third quarter.
McKinsey, JPMorgan, Goldman Sachs, IBM, General Dynamics and other traditional large accounts have become more active at several of our hotels in the portfolio.
While we are seeing early stages of business travel returning in each of our urban centers and expect continued improvements throughout the summer, we anticipate the next big leg up in the recovery to be after Labor Day when schools reopen in-person and employees return to the office.
Despite our hotels being primarily transient, we have seen an increase in group activity over the last few months across our portfolio.
The majority of the business has been through social groups and sports.
But as cities have reopened, larger events are occurring and being scheduled in our markets, resulting in increased group activity at our hotels.
Our luxury hotels have benefited from not only strong leisure business and social group but also the first signs of corporate group, small meetings and retreats.
The Ritz-Carlton Georgetown finished the quarter with nearly 72% occupancy at a $456 ADR. The Rittenhouse Hotel in Philadelphia also turned cash flow positive this quarter as ADR reached $478 with occupancy growing by more than 2,500 basis points versus the first quarter.
Many of our hotels are located near major universities and health systems, and these significant demand generators have mobilized and are leading to increased production and group bookings at many of our Boston, New York, Philadelphia and Washington, D.C. hotels in the third quarter.
Larger events are taking place in the third and fourth quarters across many of our markets, highlighted by healthcare-related conventions in Washington, D.C., boston and Philadelphia.
Otakon in August in Washington, D.C. and the Boston and New York City marathons in the fourth quarter.
The Javits Center in New York is slated to host a few larger citywides in August, including the New York Auto Show, but the major events in New York will return in September.
The U.S. Open for tennis, Fashion Week and the UN General Assembly.
And for the first time, Salesforce's Dreamforce event will occur across multiple cities, including New York.
Our New York City portfolio saw occupancies incrementally build throughout the balance of the quarter.
Visitation remains primarily transient, and this leisure demand should continue as Broadway reopens this fall and more events occur.
But as noted in other markets, first signs of corporate travel have emerged across the past few months, and we are encouraged by the return of our more traditional large corporate accounts in the market.
We are very well positioned with our locations in several high-growth submarkets.
We supported teams during the mayoral election race early in the quarter at our Hilton Garden Inn Midtown East and have since transitioned to JPMorgan as our top account.
Our Hyatt Union Square has seen a pickup in travelers from entertainment, media and technology: AT&T, Discovery and Apple.
And downtown at the Hampton Seaport and the Hilton Garden Inn Tribeca, business travel has increased from major financial services companies and GE, Blackstone.
Pockets of corporate strength have taken shape across the city.
And we believe they will continue to expand after Labor Day when schools fully return and more workers across all industries return to the office on a consistent schedule.
Conversations with our larger corporate accounts indicate that September is the month when the switch for business travel and in-person office work turns on.
And with our first-mover advantage of remaining open throughout the pandemic, our clustered sales effort in the marketplace should yield additional revenue opportunities.
Momentum is clearly building in New York, and our operating and data advantage can drive meaningful outperformance as supply remains significantly below pre-pandemic levels.
The lodging recovery is clearly underway.
Near-term results have exceeded expectations, and there is a long runway of value creation ahead.
During the first half of the year, we took swift action to rightsize our balance sheet and evenly reduced our exposure to our core markets by divesting of a lower-growth hotel in each market.
With few capital expenditures on the horizon over the next few years, we can focus on hotel operations to drive high absolute RevPAR on industry-leading margins, resulting in significant EBITDA and free cash flow growth in the coming years.
Results this past quarter illustrate the merits of this strategy and the growth profile of our unique portfolio.
We are looking forward to a continued recovery in earnings in what we anticipate to be the start of a long up cycle in lodging.
So my comments will focus on the demand improvement across our portfolio throughout the second quarter and its impact on our margins and cash flow before closing with an update on our balance sheet and outlook for the current quarter.
Demand fundamentals continue to improve from March over the balance of the second quarter and ultimately led to the company achieving corporate-level cash flow for the first time since the onset of the pandemic.
In what is typically our best quarter of the year with meaningful business travel, group and conference demand and the beginning of peak summer leisure travel boosting results, demand trends during the second quarter were still heavily weighted toward leisure.
RevPAR and occupancy were up meaningfully from the first quarter, but RevPAR was still down approximately 45% from the second quarter of 2019.
The strong demand at our leisure-oriented properties and weekend demand at our urban hotels allowed us to maintain our average daily rates, less than 18% below 2019, all without any meaningful business travel or group demand in the marketplace.
On the weekends from March to June, we were able to achieve ADR growth at our resorts approximating 13%, while our urban portfolio captured 46% increase in rates with occupancies up 1,000 basis points.
Incremental growth in occupancies, combined with our rate first strategy and expense savings initiatives, resulted in margin expansion and material cash flow generation at our hotels throughout the quarter.
During the second quarter, 24 of our 33 hotels broke even on the EBITDA line, a 71% increase versus the first quarter.
In June, each of our 33 operational hotels broke even on the GOP line, with 24 achieving EBITDA break-even levels, representing 79% of open hotels breaking even on EBITDA versus 58% in March.
We originally forecasted levels needed to break even at the corporate level, approximately 60% of occupancy with a 40% RevPAR decline from 2019.
Results from June cemented these projections as our comparable portfolio generated 59% occupancy with a 40% RevPAR decline.
And combined with our $7.7 million in property level earnings, resulted in $334,000 of positive corporate cash flow.
The asset management initiatives we implemented in 2020, in conjunction with our flexible operating model, showed early signs that our margin improvement goal following the pandemic is beginning to take shape, as GOP margins of 44% during the second quarter were 830 basis points higher than the first quarter and just 260 basis points below our second quarter 2019 GOP margin.
Based on current forecasts, we believe our third quarter GOP margins will actualize in line to slightly ahead of our third quarter 2019 GOP margins.
As RevPAR and out-of-room revenues increase in 2022 and beyond, our current operating model will yield much higher levels of GOP and allow us to amortize our fixed operating expenses as well as our property taxes and insurance expenses.
This provides us confidence in our ability to forecast post-pandemic EBITDA margin growth as our ability to drive ADR in tandem with applied expense savings initiatives should allow us to generate 150 to 250 basis points of sustainable long-term margin savings for the portfolio.
From a profitability perspective, our South Florida cluster led the portfolio again this quarter with 41% EBITDA margins, highlighted by our Parrot Key and Cadillac assets.
The Parrot Key and Cadillac finished the quarter with 58% and 43% EBITDA margins, respectively, both exceeding second quarter 2019 EBITDA margins by more than 2,000 basis points.
Robust results were also seen at our California and Washington, D.C. drive-to resorts as our Sanctuary Beach Resort and Hotel Milo generated a 49% and 38% EBITDA margin, respectively.
While outside D.C., a strong start to the summer travel season from a rate and occupancy perspective, coupled with proprietary operational initiatives we have implemented since acquiring the hotel in 2018, led to a 59% EBITDA margin at the Annapolis Waterfront Hotel, 1,200 basis points higher than the second quarter of 2019.
Our asset management strategy since the onset of the pandemic focused on driving margins through aggressive cost control.
This was done primarily through the reduction in labor, but we have also utilized various technology platforms at our hotels, such as mobile check-in and concierge services, guestroom energy management systems and water reuse systems to lower utility costs, and smartphone ordering systems at our food and beverage outlets.
We have been more nimble in this strategy at our independent hotels, which has resulted in significant margin savings versus our brand-oriented portfolio, as our independent and Autograph Collection hotels generated a weighted average 38% EBITDA margin for the second quarter.
Strong performance at our properties this quarter was not limited to just increased occupancies and our ability to push rate as we also saw substantial growth in our restaurant and bars.
At our Parrot Key, revenue generated from our outlets during the second quarter was 58% higher than the second quarter of 2019.
Meanwhile, up in Boston, our Envoy in the Seaport District saw meaningful revenue generation from its Lookout Rooftop and our newly installed taqueria pop-up Para Maria, both of which have been well received by guests and locals alike.
The Envoy boasts the premier rooftop in the city and its popularity helped the hotel achieve close to $2 million in revenues during -- in food and beverage revenues during the second quarter, $1 million of which was generated in June alone.
We expect our restaurant and bars and our outlets at The Envoy will remain popular during the peak summer months.
Based on strong demand at our resorts and increased travel to urban markets from the leisure traveler, our ability to strategically and effectively drive rates and a return of more consistent business travel on the horizon, we believe we are past the inflection point of corporate level cash burn and expect month-over-month positive cash flow for the remainder of 2021.
A few closing remarks on our balance sheet and outlook for the third quarter.
We ended the second quarter with $80.2 million in cash and cash equivalents and deposits.
As of July 1, we had approximately $46 million in capacity on our $250 million senior revolving line of credit, and $50 million of undrawn credit from the unsecured notes facility we placed with affiliates of Goldman Sachs Merchant Bank.
Additionally, we received approximately $1 million in business interruption proceeds in the second quarter from the impact of COVID-19 at several of our hotels.
Based on discussions with our insurance providers, we do not anticipate receiving additional recoveries for business interruption related to the pandemic.
During the second quarter, we successfully refinanced mortgage debt on four hotels: The Hilton Garden Inn Tribeca, Hyatt Union Square, Hilton Garden Inn 52nd Street and the Courtyard L.A. Westside.
As of June 30, 79% of our debt is fixed or swapped with our total debt weighted average interest rate of 4.48% and 3.1 years life to maturity.
We spent $2.6 million on capital projects last quarter, and we continue to limit our capex spend strictly to maintenance and life safety renovations.
During the first half of 2021, we spent $5.3 million on capital projects, and we anticipate our full year capex load to be roughly 40% below our 2020 spend.
We project very little disruption or capital spend for our portfolio across the next few years, which is materially beneficial from a cash flow perspective as the sustained surge in construction costs, freight rates, oil prices, and the continued tightening of the supply chain remain elevated.
Month-to-date in July, we have seen continued growth in our portfolio occupancy and revenues, with the majority of our portfolio in line to slightly ahead of our internal forecast.
The largest outperformance month-to-date in July has been our New York portfolio, which is currently trending up approximately 20% from June on occupancy growth, both on weekdays and weekends.
Month-to-date in July, we are up over 1,000 basis points in occupancy in our Manhattan portfolio, and our New York City Metro, which includes the Boroughs, White Plains and Mystic, are running close to 80% occupancy.
With our sights set on the recovery, which has already commenced, we remain laser-focused on operational performance of the portfolio and accretive opportunities that become available throughout the cycle.
So this concludes my portion of the call.
We're happy to address any questions that you may have at this time. | not providing full-year 2021 guidance at this time. | 1 |
s First Quarter 2021 Earnings Call.
Im Jason Bailey, Director of Investor Relations.
; and Bryan Buckler, CFO of OGE Energy Corp.
In terms of the call today, we will first hear from Sean, followed by an explanation from Bryan of first quarter results.
In addition, the conference call and accompanying slides will be archived following the call on that same website.
Earlier, we reported first quarter consolidated earnings of $0.26 per share, which includes utility earnings of $0.06 per share, earnings associated with our investment in Enable of $0.19 per share, and earnings at the holding company of $0.01 per share.
We've accomplished a lot, and I'm pleased to report that we've made great progress in mitigating the impacts of Winter Storm Uri.
We are back within the guidance range we reported last quarter, and we are not done.
We are one quarter into the year, and we're focused on a great year.
Our efforts to mitigate the impacts of Uri are ongoing as we work consistently to deliver shareholder value.
Bryan will provide additional details when he discusses our financial results.
We've had a productive and busy first quarter, starting the year off by announcing our support of the merger between Enable and Energy Transfer.
And as we work to finalize that merger agreement in February, our service territory experienced Winter Storm Uri, and I'm pleased to say that our operational performance during the storm was strong.
Our employees and our generation fleet performed admirably, and our customers experienced minimal disruptions.
Importantly, we performed our work safely, improving our year-over-year first quarter safety results by 60%, which is a great accomplishment when you consider that 2020 was our second safest year on record.
And particularly when you consider that our members worked in some of the most difficult winter conditions imaginable during the storm.
Then we quickly got to work on legislative and regulatory solutions to address the financial impacts of Uri.
We now have a regulatory asset for the recovery of the winter storm cost in Oklahoma and in Arkansas.
We now have securitization legislation in Oklahoma and in Arkansas.
And we have filed for securitization in Oklahoma and in Arkansas.
Turning to other positive regulatory outcomes in the first quarter.
In March, the Arkansas Public Service Commission approved the settlement in our Third Formula Rate and new rates were implemented April 1.
In Oklahoma, under our grid enhancement mechanism, the work is going well.
We file regulatory reports each quarter as projects are placed in service.
And I'm pleased to say that the entire program is going smoothly.
On the last call, I mentioned that we have a lot of really exciting projects in and around our communities in various stages of development.
The two projects I'm sharing today are only the first, and there are more to come.
We announced an innovative deal with Dobson Fiber to upgrade the resiliency and capacity of our utility communications network to accommodate new grid automation and mitigate the risk of wireless interference.
This is part of our continued grid enhancement efforts to deploy increased automation, monitoring and operational technologies.
This initiative enables us to essentially future-proof our communications network while saving more than 60% of our standard capital deployment and O&M costs.
Those are just real savings for our customers.
We also announced an expansion of the Choctaw Nation/OG&E Solar Energy Center.
And we're proud to continue our work with the Choctaw Nation and expand our commitment to renewable energy.
This commitment is based off customer-driven demand for our renewable energy offerings.
We now have included $25 million to our 2021 capital investment forecast to reflect the inclusion of these two projects in the first quarter.
These are just two examples of the kinds of innovative projects you can expect from us in the future.
We are seeing the recovery we anticipated at the beginning of the year.
Last quarter, we stated our expectations for 2021 weather-normalized load being 2.4% above 2020 levels.
After the first quarter, we still expect full year 2021 weather-normalized load to be at that level.
Adding to our confidence around the return of load is the fact that even during the pandemic, we've continued our trend of strong customer growth, which is up 1.4% over the same period in 2020, driven primarily in our residential and commercial classes.
Add to this, the fact that in Oklahoma, gross receipts are up 38% for the month of April, adding to the confidence we have in our business.
Today, as I've said before, our electric rates are lower than they were in 2011.
And let me share an interesting data point.
When adjusted for inflation, our rates are actually 14% below what they were in 2011.
Business and economic development is active in our service territory.
These low rates are a significant driver of companies coming to or expanding their operations, including electrification in our service territory.
So far, this year, those efforts expect to bring an additional 50 megawatts of load by the end of 2021.
This combination of strong customer growth and outstanding business and economic development activity puts us on track for sustained load growth of at least 1%.
We will continue to work on the many opportunities that will bring more load, more jobs and more investment to our communities in Oklahoma and Arkansas.
So let me put all of this into perspective.
We've continued to achieve positive regulatory outcomes, we've added new innovative projects, we see strong customer growth.
We have some of, if not the lowest rates in the nation, combined with annual load growth and better unemployment rates than most of the nation.
This is all part of our great story that further supports our sustainable business model of growing revenues by attracting new customers, managing expenses by utilizing technology and becoming more efficient, this helps us maintain the low rates, which in turn attracts more customers.
This virtuous cycle continues.
Our results this year will rest on our operational execution, and I'm very confident in our ability to achieve that.
For the remainder of the year, we will achieve final regulatory approval of cost recovery plans for Winter Storm Uri, submit integrated resource plans in Oklahoma and Arkansas, file our Fourth Formula Rate in Arkansas, including a request for an extension of its term, finished construction of the two solar farms, continue our grid enhancement investments in Oklahoma, which are on track to deliver results to our customers.
And finally, we continue to prepare for our next Oklahoma rate case, which we plan to file later this year.
So we've accomplished a lot already in the first quarter, but we're still going.
And this all sets us up for a great year in years to come.
We expect the transaction to close in 2021, subject to the satisfaction of customary closing conditions, including the HSR clearance.
Our intention to prudently exit our midstream investment remains the same, and we will provide information upon closing of the transaction.
On our last call, we talked about our solid compelling investment thesis, supported by a track record of performance.
We put in motion our vision to become a pure-play utility, targeting 5% earnings growth based off lower risk investments that will enhance our customers' experience.
We have some of the most affordable rates in the nation helping to drive economic growth in our communities.
Weve made great progress toward getting back to our 2021 guidance.
Our ability to meet guidance rests on our operational execution, and I'm confident in our ability to do so.
Our company is strong, and while COVID and extreme weather have presented challenges, it's important to understand that we have always been determined to more than simply manage the downturn instead, set our sights on excelling through the recovery.
Starting on slide nine.
For the first quarter of 2021, we achieved net income of $53 million or $0.26 per share as compared to a loss of $492 million or $2.46 per share in 2020.
The loss in 2020 was driven by the impairment charge recorded on our Enable midstream investment.
At the utility, OG&E's first quarter results were $0.04 lower than 2020, primarily driven by the previously disclosed losses that occurred during the extreme winter weather from the Guaranteed Flat Bill program.
As I discussed during our fourth quarter call, the GFB program represents approximately 3% of our load, whereby variabilities in fuel and purchase power costs are not trued up.
The financial impacts of the weather event are consistent with the estimates we provided you on the fourth quarter call.
Excluding the impact of the extraordinary fuel costs in our GFB program, OG&E's core operations performed very well during the first quarter, including strong cost management.
I'll speak to our updated full year 2021 projection in a moment.
Our natural gas midstream operations were income of $0.19 per share in the first quarter compared to a loss of $2.84 in 2020.
The increase in earnings was primarily due to the 2020 impairment of our investment in Enable.
The current quarter was also marked by higher net income from Enable's transportation and storage business resulting from higher natural gas prices.
Turning to our economic update on slide 10.
As Sean mentioned, we are seeing strong employment figures in our service territory, and we are especially pleased with the customer growth of 1.4% year-over-year, illustrating the attractiveness of living and working in Oklahoma and Arkansas.
Furthermore, our commercial segment is showing encouraging strength, with year-over-year load growth of approximately 6% in the month of March alone, leading to the 1.8% quarterly load increase figure you see on the slide.
For the full year, we continue to expect total weather normal load results to be approximately 2.4% higher than 2020 levels.
Let's move to slide 11.
We've made outstanding progress in the quarter toward mitigating the aforementioned GFB program impacts and currently project OG&E full year 2021 results within the lower half of our original guidance range of $1.76 and to $1.86 per share.
On the fourth quarter call, we outlined our initial estimate of approximately $0.10 of headwinds associated with the weather event.
As I mentioned earlier, our estimates continue to come in at approximately this level, included in the $0.10 of headwinds was estimated financing costs associated with the incremental fuel and purchase power, which is no longer an earnings headwind as we were recently able to obtain regulatory orders in Oklahoma and Arkansas for the deferral of the financing cost.
The OG&E team has worked hard during the quarter to further mitigate these impacts and already has line of sight to $0.03 to $0.04 of favorable mitigations, including strong O&M management.
Thus, our current estimate of 2021 full year earnings per share is back in the lower half of guidance with three quarters in front of us.
Looking more long term.
The very solid start to 2021 for our core operations, coupled with the capital investments we are making for our customers and communities in 2021, position our company well for sustained earnings growth into 2022 and beyond.
As I mentioned to you on our fourth quarter call, our business fundamentals are strong, and we have great confidence in our ability to grow OG&E at a 5% long-term earnings per share growth rate through 2025 off the midpoint of our 2021 guidance of $1.81.
On slide 12 and 13, I'd like to update you on the fuel and purchase power costs, the status of our regulatory filings and the securitization path in Oklahoma and Arkansas.
As of March 31, fuel and purchase power costs of approximately $930 million were recorded on the balance sheet, consistent with the initial estimates.
In Oklahoma, approximately $830 million has been deferred to a regulatory asset with the initial carrying charge based on the effective cost of debt financing.
In Arkansas, we have incurred approximately $100 million of cost with the case pending that allows interim recovery of these costs over a 10-year period, including an initial carrying cost that approximates the effective cost of financing.
As Sean mentioned, both Oklahoma and Arkansas have passed securitization laws.
And some of the key parameters of those laws are shown on the slide.
In Oklahoma, we filed an application on April 26, seeking authorization from the OCC to securitize the costs associated with the extreme February weather.
Based on the timeline outlined in the legislation, we would expect to receive proceeds from the securitization by mid-2022, which would restore our credit metrics due to levels we expected prior to the weather event.
In Arkansas, on May 4, we made a filing indicating OG&E's intention to pursue securitization of the fuel and purchase power costs.
As a reminder, the Arkansas legislation dictates that a carrying charge equivalent to a WACC is the appropriate -- is appropriate from the date of cost occurrence to the issuance date of the securitization bonds.
This securitization is pursued in Arkansas, it will replace our open docket that is requesting a 10-year recovery period with a carrying charge at our weighted average cost of capital.
As we noted on our fourth quarter call, we closed on a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs.
We intend to refinance this short-term loan by issuing longer-term debt in 2021, likely with the call feature that coincides with the expected timing of the securitization of the fuel and purchase power cost.
Our balance sheet continues to be one of the strongest in the industry, and our equity plans have not changed.
While our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred, we believe the metrics will return to the targeted 18% to 20% level once the securitizations are complete.
Separately, as a procedural matter, later today, we will update our standard S-3 Chef filing with the SEC, which ensures our continued access to the capital markets.
Finally, we remain confident in our ability to drive long-term OG&E earnings per share growth of 5%, which when coupled with a stable and growing dividend, offers an investors an attractive total return proposition. | compname reports q1 earnings per share of $0.01.
q1 earnings per share $0.01.
og&e's 2021 earnings guidance remains unchanged and is between $352 million to $373 million, or $1.76 to $1.86 per average diluted share.
oge energy-is not issuing 2021 consolidated earnings guidance due to enable not issuing an earnings outlook.
oge energy-currently projects full year results in lower half of range. | 1 |
As the operator indicated, please limit your Q&A participation to one question plus a follow-up.
This will help maximize participation during our time together.
We appreciate your interest in Vulcan Materials Company.
We hope you and your families are well and will continue to be safe and healthy.
Despite the difficulties caused by the pandemic, our company continues to thrive as a direct result of their efforts.
Turning now to the third quarter.
Our financial results can be summed up very simply.
Our teams delivered another quarter of aggregate unit margin expansion through improved pricing, disciplined operating performances and solid execution.
Our aggregate cash gross profit per ton increased by 5% despite an 8% volume decline.
Volume was obviously impacted by the pandemic, but also by severe wet weather across the Atlantic Coast, the Southeast and Texas and wildfires on the West Coast.
We expanded our unit margins by remaining focused on what we could control and by making sure that we were well positioned to respond to a rapidly changing environment.
We've talked about our four strategic disciplines for a number of quarters now, and we believe that they have been a critical part of our success this year.
Our commercial excellence and our operational disciplines have been particularly helpful.
On the commercial side, our aggregate mix adjusted sales price increased by approximately 3% in the quarter.
On a year-to-date basis, mix adjusted pricing increased by 3.5% despite a 4% decline in volume.
Operationally, year-over-year, our cash unit cost of sales was flat, both for the quarter and year-to-date.
Cost control, operating efficiencies and a tailwind from diesel mitigated the impact of lower aggregate volume.
Our four strategic disciplines continue to drive improvement in our unit margins.
This is evidenced by our 7% year-to-date improvement in cash gross profit per ton.
Suzanne will review the quarter and year-to-date results in more detail shortly, but first, I want to address the demand trends that we're seeing.
Certain leading indicators are showing signs of improvement, both sequentially and year-over-year.
However, the pace of recovery and the timing of shipments is not certain.
Residential construction continues to be the most resilient of our market segments.
Starts and permits have rebounded, particularly in our footprint.
Single-family housing is leading the way, and we are especially well positioned in our markets to take advantage of this trend.
Private nonresidential construction continues to be the most variable in use.
Following the drop in the spring, construction starts have remained weak as compared to last year.
However, we are encouraged by improvement in certain leading indicators, which could point to future growth.
Dodge Data states that warehouses and distribution centers, now the largest nonresidential starts category continue to see growth.
As a leading supplier in the majority of our markets, we are well positioned to serve all types of nonresidential business regardless of the category.
According to Dodge, Vulcan-served states are expected to account for approximately 90% of the growth in warehouses and distribution centers over the next two years.
In addition, nonresidential demand for commercial buildings, like gas stations and grocery stores has historically followed the build-out of new housing subdivisions.
We could expect this type of traditional nonresidential construction to follow the growth we're experiencing in residential demand.
As we think about these current trends, it's important to keep in mind that unlike the great recession of 2008, nonresidential construction going into the pandemic was not overbuilt.
The uncertainty surrounding the pandemic has weighed more heavily on this segment.
With respect to public highway construction, most Vulcan-served states have flat to increasing DOT budgets for their fiscal year 2021 versus 2020.
This, coupled with a one-year extension of the FAST Act bodes well for highway demand.
Now that state DOTs have greater clarity around highway revenues, lettings are returning to higher pre-COVID levels and are projected to continue to be consistent with state DOT budgets in 2021.
Timing of shipments to highway projects may start a little slow early in 2021 due to states conservative approaches to lettings earlier this year, but will pick up as the year progresses.
As a more recent data point, aggregate shipments in the month of October were down 5% due to one less shipping day.
While one month doesn't constitute a trend, we were still pleased with the outcome and attribute this performance to better weather and pent-up demand from the third quarter.
As we consider the remainder of 2020, we now believe we have sufficient near-term visibility to provide guidance for the full year.
We expect that our 2020 adjusted EBITDA will range between $1.285 billion to $1.315 billion.
This guidance range is predicated on no major changes in COVID-19 shelter-in-place restrictions, it also assumes our normal weather pattern.
With respect to 2021, we are in the midst of our budget season and still have work to do.
Visibility continues to improve.
Therefore, we expect to be able to provide 2021 guidance in February.
The key point to remember here is, while the pandemic has created uncertainty, our view of the underlying fundamentals of our business remains unchanged.
Our aggregates-focused business is sound, resilient and adaptable to changing market conditions.
We have a history of good operational execution, and this increases our confidence in our ability to compound unit margins.
We're in the right geographies.
Our balance sheet and liquidity position are a great source of strength and flexibility and will support our operational initiatives and our growth plans.
Going forward, we will remain focused on the things that we can control, keeping our employees safe and healthy, taking good care of our customers and ensuring strong execution on our operating disciplines.
We have confidence in our future success.
And now I'll hand the call over to Suzanne for additional comments.
I'll cover a few financial highlights and then comment briefly on our balance sheet and liquidity position.
Our adjusted EBITDA for the third quarter was $403 million.
Adjusted EBITDA margins increased by 210 basis points as compared to the prior year despite an 8% decline in total revenues.
Significant contributors to our quarterly EBITDA margin improvement were: first, the aggregates unit margin expansion that Tom discussed earlier; and second, a 6% or $5 million year-over-year reduction in SAG expense.
These metrics have improved on a year-to-date basis as well.
Our aggregates cash gross profit per ton increased by 7% to $7.15, while aggregates volume decreased by 4%.
SAG expense for the nine months declined by 5% or $14 million due to the execution of cost reduction initiatives and general cost control.
Now I'd like to provide a little color on our quarterly segment performance.
Starting with aggregates, volumes declined in most of our markets, reflecting weaker demand resulting from the pandemic.
In addition, the key markets that Tom called out were particularly affected by severe weather as we experienced a record-setting number of named storms.
California shipments were impacted by wildfires and resulting power outages, which interrupted the supply of cement or ready-mix concrete production.
This limited construction activity.
Aggregate sales price growth in the quarter of nearly 3% on a mix adjusted basis was widespread across our footprint, reflecting a positive pricing environment.
The combination of sales price growth and good cost control more than offset reduced volume.
And as a result, virtually all of our markets improved their respective unit profitability.
Moving to our nonaggregates segments.
Asphalt gross profit improved by $3 million as compared to last year's quarter.
A 13% volume decline was more than offset by improved pricing and lower liquid asphalt costs.
The concrete segment's gross profit was $12 million, a reduction of $3 million versus the prior year.
Shipments decreased by 11% due to wet weather, particularly in Virginia, our largest concrete market.
California's volume was also less than last year's third quarter due to the factors previously mentioned.
On a year-over-year basis, we were particularly pleased with our improving return on investment profile.
For the trailing 12 months ended September 30, ROI was 14.2%.
And consistent with past practice, this was calculated on an adjusted EBITDA basis.
Turning now to the balance sheet and liquidity.
We took further steps this quarter to enhance our position.
We renewed our revolving credit facility for another five years and took the opportunity to increase its size from $750 million to $1 billion.
All other terms were substantially similar to those contained in the previous facility.
At the end of the quarter, our leverage ratio was 1.7 times on a net debt-to-EBITDA basis, reflecting $1.1 billion of cash on hand.
Approximately $500 million of this cash on hand will be used to repay a debt maturity coming due in March 2021.
And at September 30, our available liquidity was a very healthy $2 billion.
We also generated a robust $1.1 billion of operating cash flow in the trailing 12-month period.
That represents a 23% increase as compared to the previous period.
We have been and will continue to be disciplined about how we invest our cash and therefore, our capital allocation priorities are unchanged.
Capital expenditures for the nine months totaled $229 million.
And we now expect to spend between $300 million and $350 million this year, a modest increase from our prior guidance of $275 million to $325 million.
For making marked progress toward our longer-term goal of $9 cash gross profit per ton and for driving our improved results through our four strategic disciplines. | qtrly total revenues $1,068.3 million versus $1,049.2 million.
sees 2021 aggregates shipments to increase between 1 percent and 4 percent compared to 2020. | 0 |
Actual results could vary materially from such statements.
Earnings for the quarter were $1.57 per share compared to $0.65 in the prior year quarter.
Adjusted earnings per share increased to $1.83 in the quarter compared to $1.13 in 2020.
Net sales in the quarter were up 12% from the prior year, primarily due to increased volumes across all segments, favorable foreign currency translation and the pass through of higher material costs.
Segment income improved to $433 million in the quarter compared to $298 million in the prior year, primarily due to higher sales unit volumes, favorable price cost mix and the non-recurrence of charges for tinplate carryover costs that we saw in 2020.
As outlined in the release, we currently estimate second quarter 2021 adjusted earnings of between $1.70 and $1.80 per share.
This estimate includes the results of the European tinplate business, which will be reported as discontinued operations beginning with the second quarter results.
We are maintaining our full year adjusted earnings guidance of $6.60 to $6.80 per share.
Assuming the sale of the European tinplate business closures at the beginning of the third quarter, we expect that the earnings dilution impact over the balance of the year of about $0.50 per share will be offset by improved results in the remaining operations as compared to our original guidance.
Our expected tax rate for the year remains at 24% to 25%.
Demand was strong across all major businesses and despite the ongoing challenges posed by the pandemic and severe winter weather in the United States the company continue to convert strong volume growth into record earnings.
This performance could not have been possible without great people and our global associates continue to perform extraordinarily in the face of the pandemic, ensuring that our customers receive high quality products and services in a safe and timely manner.
And while it feels that we're turning the corner with widespread vaccinations now available.
New streams and increased positivity rates in some jurisdictions remind us that we must remain vigilant in our adherence to recommended behaviors.
Global demand continues to be very strong for the beverage can and we are committed to deploying necessary capital to meet customer needs.
As detailed in last night's release, we expect to commercialize 6 billion units a beverage can capacity in 2021 with further investments being made to bring on at least that much more in 2022.
Before reviewing the operating segments we thought it would be well to remind you that delivered aluminum in North America sit around $1.28 a pound versus $0.75 a pound last year at this time, so an increase of 70%.
And as we contractually pass through the LME and the delivery premium, reported revenues will reflect both volume increases and the higher aluminum cost this year.
In Americas Beverage, demand remained strong across all of the markets we serve with overall segment volumes up 9% in the first quarter.
We expect that demand will continue to outweigh supply for the foreseeable future.
And as described to you in February, we have eight production lines in various stages of construction to bring more supply to these markets during 2021 and 2022.
While the CMI no longer publishes industry volumes, we can tell you that our North American volumes increased 12% in the first quarter compared to the same prior year period.
Unit volumes in European Beverage increased 6% in the first quarter as growth across Northwest Europe and the Mediterranean offset softness in Saudi Arabia.
Segment income reflects contribution from the volume growth and the two aluminum lines in Seville, Spain, which were down for conversion in last year's first quarter.
Sales unit volumes in European Food increased 6% in the first quarter as the business continues to benefit from strong consumer demand for packaged food.
Segment income which almost doubled the prior-year amount reflects the above noted volume growth.
$5 million of favorable foreign exchange and the negative impact of tinplate carryover included in the prior year first quarter.
As reported on April 8, 2021, the company entered into an agreement to sell its European tinplate businesses, which includes European Food.
And as Tom said, we expect the sale to be completed in the third quarter and beginning with the second quarter, results will be reflected in discontinued operations.
Asia-Pacific reported 8% volume growth in the first quarter as both Southeast Asia up 5% and China up more than 30%, continue to show recovery from the pandemic related shutdowns.
As described in February, activity levels are returning.
However, we expect there will be virus-related shutdowns and movement control orders from time to time across the region throughout 2021.
Excluding foreign exchange, results for Transit Packaging were in line with the prior year with industrial demand surging, activity remains extremely strong in Transit and we expect this segment will post full year segment income growth of approximately 25% in 2021 over 2020.
There will be a large outperformance in the second quarter against an easy comp with further gains through the end of the year.
Other operations also reported strong results in the first quarter led by North American Food and our beverage can making equipment businesses.
In summary, a great start to 2021.
With numerous projects completed last year and several more under way currently, we remain well positioned to continue to capture our share of global beverage can growth.
Importantly, we continue to convert growth into expanded earnings and cash flow.
As Tom discussed, our full year guidance remains unchanged, despite expected dilution from the sale of the European tinplate businesses.
Better than expected first quarter performance combined with continued strong demand across beverage and transit will allow us to earn through sale-related dilution and a rising commodity cost environment.
And just before we open the call to questions, we ask you that you limit yourselves to two questions initially so that everyone will have a chance to ask their question.
But always as -- feel free to jump back into the queue.
And with that, Dale, we're now ready to open the call to questions. | compname reports q1 adjusted earnings per share $1.83.
q1 adjusted earnings per share $1.83.
q1 earnings per share $1.57.
sees q2 adjusted earnings per share $1.70 to $1.80.
sees fy adjusted earnings per share $6.60 to $6.80.
qtrly global beverage can volumes grew 8%. | 1 |
The company undertakes no obligation to update this information.
Whitestone's third quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website www.
whitestonereit.com in the Investor Relations section.
Now over to Jim Mastandrea, our Chairman and CEO, to update you on our third quarter results.
Operating portfolio occupancy increased to 90.2% from 89.9% last quarter and annualized base rent increased to $20.41 from $19.95 last quarter.
Our overall foot traffic at our centers in 3Q '21 was 35% higher than the same quarter in 2020.
With the resurgence of the COVID through its delta variant, we maintained a steady, but slightly lighter pattern versus 2Q '21.
We continue to experience active recurring traffic from existing and new community members visiting our centers as population shifts continue with the ongoing migration from corporations and individuals to Arizona and Texas.
Regarding our financial performance for the quarter, revenue grew by 9% to $32.4 million this quarter compared to $29.9 million in 3Q '20.
Same-store net operating income growth of 7% in this quarter and 8% in Q2 was driven by increases in occupancy and annual base rent per square foot as previously noted, as well as positive leasing spreads.
A key financial indicator for REIT is FFO.
Funds from operations core was $0.25 per share and $0.75 per share in the quarter and the nine months ended September 30, 2021 respectively.
Along with this noted growth, we continue to make progress toward one of our long-term goals of deleveraging the trust.
We reduced our debt to EBITDA, which is now 8.1 times down from 9.4 times a year ago.
Equally important to the trust is our dividend, which we consider sacred.
Regarding our quarterly dividend, we now have paid dividends to our shareholders for the 134th consecutive months since our IPO.
Our dividend yield of 4.3% remains at a premium and our payout ratio to FFO core is exceptionally strong at 42%.
This quarter we reactivated our external growth plan with the acquisition of Lakeside Market in Plano, Texas at a purchase price of $53.25 million.
Importantly, this acquisition did not require any additional corporate overhead, which is a key component toward our attaining economies of scale.
Along with this acquisition, we're actively pursuing additional properties in our strong pipeline of assets in Austin, Dallas and Phoenix.
Looking at our current portfolio, we now have 4.6 million of our 5.1 million square feet of space leased.
Our approximately 1,500 tenants' average lease space is 3000 square feet per tenant, complemented by a mix of larger square footage leases by our grocery anchors.
Our strong tenant relationships and rigorous vetting process ensures the quality of our revenue for our portfolio and stability of our cash flow.
I would like to point out that our tenant improvement costs to bring a new smaller tenant into one of our centers is much lower per square foot than the cost of a big box tenant.
By doing so, we spread our risk among a group of tenants in a relatively the same space as a larger tenant, achieve higher rent per square foot, annual escalators of 2% or 3% and some of our tenants pay percentage lease of revenues.
In addition, typically our tenants pay taxes, insurance and common area maintenance.
Our strong leasing activity is one of the key drivers and performance this quarter.
Some important metrics to highlight that our new lease count for 3Q '21 is 38 versus 35 in the prior quarter and 32 in the prior year.
Our leasing spreads for 3Q '21 are 5.4% versus 3.1% in the prior quarter and 2.9% in the prior year, both of which are moving in a positive direction.
In summary, the update I've shared with you today highlights, in particular, our business model continues to perform exceptionally well.
Our leasing strategy focusing on entrepreneurial tenants continues to produce consistent results.
And most notably, we are continuing to make good progress to achieving our long-term goals.
While we are pleased with our continued improving performance, we know that the work ahead of us is cut out, but our team remains committed to serving our shareholders and increasing long-term value.
I appreciate the opportunity to share some great results for the third quarter.
During the quarter, our best-in-class geography and strategically designed tenant mix have produced strong top line and bottom line growth, and our long-term focus and day-to-day execution have allowed us to make significant progress toward our long-term goals of scaling our infrastructure and improving our overall debt leverage.
The MSAs that we operate in, continue to see significant population migration and corporate relocations producing jobs from other areas of the country.
This is best evidenced by record leasing activity, occupancy and annualized base rent growth, year-over-year and quarter-over-quarter topline revenue, NOI and FFO growth, robust leasing spreads, strong same-store NOI growth, reduced debt levels and interest cost resulting in improved debt leverage metrics and greater scale of our G&A infrastructure.
Total revenue was $32.4 million for the quarter, up 6% from the second quarter and up 9% from the third quarter of 2020.
The revenue growth was driven by a sequential 0.3% increase in same-store occupancy from Q2 and a 1.2% improvement compared to Q3 of 2020.
We are also benefiting from our ABR per square foot, rising 2.3% sequentially and 5.3% from a year ago along with lower and collectability reserves.
Property net operating income was $23.2 million for the quarter, up 5% sequentially and up 9% from the third quarter of 2020.
Q3 same-store NOI increased 7% from Q3 of 2020.
Net income for the quarter was $0.06 per share, up from $0.02 per share in the prior year quarter.
Funds from operations core was $0.25 per share in the quarter, up 9% from the second quarter of 2020 and year-to-date FFO core per share was $0.75 per share, up 9% from the same period of 2020.
Our leasing activity in the quarter continued to build on our very strong first and second quarters, with 38 new leases, representing 90,000 square feet of newly occupied spaces.
Our new leasing activity for the nine months was 56% higher on a square foot basis than 2020 and 48% higher than 2019.
On a total lease value basis, our new leasing activity for the nine months was 112% higher than 2020 and 191% higher than 2019.
Leasing spreads on a GAAP basis have been a positive 8.5% over the last 12 months and third quarter leasing spreads increased by 5.4% on new leases and 14.1% on renewal leases signed.
Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 2.3% to $20.41 from $19.95 in the previous quarter and increased 5.3% from a year ago.
Total operating portfolio occupancy stood at 90.2%, up 1.2% from a year ago and up 0.3% from the second quarter.
Including our newest acquisition Lakeside Market, our total occupancy is 89.9%, up 1% from a year ago.
Our collections continued to be very strong in the third quarter, reflecting the overall high collection levels and collections on tenants classified as cash basis.
Our tenant receivables decreased by $1 million, an improvement of 4.4% from year-end 2020.
Our interest expense was 4% lower than a year ago, reflecting our lower net debt.
At quarter end, we had $22 million in accrued rents and accounts receivable.
Included in this amount is $17.8 million of accrued straight-line rents and $1.3 million of agreed upon deferrals.
Our agreed upon deferral balance is down 43% from year-end reflecting tenants honoring their payment plans.
Turning to our balance sheet.
Since early last year, we have implemented various measures to strengthen our liquidity.
Our total net debt was $616.6 million, down $20.5 million from a year ago, improving our debt to gross book real estate cost ratio to 51% down from 55% a year ago.
Our debt to EBITDA ratio improved 1.3 turns from a year ago and 0.1 turn from the second quarter to 8.1 times in Q3.
We are pleased with the significant progress we are making toward our long-term debt reduction goal and remain steadfast in our commitment in this area.
As of quarter end, we have $155.5 million of undrawn capacity and $81.8 million of borrowing availability under our credit facility.
During the quarter, we sold 3 million common shares under our ATM program, resulting in $28 million in net proceeds to the company at an average sale price of $9.49 per share.
These strong results in 2021 are a testament to the strength of Whitestone's strategic geographic focus and business model.
We are encouraged by the acquisition of Lakeside Market in the quarter and look forward to continued delivery of value to all of Whitestone's stakeholders.
With that now -- we will now take questions.
Operator, please open the lines. | q3 ffo per share $0.25.
q3 revenue $32.4 million versus $29.9 million. | 1 |
Also joining us here today is Tim Bruckner, our Chief Credit Officer.
This quarter's results continue to demonstrate the unique benefits of Western Alliance's national commercial business strategy to position WAL as one of the country's premier growth commercial banks that consistently generates leading balance sheet and earnings growth with superior asset quality across economic cycles.
As a company, we are proud of our thoughtful, safe, sustainable growth and are excited to have passed the $50 billion asset milestone.
Validating our strategy during the quarter, we raised $300 million in inaugural preferred offering, achieving the lowest ever preferred dividend rate for a US bank under $100 billion in assets at 4.25%.
In the third quarter, exceptional balance sheet expansion continued with our highest ever quarterly loan growth of $4.8 billion or 63% on a linked quarter annualized basis and deposits rose by $3.4 billion or 32% annualized as we continue to effectively deploy liquidity.
Loan demand continued to broaden across our business lines, with C&I loans increasing by $2.2 billion, inclusive of $240 million of PPP runoff, along with $2.3 billion of growth in our residential portfolio.
Notably, capital call lines drove $1.9 billion of growth within C&I as deal activity continues to be strong and utilization rates rose.
Additionally, resort lending and hotel franchise finance contributed approximately $114 million to loan growth as well as $148 million increase in CRE investors.
For the third quarter, WAL generated record total net revenues of $548.5 million, a 57% annualized rise, in PPNR to $317.1 million and adjusted earnings per share of $2.30.
Adjusted earnings per share quarter-to-quarter rose by $0.01 as the company recorded a provision for credit losses, totaling $12.3 million, an increase of $26.8 million from the $14.5 million provision release in the second quarter.
We remain one of the most profitable banks in the industry with return on average assets and return on average tangible common equity of 1.83% and 26.6%, respectively, which will continue to support capital accumulation and strong capital levels in the quarters to come.
I would like to reiterate that AmeriHome is now integrated into the strategic fabric of Western Alliance and is thoughtfully managed to maximize value for the entire bank through loan, deposit and net interest income growth.
A $5.2 billion increase in average earning assets drove net interest income growth of $39.9 million or 10.8% for the quarter or 43% annualized to $410.4 million of excess liquidity deployment into loans and loans held-for-sale contributed significantly to earnings.
Fee income increased $2.1 million to $138.1 million and now represents over 25% of total net revenue.
Asset quality continues to remain stable as total nonperforming assets declined to $10 million to 17 basis points of total assets and net charge-offs were $3 million or 4 basis points.
Finally, what excites me most is the diverse set of growth opportunities in front of us.
We will continue to do what we do best and support our clients in attractive markets nationally where they do business.
I believe we have exited the pandemic as an employer of choice for leading specialized commercial lenders, which positions us well or extremely well to attract and retain uniquely qualified talent to thoughtfully sustain growth with superior risk-adjusted returns.
For example, during the quarter, we hired two seasoned teams.
We added 11 people based in Texas to our single-family home construction CRE national business line and brought on the leading national restaurant franchise finance team with the hire of six loan and credit professionals.
Both teams join us from larger commercial banks where they improved their business plans and built robust multibillion-dollar books of business.
The Texas CRE team has $10 million in outstandings and an additional $110 million approved to be funded and a $400 million pipeline.
Likewise, the restaurant franchise finance team has $90 million in outstandings and $54 million approved to be funded and a pipeline of $300 million.
Dale will now take you through the details of our quarterly financial performance.
For the quarter, Western Alliance generated record net revenue of $548.5 million, up 8.3% quarter-over-quarter or 33% annualized.
Net interest income grew $39.9 million during the quarter to $410.4 million, an increase of 44% year-over-year, primarily a result of our significant balance sheet growth and deployment of liquidity into higher-yielding assets.
PPNR rose 57% on an annualized linked quarter basis to $317.1 million excluding acquisition and restructuring expenses.
Noninterest income increased $2.1 million to $138 million from the prior quarter as mortgage banking-related income rose $12 million for the quarter and totaled $123.2 million.
Servicing revenue increased $23 million in the quarter as refinance activity slowed, despite a smaller servicing portfolio of $47.2 billion in unpaid principal balance.
Gain on sale margin was 51 basis points for the quarter as we extended the time from funding to sale, which positively impacted net interest income.
With these evolving mortgage sector fundamentals, AmeriHome continues to meet our pro forma acquisition expectations, contributing $0.58 during the quarter, which is inclusive of $0.20 in net interest income from AmeriHome using our balance sheet, an opportunity most stand-alone correspondent lenders don't have.
Finally, adjusted net income for the quarter was $238.8 million or $2.30 in adjusted EPS, which is inclusive of a credit loss provision of $12.3 million, but excludes pre-tax merger and restructuring charges of $2.4 million.
Turning to net interest drivers.
During the quarter, deployment of our excess liquidity into higher-yielding assets drove both loan growth and net interest income growth.
Loans held-for-sale increased $2.1 billion and are yielding 3.35%.
On a linked-quarter basis, yields on loans held-for-investment declined 20 basis points to 4.28%, which is fully explained by the continued strong growth of low to no loss asset categories, namely residential loans and capital call lines.
Interest-bearing deposits remained relatively stable from the prior quarter at 21 basis points as were total cost of funds at 28 basis points.
Consistent with our previous comments, we believe that in the current rate environment, funding costs have stabilized.
Net interest income grew $39.9 million during the quarter to $410 million or 44% year-over-year as balance sheet growth and optimization of earning asset mix generated robust spread income.
Average earning assets increased $5.2 billion or 12% during the quarter to $48.4 billion.
Additionally, we successfully deployed liquidity into loans and have held the investment portfolio relatively flat in favor of loans held for sale, which we view as a higher-yielding cash-like alternative.
Despite our successful liquidity deployment in Q3, we still have meaningful dry powder of $1 billion in cash and the opportunity to further fund loans through continued deposit growth.
As a result of loan growth in lower yielding categories, NIM declined 8 basis points to 3.43%.
We expect continued strong net interest income growth as we're well positioned to take advantage of a rising rate environment as 71% of our commercial loan portfolio is variable rate, and we have 47% noninterest-bearing deposit funding.
Our efficiency ratio improved to 41.5% from 44.5% during the quarter, while we continue to make investments to support risk management and sustained growth.
The inherent operating efficiency of deploying excess liquidity has helped push our efficiency ratio to the lower 40s.
Pre-provision net revenue increased $39.7 million or 14% from the prior quarter and 75% from the same period last year.
This resulted in a PPNR ROA of 2.45% for the quarter, an increase of 14 basis points compared to 2.31% from the last quarter.
This continued strong performance and leading capital generation provides us significant flexibility to fund ongoing balance sheet growth, support infrastructure and capital -- other capital management actions as well as meet credit demand.
Balance sheet momentum continued during the quarter as loans increased $4.8 billion or 15.9% to $34.8 billion.
Strong deposit growth of $3.4 billion brought balances to $45.3 billion at quarter end, and all total assets have grown 58% year-over-year to $52.8 billion.
Total deposits increased $313 million over the prior quarter to $2.1 billion, primarily due to overnight borrowings of $400 million, partially offset by redemption of $75 million in subordinated debt.
As Ken described, we experienced record quarterly loan growth this quarter with growth evenly split between residential and C&I loans.
In all, loans grew $4.8 billion during the quarter and were up $5 billion ex PPP runoff and 34% year-over-year.
Residential real estate and C&I loans grew $2.3 billion and $2.2 billion, respectively.
We continue to see broad-based core deposit growth across our business channels.
Deposits grew $3.4 billion or 8% in the third quarter, with the strongest growth in savings and money market accounts of $1.6 billion.
Noninterest-bearing DDA accounts contributed $950 million and represents 47% of total deposits.
Strong performance from commercial clients, robust fundraising activity and tech and innovation and seasonal inflows in HOA banking relationships were all significant drivers of deposit growth during the quarter.
We are confident in the stickiness of deposits that we've generated in recent quarters, particularly as our newer initiatives are finally taking root.
Our asset quality remains strong and stable.
Special Mention loans continue to decline to $364 million or 105 basis points of funded loans.
Total classified assets rose $26 million in the third quarter to $265 million or 50 basis points in total assets, but are down more than 40% from a year ago on a ratio basis.
Total nonperforming assets declined $10 million to 17 basis points in total assets.
Quarterly credit losses continue to be nominal.
In the third quarter, net charge-offs were $3 million or 4 basis points of average loans annualized compared to $100,000 in the second quarter.
Our loan allowance for credit losses increased $15 million from the prior quarter to $275 million due to robust loan growth.
In all, total loan ACL to funded loans is 80 basis points or 82 basis points when excluding PPP loans.
As mentioned in prior quarters, the strategic focus of the bank is to source a significant portion of loan growth from low to mid last [Phonetic] segments to achieve a diversified risk -- risk-diversified portfolio.
With the third quarter loan growth, our low to no loss segments now comprise over half of total loans.
Given our industry-leading return on equity and assets, we generate sufficient capital to fund about 25% to 35% annual loan growth depending on the mix and this is after dividend service.
Our tangible common equity to total asset ratio of 6.9% and common equity Tier 1 of 8.7%, were weighed down this quarter by robust asset growth in excess of these levels.
As you have seen throughout the year, we took several capital actions to enhance our capital staff and support ongoing growth.
During Q3, we issued $300 million of preferred equity, which was slightly offset in total capital as we redeemed $75 million of subordinated debt.
We are also redeeming $175 million of 6.25% subordinated debt this quarter, which we anticipate to be completed in November.
We will recognize a $6 million pre-tax nonrecurring charge associated with this redemption as we accelerate amortization of origination costs on net debt.
Inclusive of our quarterly cash dividend payment, which we increased to $0.35, our tangible book value per share rose $1.81 in the quarter to $34.67 or 19% growth from the past year.
Our tangible book value per share growth is industry-leading and has grown 2.5 times that of the peers over the past five years or at a compound annual rate of over 19%.
I'll now hand the call back to Ken to conclude.
The third quarter really was an exceptional quarter from an earnings and loan growth perspective as our distinctive national business strategy model continues to hit on all cylinders.
Impressively, end-of-period loan balances were $3.3 billion greater than the average balance, which provides a strong jump-off point for the fourth quarter, net interest income in addition to the $1 billion in excess liquidity that we are gradually deploying in the coming quarters.
We're very excited about the diverse set of growth opportunities in front of us as we enter the fourth quarter.
Looking forward, for full year 2022, you can expect loan held for investments to continue robust growth with a quarterly minimum of $1.5 billion to $2 billion, an increase from the prior guidance of $1 billion to $1.5 billion or a low to mid-20s percent growth rate for the year with flexible origination mix designed to maximize net interest income.
Today, approximately half of our growth was generated from low to no loss residential mortgages.
Deposits are expected to grow in line with loans as we work to deploy excess liquidity and normalize the loan-to-deposit ratio, which today stands at 77%.
We expect to maintain our efficiency ratio in the lower 40s as we continue to invest in risk management and technology and work to bring new business lines, products and services to market.
Total revenue and PPNR growth will track balance sheet growth as we benefit from operational leverage.
Regarding capital, we are targeting a CET1 ratio of 9%, which our robust quarter-end loan growth impacted.
We have several mechanisms to address our capital levels.
Most importantly, we generate significant capital through earnings growth and have historically demonstrated our success in accessing the capital markets.
In conclusion, we continue to see strong pipelines and have the operating flexibility to both execute on near-term opportunities while investing for the long-term growth. | q3 revenue rose 8.3 percent to $548.5 million.
net interest income was $410.4 million in q3 2021. | 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's customers and its operations could be potentially adversely impacted by the ongoing COVID-19 pandemic.
While we continue to be impacted by COVID-19, our markets are stabilizing and our businesses have adapted to the new normal way of operating, which encompasses a variety of challenges that we have had to overcome.
While we have had an uptick in COVID cases, all of our plants have remained open with normal production.
The collective efforts of our folks generated consolidated sales of $227 million for the third quarter, split almost equally between our Metal Coatings and Infrastructure Solutions segments.
We had sequential improvement in operating performance, and we have returned over $44 million of capital to shareholders in the form of cash dividends and share repurchases through the third quarter of this year.
Also, we have made good progress on our Board-led strategic review that we announced earlier.
While sales were down 22% from Q3 of last year, our realignment activities and operational performance generated net income of $19.7 million, down about 10% from the same period of the prior year.
This resulted in earnings per share of $0.76 per diluted share, or $0.80 on an adjusted basis.
Our Metal Coatings business continues to execute strongly while navigating the economic uncertainty resulting from COVID.
Hot-dip galvanizing sales were down 8.8% from the same quarter last year, while Surface Technologies was down more due to the nature of their customer base being more impacted by COVID.
Within our Infrastructure Solutions segment, third quarter sales results improved sequentially, even with a muted fall refining turnaround season.
Segment results were below the same quarter of the prior year due to the protracted weak demand for refined oil products, as well as lower international sales, primarily from China.
As we previously communicated earlier this year due to shifting industry and customer dynamics and the protracted impact of the COVID-19 pandemic, we began to take aggressive steps to accelerate the strategic restructure of our portfolio of businesses with the goal of becoming predominantly a coatings business.
Our actions during the quarter included recording a loss on the sale of SMS of $1.9 million and initiating a comprehensive Board-led review of our businesses with the assistance of leading independent financial, legal and tax advisors.
As I mentioned, our review of the Infrastructure Solutions businesses and associated assets, and the exploration of other capital allocation opportunities to maximize shareholder value is ongoing and I am pleased with the progress the team has made during the quarter.
Finally, given the share repurchases currently and attractive use of our capital, we repurchased over 652,000 shares in the quarter, which brings our total for the year to over 850,000 shares.
While our Metal Coatings segment had lower sales in the third quarter of the prior year, they were able to generate higher operating income and improved operating margins to 24.8%.
Surface Technology sales were still way off at some plants, primarily due to how badly COVID impacted demand for several of their largest customers.
However, during the quarter, Surface Technologies began to reopen powder coating lines in two Texas plants that had previously been idled earlier in the year.
I am particularly pleased with how the Metal Coatings team continues to drive value through outstanding customer service and operational performance while maintaining market-level pricing as they benefited from lower zinc costs during the quarter.
We remain committed to our strategic growth plan for this segment, as evidenced by last week's announcement regarding the acquisition of Acme Galvanizing in Milwaukee, Wisconsin.
Although COVID has slowed our normal pace of acquisitions, I am grateful that the team was able to close this acquisition right after the holidays.
As we previously indicated on our second quarter earnings call, the third quarter turned out sequentially stronger, but turnaround activity remained constrained by COVID travel restrictions and continued low demand for refinery products.
Our Infrastructure Solutions segment's third quarter fiscal 2021 sales decreased by 31.5% to $111 million.
This resulted in operating income of $8.7 million as compared to $17.4 million in Q3 a year ago.
As I mentioned previously, the decline in sales was a result of muted refinery turnaround activity in the quarter, particularly in the U.S., as well as lower China high-voltage bus shipments and decreased demand for some of our oil patch related products and services.
WSI's domestic and foreign facilities remained open and working and crews deployed on several smaller projects.
All of the electrical platforms operations also remained open throughout the quarter, as they effectively managed the uptick in COVID cases.
Due to the prolonged uncertainty associated with COVID pandemic on many of our end markets, we will not provide an update to our previously suspended fiscal 2021 earnings and sales guidance range.
However, we believe our fourth quarter will be seasonally lower than the third quarter, but we should generate improved earnings versus the fourth quarter adjusted earnings of last year.
Our low debt level combined with our consistent ability to generate strong cash flow provides us with the ability to effectively manage our debt and liquidity throughout the remainder of fiscal year 2021 and beyond.
We expect to establish guidance for normal cadence for the fiscal 2022, as we wrap up our annual budgeting process and review it at our upcoming Board meetings.
Our Metal Coatings business is operating at a fairly normal level despite some continued restrictions and disruptions in a few of the cities and states we're operating in.
We are confident though that our business remains vital to improving and sustaining infrastructure.
So, we will use the remainder of our fiscal year to position our core businesses to emerge stronger and better equipped to provide sustainable profitability growth long into the future.
For the third quarter of fiscal year 2021, we reported sales, as Tom had noted, of $226.6 million, a $64.5 million decrease or 22.2% lower than the third quarter of the prior year.
Sales were down primarily as a result of lower sales in the company's Infrastructure, Industrial platform as a result of the pandemic and lost aggregate sales from divested entities over the past year.
Net income for the third quarter of fiscal '21 was $19.7 million, a decrease of $2.3 million or 10.6% below the prior year third quarter.
Diluted earnings per share of $0.76 per share declined 9.5% compared to the $0.84 per share in the prior year third quarter.
Despite the lower sales, third quarter fiscal 2021 gross margin improved 100 basis points to 24.1% on a year-over-year basis and was driven by continued strong margin performance within the Metal Coatings segment.
Operating margins of 12.3% of sales increased 80 basis points compared to 11.5% of sales in the prior year.
Operating income for the third quarter of fiscal 2021 decreased 16.6% to $27.9 million from $33.4 million in the prior year third quarter.
Third quarter EBITDA of $39.6 million decreased 15.4%, compared to $46.8 million in EBITDA in last year's third quarter.
As for the year-to-date results, through the third quarter of fiscal '21, we reported year-to-date sales of $643.3 million, 21.2% below the $816.5 million in sales in the same period last year.
Year-to-date net income for the third quarter was $23.5 million, a decrease of $35.4 million or 60.2% from the same period last year.
Year-to-date net income, as adjusted for the restructuring and impairment charges primarily incurred earlier in the year was $39 million, which was $19.9 million or 33.8% lower than the comparable prior year results.
Year-to-date reported diluted earnings per share declined 59.8% to $0.90 a share as compared to $2.24 per share for the same period last year, primarily driven by restructuring and impairment charges, as well as softer markets and travel restrictions resulting from the pandemic, mostly in our Infrastructure Solutions segment.
On an adjusted basis, year-to-date 2021 diluted earnings per share was $1.49 per share, a reduction of 33.5% from the prior year.
Our fiscal year 2021 year-to-date gross margin of 22.2% declined 60 basis points from a gross margin of 22.8% from the prior year.
Year-to-date reported operating profit of $42.8 million was $43.8 million or 50.5% lower than the $86.6 million reported for the same period last year.
Year-to-date reported operating margin of 6.7% decreased 390 basis points compared to 10.6% last year.
On a year-to-date basis, excluding the impact of the $20.3 million of restructuring and impairment charges, operating margins were 9.8% or 80 basis points below prior year.
I'll now turn to discussion regarding our liquidity and capital allocation.
On a year-to-date basis, our net cash provided by operating activities of $59.4 million declined $12.7 million or 17.6% from the comparable period in the prior year, primarily the impact of lower year-to-date net income.
During the third quarter of fiscal 2021, as Tom had noted, we repurchased 652,000 shares of our common stock at an average price of $37.66.
On a year-to-date basis, we have repurchased 852,000 million [phonetic] shares at an average price of $36.31 per share.
Investments in capital equipment to support our business were $8.6 million for the third quarter and $27.9 million on a year-to-date basis, which are in line with our expectations of spending roughly $35 million for the year.
As of the end of our third quarter of fiscal '21, our existing debt of $182 million is down $20.9 million from the end of the year, as we continue to effectively manage our balance sheet.
I will close by sharing with you some key indicators that we continue to monitor.
For the Metal Coatings segment, fabrication activity will remain solid during the balance of our fourth quarter and we are off to a reasonably good start in December.
Within our galvanizing business, we are closely tracking steel fabrication and construction activity.
Zinc costs in our kettles are relatively stable, but we anticipate increases in zinc costs in fiscal 2022 as zinc prices on the LME have been rising for a while now.
The Acme Galvanizing team is being quickly integrated into our existing operating network, bringing our total hot-dip galvanizing locations to a market-leading 40 sites in North America, in spite of recently closing two Gulf Coast locations.
For Surface Technologies, we are primarily focused on growing sales with both existing and new customers and driving operational process improvements.
Within the Industrial platform of the Infrastructure Solutions segment, we continue to carefully monitor the COVID situation in the states with large refining capacities.
Currently, we still are experiencing travel restrictions in some countries.
For the Electrical platform of the Infrastructure Solutions segment, we are carefully tracking proposal activity and experienced solid bookings in December.
We will continue to focus on growing the backlog for many of our business units so that we enter fiscal year 2022 in good shape.
Finally, for corporate, we have strong cash management processes and have further focused our oversight on cash flow indicators and customer credit.
Currently, we have not experienced any slowdown in customer payments.
Post-COVID crisis, we remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins, including an increased contribution from Surface Technologies.
We believe galvanizing would tend to run to the high end, if not above the 23%, while Surface Technologies is going to have to rebuild this margin profile as customer demand grows.
For Infrastructure Solutions, we will continue to focus on improving operating margins while we complete the comprehensive strategic evaluation of this segment.
We feel quite confident, in spite of COVID and other disruptions, about the actions we have already taken and the restructuring activities that are now under way.
We intend to focus on completing the Board-led review of our businesses and finish this fiscal year well positioned to enter fiscal 2022 with momentum.
Finally, we will remain active in the area of M&A, primarily in Metal Coatings, and we'll aggressively seek activities that support our strategic growth plan.
While pandemic-related deal travel was still somewhat restricted during the third quarter, we are seeing improved travel conditions and have an active portfolio of opportunities that we will continue to pursue. | azz inc q2 earnings per share of $0.76.
compname reports results for q2 of fiscal year 2022; generates earnings per share of $0.76 and revises guidance.
q2 sales rose 6.4 percent to $216.4 million.
azz - sees annual sales to be in the range of $865 million to $925 million.
sees earnings per share to be in the range of $2.90 to $3.20 per diluted share for fiscal year 2022.
qtrly sales of $216.4 million, up 6.4%. | 0 |
We appreciate your time today.
This is how we measure and manage these divisions internally and from now on, it's how we will report them externally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
We are very pleased that third quarter and early October results reflect consistent weekly and monthly sequential gains across our divisions.
Protiviti had another outstanding quarter reporting its 12th consecutive quarter of year-on-year revenue gains, leveraging a strong pipeline of diversified service offerings, including particularly robust growth with the blended solutions with our staffing operations.
We're also pleased with the quarter-on-quarter growth in our staffing divisions, led by our permanent placement and OfficeTeam divisions.
2020 continues to be an unprecedented year.
I'm extremely proud of the resourcefulness and commitment exhibited by all of our employees as we maintain high levels of service to our clients and candidates.
Companywide revenues were $1.19 billion in the third quarter of 2020, down 23% from last year's third quarter on a reported basis and down 24% on an as-adjusted basis.
Net income per share in the third quarter was $0.67 compared to $1.01 in the third quarter a year ago.
Cash flow from operations during the quarter was $139 million and capital expenditures were $7 million.
In September, we distributed a $0.34 per share cash dividend to our shareholders of record, for a total cash outlay of $38 million.
We also acquired approximately 450,000 shares during the quarter for $24 million.
We have 1 million shares available for repurchase under our Board-approved stock repurchase plan.
Return on invested capital for the company was 25.8% in the third quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.190 billion in the third quarter.
This is a decrease of 23% from the third quarter one year ago on a reported basis and a decrease of 24% on an as-adjusted basis.
Also on an as-adjusted basis, third quarter staffing revenues were down 31% year-over-year.
U.S. Staffing revenues were $666 million, down 32% from the prior year.
Non-U.S. Staffing revenues were $203 million, down 29% year-over-year on an as-adjusted basis.
We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the third quarter, there were 64.3 billing days compared to 64.1 billing days in the third quarter one year ago.
The current fourth quarter has 61.7 billing days equivalent to the fourth quarter of one year ago.
Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year staffing revenues by $4 million.
This increased our year-over-year reported staffing revenue growth rate by 0.3 percentage points.
Now, let's take a closer look at the results for Protiviti.
Global revenues in the third quarter were $321 million.
$260 million of that is from business within the United States, and $61 million is from operations outside the United States.
On an as-adjusted basis, global third quarter Protiviti revenues were up 6% versus the year-ago period, with U.S. Protiviti revenues up 10%.
Non-U.S. revenues were down 8% on an as-adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $2 million and increasing its year-over-year reported growth rate by 0.7 percentage points.
Protiviti and its independently owned member firms serve clients through a network of 86 locations in 28 countries.
Under these plans, employees direct the investments of their account balances, and the company makes cash deposits into an investment trust consistent with these directions.
As realized and unrealized investment gains and losses occur, the company's deferred compensation obligation to employees changes accordingly.
However, the value of the related investment trust assets also changes by an equal and offsetting amount, leaving no net cost to the company.
Going forward, changes in the company's deferred compensation obligations noted above will continue to be included in SG&A or, in the case of Protiviti, direct cost.
However, the offsetting changes in the investment trust assets will be presented separately, below SG&A and outside of operating income.
This does not change the reported level of pre-tax or after-tax income or cash flows provided -- previously provided.
Going forward, we will replace the discussion of consolidated operating income with the non-GAAP measure of combined segment income.
This will be calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets.
Turning now to gross margin.
In our temporary and consultant staffing operations, third quarter gross margin was 37.5% of applicable revenues compared to 37.9% of applicable revenues in the third quarter one year ago.
The year-over-year decline in gross margin percentage is primarily due to lower conversion revenues.
Our permanent placement revenues in the third quarter were 10% of consolidated staffing revenues versus 10.7% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin decreased 80 basis points compared to the year-ago third period to 43.8%.
For Protiviti, gross margin was $87 million in the third quarter or 27.1% of Protiviti revenues.
This includes $3.4 million or 1.1% of Protiviti revenues of deferred compensation expense related to increases in the underlying trust investment accounts.
One year ago, gross margin for Protiviti was $88 million or 29.4% of Protiviti revenues, including $200,000 of deferred compensation expense related to investment trust activities.
Companywide SG&A costs were 32.8% of global revenues in the third quarter compared to 31.2% in the same quarter one year ago.
Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percentage of revenue by 1.9% in the current third quarter and 0.1% in the same quarter one year ago.
Staffing SG&A costs were 40.2% of staffing revenues in the third quarter versus 34.8% in third quarter of 2019.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.6% and 0.1% respectively.
The increase in staffing SG&A as a percentage of revenues is primarily the result of continued negative leverage resulting from the decline in revenues.
Third quarter SG&A costs for Protiviti were 13% of Protiviti revenues compared to 16.2% of revenues in the year-ago period.
Operating income for the quarter was $77 million.
This includes $26 million of deferred compensation expense related to increases in the underlying investment trust assets.
Combined segment income was therefore $103 million in the third quarter.
Combined segment margin was 8.6%.
Third quarter segment income from our staffing divisions was $54 million, with a segment margin of 6.2%.
Segment income for Protiviti in the third quarter was $49 million with a segment margin of 15.2%.
Our third quarter tax rate was 26% compared to 28% a year ago.
The lower third quarter tax rate is primarily due to annual adjustments made to reconcile our tax accounts to prior year's tax returns as actually filed.
Our nine-month year-over-year tax rate of 28% is in line with what we expect for the full year.
Moving on to accounts receivable, at the end of the third quarter, accounts receivable were $690 million and implied days sales outstanding or DSO was 52.3 days.
Before we move to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the third quarter with September revenues down 29.3% versus the prior year compared to a 30.7% decrease for the full quarter.
Revenues in the first two weeks of October were down 27% compared to the same period one year ago.
Permanent placement revenues in September were down 30.1% versus September of 2019.
This compares to a 35.7% decrease for the full quarter.
For the first three weeks in October, permanent placement revenues were down 31% compared to the same period in 2019.
We provide this information so that you have insight into some of the trends we saw during the third quarter and into October.
But, as you know, these are very brief time periods.
We caution against reading too much into them.
With that in mind, we offer the following fourth quarter guidance.
Revenues of $1.155 billion to $1.255 billion; income per share $0.55 to $0.75.
The midpoint of our guidance implies a year-over-year revenue decline of 22% on an as-adjusted basis inclusive of Protiviti.
The major financial assumptions underlying the midpoint of these estimates are as follows.
Revenue growth on a year on year basis, staffing down 27% to 30%; Protiviti up 5% to 7%; overall down 21% to 23%.
On the gross margin percentages, Temporary and Consultant Staffing 37% to 38%; Protiviti 27% to 29%; overall 39% to 40%.
SG&A as percentage of revenues, excluding deferred compensation investment impacts, staffing 36% to 38%; Protiviti 14% to 16%; overall 30% to 32%.
Segment income, Staffing 6% to 8%; Protiviti 12% to 15%; overall 8% to 10%.
We expect our tax rate to be between 27% and 29% and shares to be 113 million.
We limit our guidance to one quarter.
As is evidenced in the growth of our newly reported inter-segment revenues.
The partnership between Protiviti and our staffing operations continues to be an accelerating source of growth for our enterprise.
We have also seen particular strength in our services to the public sector and financial services clients.
In addition, we've experienced increased demand for services and solutions in cloud technology, online security, data privacy and digital transformation as enterprise client companies have continued to strategically invest in these areas.
The significant reductions we made to our cost structure in the second quarter have also benefited the third quarter and will continue to benefit future quarters.
Remote and hybrid working models will continue long after the pandemic ceases to require them.
Access to talent is no longer limited to time zones or geographies.
With our global network of talent and world-class technology tools, we can provide the right match for clients and candidates regardless of location.
While uncertainty remains in the overall economic environment as the pandemic continues, there is much to be optimistic about.
As the fourth quarter progresses, the nature, timing and amount of any additional fiscal stimulus should be known.
Medical solutions to the COVID-19 virus move ever closer to reality, and the NFIB continues to report improving trends in the small business community.
A recent study showed that more than half of small businesses are hiring or trying to hire, with the vast majority reporting few or no qualified applicants.
We continue to believe in our positioning for future growth with the unique strengths of our brands, people, technology and professional business model.
Please ask just one question and a single follow-up, as needed.
If there's time, we'll come back to you. | compname reports quarterly earnings per share $0.67.
quarterly earnings per share $0.67.
quarterly revenue $1.19 billion.
return on invested capital for co was 25.8 percent in q3. | 1 |
I'm pleased that you're joining us for DXC Technology's third quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our EVP and CFO.
In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
And I hope you and your families are doing well.
Today's agenda will begin with an update on Q3, which was another strong quarter of operational execution for DXC.
Next, I will cover how we are consistently delivering on our transformation journey.
As a result of this execution, organic revenue, margin, and earnings per share all continue to improve.
In addition, you will see the outstanding results for book-to-bill and free cash flow.
The best part about this performance is we expect it to be sustainable.
And then I will hand the call over to Ken to share our Q3 results along with our Q4 and full year guidance.
Regarding our Q3 performance, our revenues were $4.09 billion compared to $4.03 billion in Q2.
Organic revenue continued to improve as we progressed from minus 2.4% in Q2 to minus 1.4% in Q3.
I see this as a significant improvement as only a year ago, our organic revenues were minus 9.7%.
I was also very pleased to see the organic revenue growth in GBS accelerate, from positive 3.4% in Q2, to positive 7% in Q3.
Our strategy to grow DXC relies on GBS consistently growing, and we are clearly delivering against this piece of our growth strategy.
Our adjusted EBIT margin was 8.7%, up 170 basis points as compared to last year driven by our operational work that we are doing to optimize our business.
Our non-GAAP diluted earnings per share was $0.92 in the quarter, which is up 10% as compared to $0.84 last year.
While the quarter was strong across the board, the 2 strongest financial results were book-to-bill and free cash flow generation.
We delivered $5 billion in bookings for a book-to-bill of 1.23 times.
This gets us to a book-to-bill of 1.08 times on a trailing 12-month basis.
And in Q3, we delivered $550 million in free cash flow.
Now let me turn to the progress we are making on our transformation journey.
The first step of the journey is to inspire and take care of our colleagues.
Hiring was a major focus of ours.
And we ramped up our hiring engine to meet the high level of demand and to activate more project work.
In the quarter, we increased our headcount by 3% and increased project work by 13%.
We continue to see our people-first strategy and our virtual-first model is resonating in the market and helping us in our recruiting efforts.
We recently hired Kristie Grinnell as our new CIO.
And she specifically called out our virtual-first model as one of the key items that drew her to DXC.
In addition, I am pleased with how we continue to deliver for our people through the COVID pandemic.
It is due to all these points that our attrition at DXC has stabilized and it remains below industry average.
Focus on the customer is the next step of our transformation journey and continues to be the primary driver of our success in improving organic revenue.
A key metric that we measure is our Net Promoter Score, and I'm happy to report that we continue to see improvement.
Currently, our 12-month rolling NPS score is at the upper end of the industry best practice range of 20 to 30.
Another piece of our growth strategy is to run our customers' mission-critical systems, which mainly make up our GIS business, and ultimately have these customers award us new work.
Running these mission-critical systems builds trust with our customers.
This strategy is being successful because we are winning more work from our customers in both GIS and GBS, and our revenues are clearly not going backwards.
A great example of this strategy working is the new agreement with Lloyd's.
When I started DXC a little over two years ago, Lloyd's was contemplating a significant reorganization without DXC, which would have caused a negative impact to our revenue.
Running Lloyd's' mission-critical systems well has built trust that enabled us to be chosen to build the future at Lloyd's, which will be the most advanced insurance marketplace in the world.
DXC will rearchitect and develop a cloud-native platform running on AWS to replace their legacy mainframe platform.
Simply put, leveraging the trust we have built with our customers by running their mission-critical systems is how we are stabilizing our revenues and setting ourselves up for growth.
Now let me turn to our cost optimization program.
We continue to make progress in optimizing our cost and delivering for our customers without disruption.
Managing our cost includes executing portfolio-shaping initiatives.
We have identified businesses with roughly $500 million in revenues that are not strategic and will not help us grow.
Selling these businesses will improve our organic revenue growth and our overall margin.
We expect the sale of these businesses to result in an additional $500 million in proceeds within the next 12 months.
At the same time, we are focused on prudently investing in assets that will enable us to grow.
A great example of this is our recently announced relationship with ServiceNow.
Here, we are leveraging our proprietary technology called Platform X, which is a data-driven intelligent automation platform that helps us detect, prevent and address issues before they happen within our customers' cloud and on-prem IT estates.
NelsonHall named DXC's Platform X as a leader in cognitive and self-healing IT infrastructure management, reflecting DXC's ability to deliver immediate results through automation.
Next, seize the market is where we are focused on, cross-selling to our existing customers and winning new work.
We had a strong quarter of bookings, totaling $5 billion and a book-to-bill of 1.23 times.
58% of the bookings were new work and 42% were renewals.
We are winning in the ITO market.
And this is helping us with our organic revenue growth, significantly limiting the declines from double-digit to low single-digit negative declines.
Modern Workplace is following a very similar path.
Our strong 12-month book-to-bill of 1.1 times gives us confidence that, like ITO, we can take this business from double-digit to low single-digit decline in the next 12 months.
Analytics and Engineering is a great story as we are converting our strong book-to-bill of 1.29 times on a 12-month basis and growing this business 18.7% in Q3, which is helping us consistently grow our GBS business.
We are seeing increased opportunities in the market.
We have shown the ability to win, and the investment we have made in execution is paying off, with good deals turning into good revenue as you can see in ITO and Analytics and Engineering.
Turning to Slide 11.
Our transformation journey remains on track, with strong progress across all four key metrics.
Organic revenue improved 100 basis points from Q2 to a decline of 1.4%.
Adjusted EBIT margin is up to 8.7%.
Year-over-year, our adjusted EBIT margin expanded 170 basis points, while we substantially reduced our restructuring and TSI expense.
Q3 book-to-bill was 1.23 times and 1.08 times on a trailing four quarters.
From our perspective, looking at book-to-bill over a trailing four quarters is more meaningful than looking at one quarter in isolation.
Non-GAAP diluted earnings per share was $0.92, up $0.08 compared to the prior year.
Our earnings per share expanded despite $0.23 of headwinds from taxes.
The tax rate headwinds were more than offset by increased margins and lower interest expense.
Moving to our segment results on Slide 12.
GBS continued its strong performance, accelerating organic revenue growth to 7%, our third consecutive quarter of organic revenue growth.
GBS is benefiting as we leverage our relationships with our platinum customers.
Our GBS business has higher margins and lower capital intensity.
So as we grow this business, it has a disproportionately positive impact on margins and cash flow.
Our GBS profit margin was 16.2%, up 200 basis points compared to the prior year.
GIS organic revenue declined 8.3%.
GIS profit margin was 4.8%, an improvement of 110 basis points compared to prior year.
Our focus with GIS heretofore has been on improving delivery, to deliver for our customers while stabilizing the margins.
As we set up for next year, we are putting in place a program to drive cost out of GIS to move the margins forward.
Turning to our enterprise technology stack.
Analytics and Engineering revenue was $545 million and organic revenue was up 18.7%.
We continue to see high demand in this area.
Of note is the success we are seeing with our platinum customer channel.
Applications organic revenue increased 4.8%, also accelerating.
BPS, our smallest layer of the enterprise technology stack, generated $116 million of revenue, and organic revenue was down 8.3%.
We expect the declines in this business to moderate as we move forward and put our new strategy in place.
For our GBS layers of our technology stack, our book-to-bill was 1.28 times and 1.17 times on a trailing 12-month basis.
Cloud and Security revenue was $471 million and organic revenue was down 12.2%.
IT Outsourcing revenue was $1.11 billion and organic revenue was down 1.9%.
Let me remind you that this business declined 19% in Q3 FY '21.
This is a significant improvement that we indicated last quarter.
We expect IT Outsourcing to continue to decline in low single digits, ideally 5% or better.
Lastly, Modern Workplace revenue was $561 million, and organic revenue was down 16% as compared to prior year.
We remain positive about our prospects.
And our strong book-to-bill of 1.11 times over the trailing 12 months is expected to stabilize Modern Workplace as we move through FY '23.
For our GIS layers of the technology stack, our book-to-bill was 1.18 times and 1.01 times on a trailing 12-month basis.
As you think about organic revenue growth prospects for GIS, our focus on improving the quality of revenue by expanding margins, reducing capital intensity and driving cash flow may create headwinds for organic revenue growth.
For example, using our capital to buy laptops, bearing the risk and ultimately recovering our cash over three to four years with relatively low returns does not feel like a great economic model.
At the end of the day, we would prefer to provide our offerings and services and forego the revenue associated with buying the assets to improve the underlying economics.
Next up, let me touch on our efforts to build our financial foundation.
This quarter, we made particularly strong progress with cash generation and continued reduction of restructuring and TSI expense.
With regard to financial discipline, remediating our material weakness is a top priority.
We are in the late stage of our efforts to remediate the material weakness, and we have fully implemented our 11-point remediation plan.
As a result, we expect to remediate our material weakness in Q4.
I should note, as it relates to the material weakness in governance more holistically, we are clear-eyed on how we think about governance.
We do not find our current governance score to be acceptable.
We are working hard to ensure we improve its trajectory like many things at DXC.
We are finishing the unfinished homework, creating a sustainable business brick by brick.
In addition to our material weakness remediation, we are committed to improving our pay practices.
As part of good governance, our board members and management are continuing to engage with our shareholders to proactively take their feedback as we work together to design and set our short-term and long-term incentive structure.
Our focus is to set metrics and targets that are highly aligned to what our shareholders want, all the while incentivizing management to improve the company's performance, creating an enduring and sustainable business.
The execution of the transformation journey has made measurable improvement, allowing us to put the business on a firmer financial foundation, expanding margins, and generating and keeping more cash.
Slide 15 shows the results of the structural improvements we have made.
We reduced our debt from $12 billion to $4.9 billion and are now below our targeted debt level.
We have reduced our quarterly net interest expense to $23 million, a $31 million reduction as compared to prior year.
As you recall, we were able to term out a significant portion of our debt last quarter with principally all of our outstanding borrowings at fixed rates.
We expect to continue the lower interest expense at approximately $25 million per quarter.
We also continue to make progress on reducing restructuring and TSI expense.
This reduction contributed $195 million to cash flow during the quarter as compared to the prior year.
Further, this also achieves one of our goals of narrowing the difference between GAAP and non-GAAP earnings.
I should note that while we have been reducing restructuring and TSI expense, we have also been able to expand margins.
Lastly, as you can see, we have also reduced operating lease cash payments from $156 million in the third quarter of the prior year to $117 million in the third quarter of FY '22.
Moving to Chart 16.
Let's talk about the focus we've brought to capital expenditures, including capital leases.
Our capital expenditures were reduced from $219 million in Q3 FY '21 to $146 million in Q3 FY '22.
We are closely managing our capital lease originations, which ultimately means our capital lease debt and associated payments continues to decline.
In FY '20, we had a $270 million quarterly run rate for originations while our last two quarters averaged less than $60 million.
We made $207 million of capital lease payments in Q3 last year, which is now down to $184 million in the current quarter.
For Q4, we expect a further reduction of capital lease payments to approximately $140 million.
A metric we like to look at to gauge capital efficiency is capital expenditures and capital lease originations as a percentage of revenue.
We are now tracking at 5.2% for two consecutive quarters, down from roughly 10% in FY '20.
Clearly, our focus has been on improving our cash flow.
Specific to new business, we have been focused on structuring our transactions to have lower capital intensity, potentially trading off revenue in favor of cash flow.
As you can see, from my prior comments, our focus on driving structural changes has improved our ability to generate and hold on to more cash.
Cash flow from operations totaled an inflow of $696 million.
Free cash flow for the quarter was $550 million, an increase of $956 million as compared to prior year and moves our year-to-date free cash flow to $650 million or $150 million above our full year guidance.
Further, cash in the quarter was negatively impacted by two previously disclosed payments, totaling approximately $130 million.
These payments were offset by much stronger performance due to improvements in the business and benefits from timing on payments and receipts in the quarter.
We expect this timing to create some headwinds in Q4 cash flow.
Slide 18 shows our trended cash flow profile.
Our progress in Q2 and Q3 gives us confidence as we work toward delivering our longer-term FY '24 guidance of $1.5 billion in free cash flow.
Moving to Slide 19.
Let's revisit our relatively simple capital allocation formula.
We are targeting a debt level of approximately $5 billion and a cash level of $2.5 billion.
With debt at our target debt level, cash over $2.5 billion is excess cash, which we expect to deploy.
Based on this formula, we expect to self-fund stock repurchases of $1 billion over the next 12 months.
The $1 billion in repurchases will be funded from a combination of cash generated from operating our business as well as proceeds from our portfolio-shaping efforts.
We recently executed a number of sale agreements and expect to divest businesses and assets with approximately $500 million of revenue and will generate $500 million of proceeds in the next 12 months.
These businesses are not synergistic and cannot be leveraged more broadly in our platinum channel.
As you will see in our 10-Q, we entered into an agreement to sell our German financial service subsidiary that includes both of our banks for approximately $340 million.
As noted in the liquidity section of our previously filed financials, the German financial services business has cash held on deposit for the bank's customers.
The current cash balance related to these deposits is $670 million.
We also announced an agreement for the sale of our Israeli business for $65 million.
The valuation for these assets are accretive to our valuation.
Further, we do not expect these divestitures to create headwinds related to achieving our FY '24 longer-term guidance for organic revenue growth, adjusted EBIT margin, and free cash flow.
We continue to assess our portfolio to ensure we have businesses that are aligned to our strategy and not a distraction for our management team.
Now let me cover our progress on share repurchases.
In Q3, we repurchased $213 million of common stock, bringing our FY '22 year-to-date repurchases to $363 million or 10.6 million shares.
Our share repurchases are self-funded.
As noted, we expect to repurchase $1 billion of our common stock over the next 12 months as we firmly believe our stock is undervalued.
Turning to the fourth quarter guidance.
Revenues between $4.11 billion and $4.15 billion.
If exchange rates were at the same level as when we gave guidance last quarter, our fourth quarter revenue guidance range would be $20 million higher.
Organic revenue declined, minus 1.2% to minus 1.7%.
Adjusted EBIT margin in the range of 8.7% to 9%.
Non-GAAP diluted earnings per share of $0.98 to $1.03 per share.
For Q4, we expect a tax rate of approximately 26%.
As we look to the end of FY '22, I would like to update our current fiscal year guidance.
Based on the strengthening U.S. dollar, our revenues are expected to be negatively impacted by approximately $40 million.
We now expect to come in at approximately $16.4 billion.
Organic revenue growth range of minus 2.2% to minus 2.3%, which is slightly lower than our previous range.
Adjusted EBIT margin, 8.5% to 8.6%.
We continue to expand margins while significantly lowering restructuring and TSI expense and are now guiding to $400 million for FY '22.
To put this all in context, we expect to spend $500 million less on restructuring and TSI spend than last year, while expanding margins by over 200 basis points.
Our focus is to embed these types of expenses over time into the normal performance of the business and believe we have taken significant strides in doing so.
Non-GAAP diluted earnings per share of $3.64 to $3.69.
Lastly, we are increasing free cash flow guidance to over $650 million, $150 million improvement to our prior FY '22 guidance.
Fourth quarter cash flow is expected to be impacted by timing, which boosted Q3 cash flow and in addition, a $100 million payment in Q4 to terminate a financial structure put in place a number of years ago.
We are reaffirming our guidance for FY '24.
This reflects our strong execution and driving forward on our transformation journey.
Overall, we are making great progress driving efficiency in the business and generating strong free cash flow.
We are utilizing those cash flows to drive significant value for our shareholders through our stock repurchase program.
Let me leave you now with a few key takeaways.
As I think about finishing out FY '22, we are making great progress.
During our June investor day, we committed to making progress on all nine of these points, and let me quickly give you an update on each.
Win in the market and a book-to-bill of greater than 1x.
Our trailing 12-month average is now 1.08 times.
This year, we produced relatively stable revenues in Q2, Q3, and we expect this to continue in Q4.
Strengthening the balance sheet.
Our debt is now at $4.9 billion, and our refinancing has significantly lowered our interest expense.
Achieved organic revenue growth of minus 1% to minus 2% in FY '22.
This is where we're coming up a little short, anticipating negative 2.2% to negative 2.3% organic revenue growth.
Remediate material weakness and improve governance score.
As Ken indicated, we will remediate the material weakness in Q4, and we have plans to continue to improve our governance score.
Reduce restructuring and TSI.
We have taken it from over $900 million to roughly $400 million in FY '22.
We have expanded margins every quarter throughout FY '22.
Improve free cash flow.
We exceeded the $500 million guidance for FY '22.
And finally, resume capital deployment to shareholders.
We have repurchased $363 million and plan to do another $1 billion over the next 12 months.
In addition to this progress, we are also committed to portfolio-shaping.
What this means is we are making the right bets and investments like what we are doing with Platform X and ServiceNow and divesting assets that are not core to our strategy and will not help us grow.
Our portfolio-shaping is anticipated to drive $500 million in excess cash in the next year.
In closing, I am confident that by staying focused on our transformation journey, we will continue to deliver on our commitments both in the short term and the long term. | compname reports q3 non-gaap earnings per share of $0.84.
q3 non-gaap earnings per share $0.84.
q3 earnings per share $4.29.
q3 revenue $4.3 billion versus refinitiv ibes estimate of $4.2 billion. | 0 |
I'm Kelsey Duffey, Vice President of Investor Relations at Walker & Dunlop.
Hosting the call today is Willy Walker, Walker & Dunlop, Chairman and CEO.
He is joined by Steve Theobald, Chief Financial Officer.
These slides serve as a reference point for some of what Willy and Steve will touch on during the call.
We expressly disclaim any obligation to do so.
More detailed information about risk factors can be found in our annual and quarterly reports filed with the SEC.
But before I dive in comments about second quarter for Walker & Dunlop, I want to reiterate our condolences to those who lost loved ones due to the COVID-19 virus and express our concern and support to the millions of Americans, who have been adversely affected by the economic downturn.
While Walker & Dunlop's last Q2 financial results are exceptional.
Many individuals and businesses have been hit extremely hard, and it is our great hope and wish, that we can control of the virus, so that jobs and businesses can be restored.
As we've seen since the advent of the pandemic, certain businesses have benefited from the forced changes through the way we live and work, and others have been badley damage.
Fortunately for Walker & Dunlop, we have benefited and generated record revenues of $253 million during the quarter, on the back of exceedingly strong loan origination and property sales volume of $7.1 billion.
Our recorded loan and origination volume of $6.7 billion coupled with our Q1 lending volume of $9.6 billion, catapulted Walker & Dunlop's market share, total commercial real estate lending in the United States for the first half of 2020% to 13.2%, nearly tripling our market share from last year.
All these investments in people, technology and branding, came together in Q2 2020 to generate 26% year-over-year growth in revenues, and 47% year-over-year growth in diluted earnings per share to $1.95, in the midst of the global pandemic, when our entire team was working remotely.
And if record revenue growth explosive earnings were not enough, we added a record net $5.2 billion of servicing from loan originations to our portfolio during the quarter, pushing our servicing portfolio to $100 billion at the end of July, and officially achieving the first pillar of our highly ambitious five-year strategic growth plan entitled Vision 2020.
Revenue growth of 26% during the quarter and our debt brokerage and property brokerage businesses were significantly curtailed, highlights the volume of lending we did with the GSEs and HUD.
We originated $4.5 billion of financing with Fannie Mae and Freddie Mac in the second quarter, increasing our market share with the GSEs from 10% last year, up to 14% through the first half of 2020.
Our partnership with Fannie Mae, which dates back to 1988, has had an incredible year, with Walker & Dunlop representing 20% of Fannie Mae's total multifamily lending volume for the first half of the year.
We've been Fannie Mae's largest lending partner for four the last seven years, and our performance this year leaves little doubt, that we are not only Fannie Mae's largest partner, but their very best.
$5.2 billion of new loans into our servicing portfolio, during a quarter when we originated $6.7 billion in total financing; means, we were not simply refinancing loans that already existed in our servicing portfolio, but rather taking business from our competition and bringing in new clients into Walker & Dunlop.
These new mortgage servicing rights and client relationships will add huge long-term value to Walker & Dunlop.
As slide 6 shows, we had strong growth in our Fannie and Freddie origination volumes in Q2, and as the middle column shows, we had explosive growth with HUD this quarter, growing from $190 million of loan originations in Q2 of 2019, to $640 million loan originations this quarter, by far our largest HUD quarter ever.
There are several items of note in our HUD origination numbers.
First, Sheri Thompson joined Walker & Dunlop 18 months ago to lead our HUD business, and has done an absolutely magnificent job, taking our team from being a market leader to being the leader in HUD financing.
Second, as anyone who has ever done HUD financing will tell you; HUD business takes a long time to originated process and nothing ever happens in the quarter.
So our fantastic Q2 was due to our team's incredible work over the past year, not due to rates dropping and HUD becoming wildly more competitive in Q2.
But that has happened, and rates in HUD's countercyclical role should benefit our HUD volumes in future quarters.
Finally, as you can see just to the right of the HUD volumes, we've brokered $1.5 billion of debt to third parties during Q2.
That number is down 23% from Q2 2019, but still very strong, given the dislocation in place in the markets.
It is noteworthy, that the New York-based debt brokerage team we added in Q1 was responsible for 26% of our total brokered volume in Q2, quite an accomplishment for first quarter at Walker & Dunlop, particularly considering they are based in the epicenter of the early COVID crisis.
Similar to our debt brokerage business, our multifamily property sales business slowed dramatically in Q2 due to the pandemic.
We closed $447 million of sales volume in Q2, a slow quarter for our team, but we were seeing the market pick back up and currently have 33 properties worth $1.4 billion under contracts for closing in Q3 and Q4.
So with very robust GSE and HUD pipelines, our debt brokerage business rebuilding nicely, as capital begins to return of the broader market and our multifamily property sales business rebounding nicely, we feel extremely well positioned to continue outperforming the market for the remainder of 2020.
Vision 2020 was established in 2016 with very ambitious five-year goals, $30 billion of annual debt financing, $8 billion of annual investment sales, $8 billion in assets under management and $100 billion of loans in our servicing portfolio, which if achieved, would drive $1 billion in annual revenues.
As the left hand side of this next slide shows, we established the debt financing goal of $30 billion after originating $16.2 billion of debt financing in 2015 and on a trailing 12 month basis, as you can see in the last column of this chart, we have achieved our Vision 2020 debt financing goal by originating $31.4 billion of loans, which is a five-year compound annual growth rate on loan originations of 14%.
Similarly in the right side of this slide shows the growth in property sales, from established goal selling $8 billion in multifamily properties, after selling $1.5 billion in 2015, to selling $5.8 billion over the last 12 months.
While the pandemic has clearly slowed down our property sales business, we have grown this business at a compound annual growth rate of 31% over the past five years and have, built an absolutely incredible team.
I mentioned previously, the growth in our servicing portfolio to $100 billion and as this slide shows, over the past five years, we have grown the portfolio from $50.2 billion in 2015 to $100 billion today, at a compound annual growth rate of 15%.
The dramatic growth in loan originations, property sales, and servicing, have grown revenues, as you can see on the right side of this slide, from $468 million in $2015 to $916 million over the past 12 months, or at a compound annual growth rate of 14%.
So all of this brings us close, but not quite to our Vision 2020 goal of $1 billion in annual revenues, which we will continue chasing for the remainder of this year.
We announced twice during the second quarter, that the number of forbearance requests in our at-risk portfolio have been extremely low.
As seen on this slide, for various requests on office, retail and hospitality loans in our portfolio are dramatically higher than multifamily, but we have zero credit risk on any office, retail, industrial or hospitality loan we have originated and serviced today, zero.
Our only credit risk is on multifamily, and that portfolio continues to perform exceedingly well.
As Steve will discuss, we took a large loan loss reserve in Q1 to incorporate the expected impacts recorded and added another $5 million to that reserve in Q2.
The additional reserves added in this quarter, were due entirely to growth in our servicing portfolio, and not due to any specific reserves or degradation in the credit quality in our at-risk portfolio.
While it is still early days in the COVID-induced economic crisis, given the extremely small number of forbearance requests we've received in Q2, we feel extremely good about the long-standing reputation for outstanding credit discipline at Walker & Dunlop, showing itself once again.
There are two other topics I'd like to focus on, before turning the call over to Steve.
First, when the pandemic hit, we decided we needed to communicate with our employees and customers on a direct and consistent basis.
I started filming daily videos to all Walker & Dunlop employees, that helped every one in the team know what was going on inside and outside of the company.
The videos also helped maintain the exceptional corporate culture, that defines Walker & Dunlop, during a time when everyone was working from home.
For example, our client email database was 19,000 people prior to the COVID pandemic.
Today, it is over 120,000 email addresses.
Our media outreach has exploded, having Walker & Dunlop mentioned in 129 press articles in target publications during Q2, an all-time record by over 55%.
The second topic is racial justice and diversity.
It is time for real action.
Walker & Dunlop has consistently been a leader in the commercial real estate and mortgage industries, with regard to racial diversity, and we will continue to do so.
We've been a major sponsor of Project Destined, Management Leadership for Tomorrow, GEAR UP, and Future Housing Leaders, and we will continue to invest our capital in time, to make these important programs to have greater impact.
We have reinforced our commitment to building a robust diversity and inclusion program, driven in large part by our minority employee resource group, and our women's initiative.
And we have put diversity and inclusion at the center of our environmental, social and governance goals, and are in the process of tying the accomplishment of these goals to long term executive compensation.
As I wrote to all Walker & Dunlop clients two weeks ago, the commercial real estate industry is premised on the concept of community; communities to work, communities to shop and communities to live.
We must as an industry, do all we can to promote community and equality across our country during these challenging times, and most importantly, over the coming years to ensure systemic chain actually happens.
Our second quarter results once again demonstrated the power of our business model, as we delivered exceptional top and bottom line growth and continue to strengthen our balance sheet, all while operating with a fully remote workforce.
Q2 total transaction volume of $7.1 billion, included a significant year-over-year increase in our Fannie Mae loan originations, which drove the 26% year-over-year increase in total revenues, to a quarterly record of $253 million.
Second quarter net income of $62 million and diluted earnings per share of $1.95, were both up 47% from Q2 '19.
Second quarter total debt financing volume of $6.7 billion was led by $2.8 billion of Fannie Mae originations.
For the second consecutive quarter, Fannie Mae originations comprised over 40% of debt financing volume, which along with our robust HUD originations, pushed gain on sale margin to 252 basis points, well above our forecast range of 170 basis points to 200 basis points.
The first half of the year has been characterized by our dominant market share with Fannie Mae.
Looking at our current pipeline of GSE business, we expect to see an increase in our Freddie Mac originations in the second half, particularly in Q3.
Our HUD business is poised for a breakout year in 2020, having originated $640 million in the quarter and with a strong pipeline for the rest of the year, while debt brokerage volumes will likely continue to be constrained by the current economic environment.
Anticipating the shift to more Freddie Mac originations in Q3, we expect gain on sale margin to be in the range of 190 basis points to 210 basis points for the quarter.
Our scaled business model continues to produce healthy key financial metrics, with second quarter operating margin of 33% and return on equity of 23%, both well above the top end of our target ranges of 30% and 20% respectively.
Personnel expense as a percentage of revenue was 42%, due to an increase in variable expenses for commissions and bonus, driven by the strong performance during the quarter.
Variable compensation expense was 60% of our total personnel costs during the quarter.
And finally, year-to-date revenue per employee has increased to over $1.1 million, as revenue growth has outpaced the hiring of new employees.
Our strong debt financing volumes in the first half of the year have enabled us to grow our servicing portfolio by more than $6.5 billion in the last six months and our servicing portfolio ended the quarter at just $12 million below the $100 billion mark.
As Willy, mentioned we have since crossed over $100 billion, successfully achieving an important pillar of our Vision 2020 goals.
The portfolio continues to fuel strong cash revenues, with record servicing fees totaling $57 million in Q2.
Additionally, the record mortgage servicing rights revenues of $90 million in the quarter, which were more than double those of Q2 '19, will translate into higher cash servicing fees in the future.
Turning now to liquidity, we continue to strengthen the balance sheet, increasing our available cash on hand, from $205 million at the end of Q1 to $275 million at the end of June.
The increase in cash was driven by strong operating cash flows and continued payouts in our interim loan portfolio.
Adjusted EBITDA in the quarter was $48.4 million, down from $62.6 million in the year ago quarter.
The decline was driven primarily by the impact of low short-term interest rates on our escrow earnings, which declined by $12 million year-over-year.
Our average escrow balances at the end of June were $2.2 billion, which will drive significant upside to earnings and adjusted EBITDA, if interest rates start to rise.
During the quarter, we also finalized the servicing advance line mentioned in our last call, to facilitate the advancing the principal and interest payments on our Fannie Mae portfolio.
The advanced line is structured as a $100 million supplement to an existing agency warehouse line, and may be used to fund advances of principal and interest payments on loans that are in forbearance or are delinquent within our Fannie Mae DUS portfolio.
The facility provides 90% of the principal in interest advance payment, at a rate of LIBOR plus 175, and is collateralized by Fannie Mae's commitment to repay the advances.
To date, we have had very few requests for forbearance.
Through the end of July, we had only nine Fannie Mae loans, totaling $261 million that took forbearance, which is less than 60 basis points of our Fannie Mae portfolio and we have granted no new requests since May.
In addition, the three loans that took forbearance in April, all made their first post forbearance period payments in July, a really good sign as the initial three month forbearance periods come to an end.
During the quarter, we took an additional $5 million provision expense, to increase our allowance for credit obligations related to our at-risk Fannie Mae portfolio.
The provision expense was driven by the growth in our portfolio during the quarter, and was not related to any change in our forecast for future losses.
Since we established our loss forecast in the first quarter, our portfolio has continued to perform very well.
As demonstrated by the de minimis number of forbearance requests to date, and with those who requested forbearance in April, all making their required post forbearance payment in July.
Unemployment rates are at the levels we expected, and it seems likely that additional government stimulus will be provided, while the economy remains burdened by COVID-19.
Our allowance now stands at just over $69 million or 17 basis points of our at-risk portfolio.
We fully expect that there will be defaults in the portfolio over the next year, but that is baked into our forecast.
With respect to our interim loan portfolio, we reduced our allowance by $200,000 during the quarter, due to the overall decrease in the size of the portfolio, which declined from $458 million at March 31, to $408 million at the end of June.
So far this year, we've reduced the portfolio by 25%.
Inclusive of the interim loans in the Blackstone JV, we've had 12 loans, totaling $240 million, either rate lock or pay-offs so far this, year reducing the risk profile significantly.
And of those 12 loans at rate locked or paid off, we refinanced 10 of them with third party capital, mostly Fannie and Freddie, for over $290 million in permanent loan financing, achieving exactly the objective we have always had for the interim lending program.
We expect to restart our interim lending in Q3.
Cautiously at first, given the opportunities we see in the market to originate high quality loans from our very best sponsors.
Overall, we feel really good about the performance of our entire portfolio to date, and the strong performance of the multifamily market through this crisis.
Last quarter, in light of the massive uncertainty we faced at the time, we backed off of our goal for double-digit earnings-per-share growth in 2020.
Our strong financial results for the first half of the year and the pipeline of business we see for Q3, have put us back on track to achieving our annual operating margin and return on equity goals of 28% to 30%% and 18% to 20% respectively, and we believe double-digit earnings per share growth for 2020 is now achievable.
In addition, our robust capital and liquidity position give us great confidence in maintaining our dividend, as the Board approved a $0.36 dividend per share for the quarter, payable to shareholders of record as of August 21.
We had an amazing first half of 2020, on the face of uncertain economic environment.
This is all due to our resilient business model and exceptional team, which continues to deliver for our clients, shareholders and each other quarter-after-quarter and year-after-year.
We have been using Zoom to conduct our weekly Executive sales calls, long before the COVID pandemic hit, as well as Salesforce and Box to manage our client outreach and collaboration.
And our team of 900 employees took it upon themselves, to figure out how to inspect properties, receive appraisals, close loans and continue providing the exceptional service to our customers, this is expected to Walker & Dunlop each and every day.
The seamless transition to remote working, low interest rates and tight Investor spreads on agency backed commercial mortgage debt has created a terrific environment for refinancing activity in the multifamily sector.
And as I mentioned previously, W&D has been refinancing new loans, not [Phonetic] our own portfolio, which has dramatically expanded our market shift.
And with multifamily comprising close to 80% of total commercial real estate financing volumes so far this year, we are extremely well positioned to be one of the largest providers of capital to the commercial real estate industry over the coming years.
A strong macroeconomic environment coming out of the pandemic, should drive continued financing volumes in our core multifamily business, and as the multifamily property sales business rebounds, so should our capital markets business, as non-multifamily asset classes, such as office, retail and hospitality stabilize.
As I ran through Vision 2020 on a trailing 12 month basis, I did not discuss our asset management business, which as we started at the end of -- to as we stated at the end of 2019, is not going to achieve the 2020 Vision goal of $8 billion of AUM.
There are however several noteworthy accomplishments during the quarter, that I'd like to underscore.
First our AUM of $1.9 billion comprises three components; equity capital, invested in a broad array of commercial property types by JCR Capital; debt capital we lend on behalf of life insurance companies through separate accounts; and multifamily bridge loans we originate into our joint venture with Blackstone Mortgage Trust.
During Q2, we reached an agreement with a large Canadian pension fund to provide up to $250 million of preferred equity capital on multifamily deals, where we are originating first trust mortgage financing with Fannie Mae or Freddie Mac.
We also rebranded JCR Capital to Walker & Dunlop Investment Partners, and reorganize the business going forward.
Finally, during the quarter, we began efforts to raise our sixth fund, an Opportunity Fund.
So while our management business has not grown as rapidly as Vision 2020 had outlined, we were extremely pleased with the progress made during the quarter and its outlook going forward.
Steve made a point during his comments that I'd like to underscore, as we think about the new business we are originating today and how it will play out in future quarters.
The loans we are currently originating, carry with them significant servicing fees, demonstrated by our 252 basis point gain on sale margin in Q2.
As you can see in our net income and EBITDA numbers, we are generating a huge amount of non-cash revenue in mortgage servicing rights, that will convert into cash revenues over the next seven, 10 and even 40 years, depending on the life of the loan.
So non-cash revenues today convert to cash tomorrow.
We also expect our debt and property brokerage volumes to be significantly higher in Q3 and going forward into next year, which will add cash origination fees.
And finally, at some point, interest rates will begin to rise, and we will generate substantial cash interest income off our $2.2 billion in escrow deposits.
So while we have had an exceedingly successful quarter by any measure, it is truly exciting to think about the future cash generation of the platform we have built.
Walker & Dunlop went public in Q4 of 2010, just as the economy was emerging from the great financial crisis.
That quarter and our IPO were seminal moments in our company's long history, and set us up for dramatic growth we have generated over the past decade.
Q2 2020 is another seminal quarter for our company.
Where the team, scale brand and culture we have built, immediately differentiated us from the competition.
Walker & Dunlop has proven time and again, that we can weather commercial real estate cycles and emerge as the very best in the industry.
And during times of market uncertainty, borrowers want to work with the very best.
We use the momentum gained during the quarter to add property sales talent in Los Angeles and Nashville, acquire a debt and equity placement team in New York, and bring on a HUD team in Dallas.
We just became a Freddie Mac small balance lender, which gives our team, the ability to originate small loans for both Fannie Mae and Freddie Mac.
And we hired one of the top small balance loan originators in the industry, to help us grow this area of our business.
Finally, we continue to invest heavily in our appraisal joint venture.
Apprise and other technology initiatives.
Even during a period of market stress, our strong market position and financial stability have allowed us to remain focused on our long-term growth strategy initiatives, and continue to invest in our people and platform, to drive growth in future years.
I've been proud of our teams since the day I joined Walker & Dunlop.
But never in my 17 years at the company, have I seen how good we truly are, demonstrated so dramatically.
All while continuing to invest in future growth.
There are plenty of challenges that we will face in the coming months and years, but as we have shown time and again, Walker & Dunlop is not only up for the challenge, but will emerge the winner.
I know working remotely has its challenges and its benefits, but we are blessed to have an incredible company, with an outstanding corporate culture and if our performance in Q2 is any indicator, we have plenty of exciting times ahead. | walker & dunlop q2 revenue rose 26 percent to $252.8 million.
compname reports record revenues of $253 million as diluted earnings per share grows 47% to $1.95.
q2 revenue rose 26 percent to $252.8 million.
q2 earnings per share $1.95.
total transaction volume of $7.1 billion, down 2% from q2'19. | 1 |
I'm pleased that you're joining us for DXC Technology's third quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our EVP and CFO.
In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
And I hope you and your families are doing well.
Today's agenda will begin with an update on Q3, which was another strong quarter of operational execution for DXC.
Next, I will cover how we are consistently delivering on our transformation journey.
As a result of this execution, organic revenue, margin, and earnings per share all continue to improve.
In addition, you will see the outstanding results for book-to-bill and free cash flow.
The best part about this performance is we expect it to be sustainable.
And then I will hand the call over to Ken to share our Q3 results along with our Q4 and full year guidance.
Regarding our Q3 performance, our revenues were $4.09 billion compared to $4.03 billion in Q2.
Organic revenue continued to improve as we progressed from minus 2.4% in Q2 to minus 1.4% in Q3.
I see this as a significant improvement as only a year ago, our organic revenues were minus 9.7%.
I was also very pleased to see the organic revenue growth in GBS accelerate, from positive 3.4% in Q2, to positive 7% in Q3.
Our strategy to grow DXC relies on GBS consistently growing, and we are clearly delivering against this piece of our growth strategy.
Our adjusted EBIT margin was 8.7%, up 170 basis points as compared to last year driven by our operational work that we are doing to optimize our business.
Our non-GAAP diluted earnings per share was $0.92 in the quarter, which is up 10% as compared to $0.84 last year.
While the quarter was strong across the board, the 2 strongest financial results were book-to-bill and free cash flow generation.
We delivered $5 billion in bookings for a book-to-bill of 1.23 times.
This gets us to a book-to-bill of 1.08 times on a trailing 12-month basis.
And in Q3, we delivered $550 million in free cash flow.
Now let me turn to the progress we are making on our transformation journey.
The first step of the journey is to inspire and take care of our colleagues.
Hiring was a major focus of ours.
And we ramped up our hiring engine to meet the high level of demand and to activate more project work.
In the quarter, we increased our headcount by 3% and increased project work by 13%.
We continue to see our people-first strategy and our virtual-first model is resonating in the market and helping us in our recruiting efforts.
We recently hired Kristie Grinnell as our new CIO.
And she specifically called out our virtual-first model as one of the key items that drew her to DXC.
In addition, I am pleased with how we continue to deliver for our people through the COVID pandemic.
It is due to all these points that our attrition at DXC has stabilized and it remains below industry average.
Focus on the customer is the next step of our transformation journey and continues to be the primary driver of our success in improving organic revenue.
A key metric that we measure is our Net Promoter Score, and I'm happy to report that we continue to see improvement.
Currently, our 12-month rolling NPS score is at the upper end of the industry best practice range of 20 to 30.
Another piece of our growth strategy is to run our customers' mission-critical systems, which mainly make up our GIS business, and ultimately have these customers award us new work.
Running these mission-critical systems builds trust with our customers.
This strategy is being successful because we are winning more work from our customers in both GIS and GBS, and our revenues are clearly not going backwards.
A great example of this strategy working is the new agreement with Lloyd's.
When I started DXC a little over two years ago, Lloyd's was contemplating a significant reorganization without DXC, which would have caused a negative impact to our revenue.
Running Lloyd's' mission-critical systems well has built trust that enabled us to be chosen to build the future at Lloyd's, which will be the most advanced insurance marketplace in the world.
DXC will rearchitect and develop a cloud-native platform running on AWS to replace their legacy mainframe platform.
Simply put, leveraging the trust we have built with our customers by running their mission-critical systems is how we are stabilizing our revenues and setting ourselves up for growth.
Now let me turn to our cost optimization program.
We continue to make progress in optimizing our cost and delivering for our customers without disruption.
Managing our cost includes executing portfolio-shaping initiatives.
We have identified businesses with roughly $500 million in revenues that are not strategic and will not help us grow.
Selling these businesses will improve our organic revenue growth and our overall margin.
We expect the sale of these businesses to result in an additional $500 million in proceeds within the next 12 months.
At the same time, we are focused on prudently investing in assets that will enable us to grow.
A great example of this is our recently announced relationship with ServiceNow.
Here, we are leveraging our proprietary technology called Platform X, which is a data-driven intelligent automation platform that helps us detect, prevent and address issues before they happen within our customers' cloud and on-prem IT estates.
NelsonHall named DXC's Platform X as a leader in cognitive and self-healing IT infrastructure management, reflecting DXC's ability to deliver immediate results through automation.
Next, seize the market is where we are focused on, cross-selling to our existing customers and winning new work.
We had a strong quarter of bookings, totaling $5 billion and a book-to-bill of 1.23 times.
58% of the bookings were new work and 42% were renewals.
We are winning in the ITO market.
And this is helping us with our organic revenue growth, significantly limiting the declines from double-digit to low single-digit negative declines.
Modern Workplace is following a very similar path.
Our strong 12-month book-to-bill of 1.1 times gives us confidence that, like ITO, we can take this business from double-digit to low single-digit decline in the next 12 months.
Analytics and Engineering is a great story as we are converting our strong book-to-bill of 1.29 times on a 12-month basis and growing this business 18.7% in Q3, which is helping us consistently grow our GBS business.
We are seeing increased opportunities in the market.
We have shown the ability to win, and the investment we have made in execution is paying off, with good deals turning into good revenue as you can see in ITO and Analytics and Engineering.
Turning to Slide 11.
Our transformation journey remains on track, with strong progress across all four key metrics.
Organic revenue improved 100 basis points from Q2 to a decline of 1.4%.
Adjusted EBIT margin is up to 8.7%.
Year-over-year, our adjusted EBIT margin expanded 170 basis points, while we substantially reduced our restructuring and TSI expense.
Q3 book-to-bill was 1.23 times and 1.08 times on a trailing four quarters.
From our perspective, looking at book-to-bill over a trailing four quarters is more meaningful than looking at one quarter in isolation.
Non-GAAP diluted earnings per share was $0.92, up $0.08 compared to the prior year.
Our earnings per share expanded despite $0.23 of headwinds from taxes.
The tax rate headwinds were more than offset by increased margins and lower interest expense.
Moving to our segment results on Slide 12.
GBS continued its strong performance, accelerating organic revenue growth to 7%, our third consecutive quarter of organic revenue growth.
GBS is benefiting as we leverage our relationships with our platinum customers.
Our GBS business has higher margins and lower capital intensity.
So as we grow this business, it has a disproportionately positive impact on margins and cash flow.
Our GBS profit margin was 16.2%, up 200 basis points compared to the prior year.
GIS organic revenue declined 8.3%.
GIS profit margin was 4.8%, an improvement of 110 basis points compared to prior year.
Our focus with GIS heretofore has been on improving delivery, to deliver for our customers while stabilizing the margins.
As we set up for next year, we are putting in place a program to drive cost out of GIS to move the margins forward.
Turning to our enterprise technology stack.
Analytics and Engineering revenue was $545 million and organic revenue was up 18.7%.
We continue to see high demand in this area.
Of note is the success we are seeing with our platinum customer channel.
Applications organic revenue increased 4.8%, also accelerating.
BPS, our smallest layer of the enterprise technology stack, generated $116 million of revenue, and organic revenue was down 8.3%.
We expect the declines in this business to moderate as we move forward and put our new strategy in place.
For our GBS layers of our technology stack, our book-to-bill was 1.28 times and 1.17 times on a trailing 12-month basis.
Cloud and Security revenue was $471 million and organic revenue was down 12.2%.
IT Outsourcing revenue was $1.11 billion and organic revenue was down 1.9%.
Let me remind you that this business declined 19% in Q3 FY '21.
This is a significant improvement that we indicated last quarter.
We expect IT Outsourcing to continue to decline in low single digits, ideally 5% or better.
Lastly, Modern Workplace revenue was $561 million, and organic revenue was down 16% as compared to prior year.
We remain positive about our prospects.
And our strong book-to-bill of 1.11 times over the trailing 12 months is expected to stabilize Modern Workplace as we move through FY '23.
For our GIS layers of the technology stack, our book-to-bill was 1.18 times and 1.01 times on a trailing 12-month basis.
As you think about organic revenue growth prospects for GIS, our focus on improving the quality of revenue by expanding margins, reducing capital intensity and driving cash flow may create headwinds for organic revenue growth.
For example, using our capital to buy laptops, bearing the risk and ultimately recovering our cash over three to four years with relatively low returns does not feel like a great economic model.
At the end of the day, we would prefer to provide our offerings and services and forego the revenue associated with buying the assets to improve the underlying economics.
Next up, let me touch on our efforts to build our financial foundation.
This quarter, we made particularly strong progress with cash generation and continued reduction of restructuring and TSI expense.
With regard to financial discipline, remediating our material weakness is a top priority.
We are in the late stage of our efforts to remediate the material weakness, and we have fully implemented our 11-point remediation plan.
As a result, we expect to remediate our material weakness in Q4.
I should note, as it relates to the material weakness in governance more holistically, we are clear-eyed on how we think about governance.
We do not find our current governance score to be acceptable.
We are working hard to ensure we improve its trajectory like many things at DXC.
We are finishing the unfinished homework, creating a sustainable business brick by brick.
In addition to our material weakness remediation, we are committed to improving our pay practices.
As part of good governance, our board members and management are continuing to engage with our shareholders to proactively take their feedback as we work together to design and set our short-term and long-term incentive structure.
Our focus is to set metrics and targets that are highly aligned to what our shareholders want, all the while incentivizing management to improve the company's performance, creating an enduring and sustainable business.
The execution of the transformation journey has made measurable improvement, allowing us to put the business on a firmer financial foundation, expanding margins, and generating and keeping more cash.
Slide 15 shows the results of the structural improvements we have made.
We reduced our debt from $12 billion to $4.9 billion and are now below our targeted debt level.
We have reduced our quarterly net interest expense to $23 million, a $31 million reduction as compared to prior year.
As you recall, we were able to term out a significant portion of our debt last quarter with principally all of our outstanding borrowings at fixed rates.
We expect to continue the lower interest expense at approximately $25 million per quarter.
We also continue to make progress on reducing restructuring and TSI expense.
This reduction contributed $195 million to cash flow during the quarter as compared to the prior year.
Further, this also achieves one of our goals of narrowing the difference between GAAP and non-GAAP earnings.
I should note that while we have been reducing restructuring and TSI expense, we have also been able to expand margins.
Lastly, as you can see, we have also reduced operating lease cash payments from $156 million in the third quarter of the prior year to $117 million in the third quarter of FY '22.
Moving to Chart 16.
Let's talk about the focus we've brought to capital expenditures, including capital leases.
Our capital expenditures were reduced from $219 million in Q3 FY '21 to $146 million in Q3 FY '22.
We are closely managing our capital lease originations, which ultimately means our capital lease debt and associated payments continues to decline.
In FY '20, we had a $270 million quarterly run rate for originations while our last two quarters averaged less than $60 million.
We made $207 million of capital lease payments in Q3 last year, which is now down to $184 million in the current quarter.
For Q4, we expect a further reduction of capital lease payments to approximately $140 million.
A metric we like to look at to gauge capital efficiency is capital expenditures and capital lease originations as a percentage of revenue.
We are now tracking at 5.2% for two consecutive quarters, down from roughly 10% in FY '20.
Clearly, our focus has been on improving our cash flow.
Specific to new business, we have been focused on structuring our transactions to have lower capital intensity, potentially trading off revenue in favor of cash flow.
As you can see, from my prior comments, our focus on driving structural changes has improved our ability to generate and hold on to more cash.
Cash flow from operations totaled an inflow of $696 million.
Free cash flow for the quarter was $550 million, an increase of $956 million as compared to prior year and moves our year-to-date free cash flow to $650 million or $150 million above our full year guidance.
Further, cash in the quarter was negatively impacted by two previously disclosed payments, totaling approximately $130 million.
These payments were offset by much stronger performance due to improvements in the business and benefits from timing on payments and receipts in the quarter.
We expect this timing to create some headwinds in Q4 cash flow.
Slide 18 shows our trended cash flow profile.
Our progress in Q2 and Q3 gives us confidence as we work toward delivering our longer-term FY '24 guidance of $1.5 billion in free cash flow.
Moving to Slide 19.
Let's revisit our relatively simple capital allocation formula.
We are targeting a debt level of approximately $5 billion and a cash level of $2.5 billion.
With debt at our target debt level, cash over $2.5 billion is excess cash, which we expect to deploy.
Based on this formula, we expect to self-fund stock repurchases of $1 billion over the next 12 months.
The $1 billion in repurchases will be funded from a combination of cash generated from operating our business as well as proceeds from our portfolio-shaping efforts.
We recently executed a number of sale agreements and expect to divest businesses and assets with approximately $500 million of revenue and will generate $500 million of proceeds in the next 12 months.
These businesses are not synergistic and cannot be leveraged more broadly in our platinum channel.
As you will see in our 10-Q, we entered into an agreement to sell our German financial service subsidiary that includes both of our banks for approximately $340 million.
As noted in the liquidity section of our previously filed financials, the German financial services business has cash held on deposit for the bank's customers.
The current cash balance related to these deposits is $670 million.
We also announced an agreement for the sale of our Israeli business for $65 million.
The valuation for these assets are accretive to our valuation.
Further, we do not expect these divestitures to create headwinds related to achieving our FY '24 longer-term guidance for organic revenue growth, adjusted EBIT margin, and free cash flow.
We continue to assess our portfolio to ensure we have businesses that are aligned to our strategy and not a distraction for our management team.
Now let me cover our progress on share repurchases.
In Q3, we repurchased $213 million of common stock, bringing our FY '22 year-to-date repurchases to $363 million or 10.6 million shares.
Our share repurchases are self-funded.
As noted, we expect to repurchase $1 billion of our common stock over the next 12 months as we firmly believe our stock is undervalued.
Turning to the fourth quarter guidance.
Revenues between $4.11 billion and $4.15 billion.
If exchange rates were at the same level as when we gave guidance last quarter, our fourth quarter revenue guidance range would be $20 million higher.
Organic revenue declined, minus 1.2% to minus 1.7%.
Adjusted EBIT margin in the range of 8.7% to 9%.
Non-GAAP diluted earnings per share of $0.98 to $1.03 per share.
For Q4, we expect a tax rate of approximately 26%.
As we look to the end of FY '22, I would like to update our current fiscal year guidance.
Based on the strengthening U.S. dollar, our revenues are expected to be negatively impacted by approximately $40 million.
We now expect to come in at approximately $16.4 billion.
Organic revenue growth range of minus 2.2% to minus 2.3%, which is slightly lower than our previous range.
Adjusted EBIT margin, 8.5% to 8.6%.
We continue to expand margins while significantly lowering restructuring and TSI expense and are now guiding to $400 million for FY '22.
To put this all in context, we expect to spend $500 million less on restructuring and TSI spend than last year, while expanding margins by over 200 basis points.
Our focus is to embed these types of expenses over time into the normal performance of the business and believe we have taken significant strides in doing so.
Non-GAAP diluted earnings per share of $3.64 to $3.69.
Lastly, we are increasing free cash flow guidance to over $650 million, $150 million improvement to our prior FY '22 guidance.
Fourth quarter cash flow is expected to be impacted by timing, which boosted Q3 cash flow and in addition, a $100 million payment in Q4 to terminate a financial structure put in place a number of years ago.
We are reaffirming our guidance for FY '24.
This reflects our strong execution and driving forward on our transformation journey.
Overall, we are making great progress driving efficiency in the business and generating strong free cash flow.
We are utilizing those cash flows to drive significant value for our shareholders through our stock repurchase program.
Let me leave you now with a few key takeaways.
As I think about finishing out FY '22, we are making great progress.
During our June investor day, we committed to making progress on all nine of these points, and let me quickly give you an update on each.
Win in the market and a book-to-bill of greater than 1x.
Our trailing 12-month average is now 1.08 times.
This year, we produced relatively stable revenues in Q2, Q3, and we expect this to continue in Q4.
Strengthening the balance sheet.
Our debt is now at $4.9 billion, and our refinancing has significantly lowered our interest expense.
Achieved organic revenue growth of minus 1% to minus 2% in FY '22.
This is where we're coming up a little short, anticipating negative 2.2% to negative 2.3% organic revenue growth.
Remediate material weakness and improve governance score.
As Ken indicated, we will remediate the material weakness in Q4, and we have plans to continue to improve our governance score.
Reduce restructuring and TSI.
We have taken it from over $900 million to roughly $400 million in FY '22.
We have expanded margins every quarter throughout FY '22.
Improve free cash flow.
We exceeded the $500 million guidance for FY '22.
And finally, resume capital deployment to shareholders.
We have repurchased $363 million and plan to do another $1 billion over the next 12 months.
In addition to this progress, we are also committed to portfolio-shaping.
What this means is we are making the right bets and investments like what we are doing with Platform X and ServiceNow and divesting assets that are not core to our strategy and will not help us grow.
Our portfolio-shaping is anticipated to drive $500 million in excess cash in the next year.
In closing, I am confident that by staying focused on our transformation journey, we will continue to deliver on our commitments both in the short term and the long term. | dxc technology - q3 non-gaap earnings per share $0.92.
dxc technology - q3 revenue fell 4.6 percent to $4.09 billion.
dxc technology - sees fy 2022 non gaap diluted earnings per share $3.64 to $3.69.
intends to self-fund $1 billion of additional share repurchases over next twelve months. | 1 |
Just after the close of regular trading, Edwards Lifesciences released third quarter 2021 financial results.
These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters, and foreign currency fluctuations.
Finally, a quick reminder that when using the terms underlying and adjusted, management is referring to non-GAAP financial measures.
Otherwise, they're referring to GAAP results.
Let me begin by expressing appreciation for our global teams who have been highly engaged throughout the pandemic.
We're also pleased that our supply chain remained resilient during these challenging times to meet the needs of the patients we serve.
Turning to results, third quarter total Company sales of $1.3 billion increased 14% on a constant-currency basis versus the year-ago period.
Strong mid-teens growth was driven by our innovative platforms, although lower than our July expectations due to the significant impact COVID had on U.S. hospitals.
Although we experienced encouraging signs of patient confidence and continued willingness to seek medical care in July, the Delta variant had a significant impact on hospital resources during the last two months of the third quarter, especially in the U.S. Despite the pronounced impact of the Delta variant in the U.S. in Q3, we're encouraged by the recent decline in hospital COVID admissions.
We believe some procedures were unfortunately deferred in the third quarter.
And based on what we saw in Q2, we expect many of these patients who deferred treatment in Q3 will be treated in the future.
We continue to expect total Company sales growth to be in the high teens for the full year.
In TAVR, third quarter global sales were $508 and $58 million dollars, up 14% on an underlying basis versus the year-ago period.
We estimate global TAVR procedure growth was comparable with our growth in the third quarter.
Globally, our average selling price remained stable.
In the U.S., our TAVR sales grew 12% on a year-over-year basis and we estimate that our share of procedures was stable.
Growth was broad-based across both high and low volume centers.
As you might expect procedure volumes in Q3 were affected by seasonality and varied by geography and even by hospital, as patients and providers turn their focus again to the pandemic.
Our TAVR sales in July benefited from encouraging signs of continued recovery from the pandemic, however procedures were negatively impacted in the last two months of Q3 due to the significant impact Delta had on hospital resources.
Outside the U.S. in the third quarter, our sales grew approximately 20% on a year-over-year basis, and we estimate total TAVR procedure growth was comparable.
We continue to be encouraged by strong international adoption of TAVR, broadly, in all regions.
And despite the impact of Delta, the TAVR market in Europe showed relative resilience with strong growth in procedure volumes.
Growth was broad-based across Europe and driven by continued strong adoption of our SAPIEN three Ultra platform.
We were pleased with the growth rate considering that in Q3 of 2020 centers in Europe had already recovered from pandemic lows.
Longer-term, we see excellent opportunities for continued OUS growth, as we believe global adoption of TAVR therapy remains quite low.
It's worth noting that recently, published guidelines from the European Association of Cardiothoracic Surgery not definitively recommend TAVR for patients over the age of 75.
The acknowledgment by the Surgical society the TAVR is preferred for those over 75 is a significant development.
We believe these guidelines represent an important long-term opportunity and although transcatheter valves have been commercially available for over a decade in Europe, it remains clear that there is still a large, unmet need for this therapy.
Strong TAVR adoption continued in Q3 in Japan.
As expected, we received reimbursement approval in Q3 for treatment of patients at low surgical risk.
We remained focus on expanding the availability of TAVR therapy throughout this country, driven by the fact that AS remains a significantly under-treated disease among this large elderly population.
At the upcoming TCT meeting, there's a planned late-breaking update on the economic outcomes of PARTNER three at two years.
In summary, based on October procedure trends, we expect Q4 growth for TAVR to be similar to Q3.
We continue to expect underlying TAVR sales growth of around 20% in 2021.
We remain as confident as ever, about the long-term potential of TAVR because of its transformational impact on the many patients for suffering from aortic stenosis and because many remained untreated.
The long-term potential reinforces our view that this global TAVR opportunity will exceed $7 billion by 2024, which implies a low double-digit compound annual growth rate.
Now, turning to TMTT, we've made meaningful progress across all our platforms with over 6000 patients treated to date, to transform treatment and unlock the significant long-term growth opportunity.
We remain focused on three key value drivers.
A portfolio of different shaded therapies, positive pivotal trial results to support approvals and adoption, and favorable real-world clinical outcomes.
This quarter we progressed on the enrollment of five pivotal trials across our portfolio to support therapies for patients suffering from mitral and tricuspid regurgitation.
We are gaining experience with a PASCAL precision platform as part of our class trials, and physician feedback continues to be positive.
We look forward to presenting randomized data from the class 2D pivotal trial next year and remain on track for the U.S. approval of PASCAL for patients with DMR late next year.
This important milestone will mark a transition from large single-arm studies through significant pivotal trial results that support approval and adoption and will be the first of several key datasets from our class of trials.
We continue to treat patients with both of our mitral -- our transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial SAPIEN M3 and MISCEND study of EVOQUE Eos.
We are ramping up enrollment with our novel EVOQUE tricuspid replacement therapy as part of the TRISCEND II Pivotal Trial.
These processing transfemoral therapies are critical for many patients without treatment options today and exemplify the importance of a comprehensive portfolio.
As we continue to expand our body of clinical evidence, we look forward to presenting meaningful data at TCT and PCR London Valves next month.
In addition, 30-day outcomes for mitral repair with PASCAL from our Miclast, post-market clinical follow-ups study of over 250 patients.
We also anticipate several live case demonstrations of our differentiated therapies.
Turning to the financial performance in TMTT, despite the impact of Delta in summer seasonality, global sales of $22 million were driven by the continued adoption of PASCAL in Europe.
As we expanded commercially, we continue to experience high procedural success rates and excellent clinical outcomes for patients.
And we remain committed to employing our high-touch clinical support model.
We are pleased with our level of site activation during the quarter.
We continue to expect to achieve our previous full-year guidance of $80 million to $100 million and estimate the global TMTT opportunity to triple to approximately $3 billion by 2025.
And we're pleased with our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease.
In Surgical Structural Heart, third quarter global sales were $217 million, up 6% on an underlying basis versus the year-ago period.
Despite the Q3 resurgence and COVID cases we were encouraged to see continued SABR procedure growth across most regions.
We remain encouraged by the steady global adoption of Edwards RESILIA tissue valves, including INSPIRIS RESILIA aortic valve, the KONECT RESILIA valves conduit and our MITRIS RESILIA mitral valve.
This advanced tissue treatment is increasing supported by growing body of real-world evidence as demonstrated at the European Association of Cardiothoracic Surgeons annual meeting earlier this year.
Registry data confirmed excellent real-world outcomes with INSPIRIS RESILIA in patients under the age of 60.
As patients increase their awareness of surgical valve choices, we believe that they are learning about the durability potential of RESILIA and engaging with their positions to choose this technology.
In summary, we have confidence that our full year 2021 underlying sales growth will be in the mid-teens for Surgical Structural Heart, driven by market growth and adoption of our premium technologies.
We continue to believe the Surgical Structural Heart market that we serve will grow mid-single-digits through 2026.
In Critical Care, third quarter global sales were $213 million up 17% on an underlying basis versus the year-ago period.
Growth was driven by contributions from all product lines led primarily by strong HemoSphere capital sales in the U.S.
Our True Wave disposable pressure monitoring devices used in the ICU remained in demand due to the elevated hospitalizations in the U.S. and demand for products used in high-risk surgery also grew year-over-year in addition to demand for the ClearSight non-invasive finger cup used in elective procedures.
In summary, we continue to believe the Critical Care will grow revenue in the low double-digit range in 2021.
We remain excited about our pipeline of Critical Care innovations as we continue to shift our focus to smart recovery technologies designed to help clinicians make better decisions for their patients.
Today, I'll provide additional perspective on the third quarter, along with how we anticipate the rest of the year may unfold and some color on what to expect at the investor conference on December 8th.
Total sales in the third quarter grew 14% on an underlying basis over the prior year.
As indicated earlier, this strong sales growth is lower than we expected in July before the U.S. Delta surge.
Earnings in the quarter of $0.54 met our expectations as COVID -related constrained spending more than offset lower-than-expected sales.
As Mike mentioned, based on the improving trends with the Delta variant.
And our October procedure trends, we're projecting total Q4 sales of between 1.30 billion and 1.38 billion.
A as it relates to each product line, we are forecasting fourth quarter TAVR sales of $850 million to $910 million and still have the potential to reach underlying TAVR sales growth of around 20% for the full-year 2021.
We're also maintaining our previous ranges for TMTT, Surgical Structural Heart, and Critical Care.
We continue to expect our full-year adjusted earnings per share guidance at the high-end of $2.07 to $2.27 with fourth-quarter adjusted earnings per share of 53 to 59 cents.
And now I will cover additional details of our third quarter results.
Our adjusted gross profit margin was 76.3% up from 75.5% in the same period last year when we experienced substantial costs responding to COVID, the improvement was also driven by a more profitable product mix, partially offset by a negative impact from foreign exchange.
Like most companies, we are seeing signs of inflation, generally, in things like some of the raw materials we use in production, as well as shipping and logistics.
With that said, some of the extraordinary costs we incurred when COVID hit last year have lessened.
And the net result is no material impact to our gross profit margin performance or guidance for 2021.
More broadly, we're continuing our investments to ensure that our supply chain is strong and resilient and capable of delivering life-saving products for our patients.
We continue to expect our 2021 adjusted gross profit margin to be between 76% and 77%.
Selling general and administrative expenses in the third quarter were $364 million or 27.8% of sales compared to $307 million in the prior year.
This increase was primarily driven by personnel-related costs and increased commercial activities compared to the COVID impacted prior year.
We are planning a sequential ramp up of expenses in the fourth quarter as COVID related restrictions continued to subside.
We still expect full-year 2021 SGNA expenses as a percentage of sales excluding special items to be 28% to 29%.
Research and development expenses in the quarter grew 22% over the prior year to $238 million or 18.2% of sales.
This increase was primarily the result of continued investments in our transcatheter innovations, including increased clinical trial activity.
We are planning to increase these expenses in the fourth quarter as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT.
For the full-year 2021, we continue to expect R&D expenses as a percentage of sales to be 17% to 18%.
Our reported tax rate this quarter was 13% or 13.9%, excluding the impact of special items.
This rate included a 320-basis point benefit from the accounting for stock-based compensation.
We continue to expect our full-year rate in 2021, excluding special items to be between 11% and 15%, including an estimated benefit of four percentage points from stock-based compensation accounting.
Foreign exchange rates increased third quarter reported sales growth by 70 basis points for $8 million compared to the prior year.
At current rates, we continue to expect an approximate $70 million positive impact, or about 1.5%, to full-year 2021 sales, compared to 2020.
Foreign exchange rates negatively impacted our third quarter gross profit margin by 30 basis points compared to the prior year.
And relative to our July guidance, FX rates positively impacted our third quarter earnings per share by less than a penny.
Free cash flow for the third quarter was $471 million, defined as cash flow from operating activities of $532 million less capital spending of $61 million our year-to-date free cash flow was $1.1 billion.
The strong cash flows are a reflection of our exceptional portfolio of patient-focused technologies that are generating returns from previous investments, which allows us to fund future internal and external opportunities.
We continue to maintain a strong and flexible Balance Sheet with approximately $3 billion in cash and investments as of September 30th.
Average shares outstanding during the third quarter were 632 million and we continue to expect our average diluted shares outstanding for 2021 to be at the lower end of our 630 to 635 million guidance range.
We have approximately $1.2 billion remaining under the share repurchase program.
Before turning the call back over to Mike, I'll make a quick comment about our outlook for 2022.
It's premature to offer detailed guidance today, but we will provide 2022 financial guidance at our Investor Conference on December 8th.
In general, in 2022, we're planning on less disruption from COVID, as we assume the resumption of more normalized sales and earnings growth, we will provide guidance for gross profit and operating margins, as well as more visibility into any potential impact from changes in corporate tax rates.
And with that, I'll pass it back to Mike.
We're very pleased with our strong year-to-date performance despite the headwinds associated with the pandemic.
And as patients and clinicians increasingly choose transcatheter valve therapy, we remain optimistic about the long-term growth opportunity.
We are committed to aggressively investing in our focused innovation strategy, because we believe there is a broad group of patients still suffering from Structural Heart disease and the pandemic's impact will wane.
We remain confident that the innovative therapies resulting from our investments will continue to drive strong organic growth in the years to come.
And as you heard from Scott earlier, our 2021 Investor Conference will take place on Wednesday, December 8th, here at our headquarters in Irvine, California.
Either way, we really hope you can be a part of it.
In addition to our 2022 financial guidance, you'll hear more about Edwards focused innovation strategy and our comprehensive and exciting product pipeline.
For more information, please visit the Investor Relations section of the Edwards website at ir.
As a reminder, please limit the number of questions to one, plus one follow-up, to allow for broad participation.
If you have additional questions, please reenter the queue, and management will answer as many participants as possible during the remainder of the call. | compname says qtrly sales grew 15% to $1.3 billion.
qtrly sales grew 15% to $1.3 billion; underlying sales grew 14%.
q3 earnings per share was $0.54.
full year 2021 sales, earnings per share guidance range unchanged.
qtrly tavr sales of $858 million, up 15% on a reported basis.
tavr sales negatively impacted in last two months of q3 due to significant impact covid had on hospital resources. | 1 |
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow.
To ensure our disclosures are consistent, these slides will provide the same details as they have historically, and as I've said, are available on the Investor Relations section of our website.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
Always have to remember to take off from you, Mollie.
My guess is many of you, like me, are extraordinarily happy to see 2020 behind us.
I think also many of us realized that some elements of 2020 are not yet fully behind us.
The COVID cases are coming down from the extraordinary levels that we saw over the holidays.
But of course, they're not down to zero chance, and there's still a lot of it around.
We have vaccines, but they're not yet in each of our arms.
And I guess most important, the disruption that COVID-19 has caused to our businesses, our personal lives and society more broadly, obviously, remain.
Having said that, I think we all see some light at the end of this tunnel and I, for one, am so, so grateful to see that.
Today, I have two messages about our company.
The first is that I am, and I hope you are, incredibly impressed by how our company has weathered this unprecedented set of challenges of 2020 and continue to do so thus far in 2021.
And the second is to suggest that the resilience shown in 2020 further underscores my condition in the tremendous power of this company and just how bright our future is coming out of COVID.
Our teams did an incredible job.
Keeping our people safe, keeping their family safe, supporting each other and our families through that challenging year, all while delivering for clients in unprecedented ways, in critical ways from home.
As a result of those efforts, even in the face of those challenges, we won and delivered on some of the most important assignments in our company's history.
We built our brand.
While maintaining incredible morale around the firm, we promoted terrific people.
We attracted more great people to FTI.
And through all that, we delivered solid financial results, even while parts of our business faced unprecedented challenges.
With respect to the financial results, I'm going to leave most of the discussion to Ajay, but let me talk about why I use the word solid.
Some folks could look at the $5.99 of adjusted EBITDA -- sorry, the adjusted earnings per share for 2020 and point out, it's another record year, another record year of adjusted earnings per share for the company.
In truth, when you unpack it, and Ajay will unpack it a bit further, I think it's more appropriately viewed as a solid performance.
As you know, there are a bunch of things in any quarter that can play out one way or another like taxes or success fees.
In the fourth quarter, those items played out positively in a much bigger way than we typically have -- when we typically see.
If you adjust for that, you don't see it as a record year but rather a solid year.
And I think that's a better way to look at it.
Because if you look at some of the underlying factors, it's also, I think, a solid year.
We grew, but we grew less fast than we had hoped to at the beginning of the year, but we grew less than the headcount we added.
Adjusted EBITDA, which you know we've been growing over time, this year, it was really flat.
So I think a solid year is a more appropriate description of 2020.
But another way to look at it, and I think this is an important part, but we had a solid year.
For example, we grew in the face of COVID.
A solid year in a year when some parts of our business had unprecedented challenges.
Some parts of our business were close to shutdown for parts of the year.
And importantly, we drove those solid results without short changing our future, in fact, while supporting and investing for the future of this company.
We didn't risk teams that were facing slow periods.
We continue to attract great people, develop our people, retain terrific talent.
We made both organic and inorganic investments.
We didn't cut headcount in the face of COVID.
We increased our billable headcount by 14.5%.
We seized the opportunity created by disruptions in the market to attract 36 terrific SMDs laterally.
We didn't make those investments to bolster our profitability this year on the short term.
As we talked about in the past, most investments like that in professional services cost you in the short term.
We made them because we believe they, like the prior investments we made, build our business and will build their business for the next many years.
And we made those investments because we could.
Because the investments we had made in prior periods had given us a strength that allowed us to have the wherewithal to invest at a time when others we're not so fortunate.
Those moves, those investments, that support for the great core team of FTI in my position, in my opinion, position us extremely well for the period coming out of COVID.
You could ask other challenges ahead -- of course, they're a challenge ahead.
I think we all know them.
I've never seen a world with more uncertainty, with more disruption, whether it's economic uncertainty, credit uncertainty or political uncertainty.
You can point to lose money out there and government interactions that are dampening restructuring activity, you can look at the fact that there are new variants of the coronavirus that could accelerate cases conceivably, and we can all point to stress and uncertainty in the global political world.
But to me, if this year proves anything about our company, it is the incredible resilience of our business and our people, our ability to thrive through a myriad of challenges over any medium term.
A few quarters ago, we had some businesses that had record low utilization and were, for the first time ever, not profitable.
In those circumstances, you always have some people question, oh, should we do layoffs?
Will these businesses ever come back?
We thought those were great businesses with great people, and we continue to support them.
And now just two to three quarters later, that confidence in this business is being rewarded.
The efforts of the people in those businesses that they made to stay relevant to clients, connected to critical issues, connected to their people, not only resulted in those businesses coming back, but as a result of us being involved in critical matters and our backlogs up dramatically from where they were just a few quarters ago.
This past year confirms for me lessons I've learned over many years in professional services, which in times of difficulty, if you avoid focusing on the quarter, avoid overreacting, but rather concentrate on aggressively building positions around the most important market needs, attracting and supporting the best professionals, you can use that period to help build an institution that's a powerful growth engine.
Perhaps not in that quarter or the next one, but for years to come.
An institution that great professionals want to be part of, that they want to help grow and an institution that creates economic value for those committed employees and for shareholders.
That is what we have been doing in these last years.
It has led to some quarters, some quarters with down results, and some years with only solid results.
But it's also led to years where we can deliver the highest employee engagement scores and the lowest turnover ever.
We can invest in important initiatives for the future of this company, like diversity, inclusion and belonging and corporate citizenship.
It allows us to continue to attract great talent.
I think it's not generally known that two-thirds of our SMDs in this firm today either joined the firm or were promoted in during my six years.
And it allows you to win more big impactful cross-segment jobs in more places than ever before.
Ultimately, those sorts of investments allow you to build a better, stronger, more attractive vibrant institution, which ultimately then also allows you to deliver a lot of shareholder value.
For example, as many of you know, we've more than doubled the market cap of this company over the last few years.
I so look forward to continuing that journey, hopefully, with each of you in the years ahead.
I'll begin with some highlights for the year.
Revenues of $2.461 billion increased $108.6 million or 4.6%.
GAAP earnings per share of $5.67 compared to GAAP earnings per share of $5.69 in 2019.
Adjusted earnings per share of $5.99 compared to adjusted earnings per share of $5.80 in 2019.
As Steve mentioned, our GAAP and adjusted earnings per share included a significant tax benefit that boosted full-year 2020 earnings per share by $0.30.
And adjusted EBITDA of $332.3 million was down from $343.9 million in 2019.
Our performance this year is the result of the breadth of our service offerings and the continued investments we have made for future growth.
The global pandemic boosted demand for our restructuring services.
Though such demand peaked in the second quarter as governments increased liquidity and placed moratoriums on insolvency proceedings.
Conversely, in the second half of the year, increase in liquidity spurred M&A activity, creating more demand for our Economic Consulting and Technology segments as well as our transactions practice within our Corporate Finance & Restructuring segment.
Undeterred by the impact of the pandemic on co-closures and travel, which especially hurt our Forensic and Litigation Consulting or FLC segment, we continue to invest in growth.
In 2020, our total billable headcount for the company grew 14.5%, on top of the 17.8% growth in 2019.
Lower SG&A expenses from the constraints on travel and entertainment and lower weighted average shares outstanding or WASO from share buybacks also boosted 2020 EPS.
Overall, given the challenging year, we are very pleased with these results.
Now I will turn to fourth-quarter results, which exceeded our expectations.
For the quarter, revenues of $626.6 million increased $24.4 million or 4%.
GAAP earnings per share of $1.57 compared to $0.76 in the prior-year quarter.
Noteworthy during the quarter, we recorded an $11.2 million tax benefit from the use of foreign tax credits in the United States and a deferred tax benefit arising from an intellectual property license agreement between our U.S. and U.K. subsidiaries, which boosted both GAAP earnings per share and adjusted earnings per share by $0.32 for the quarter.
Additionally, the impact of lower WASO from share repurchases increased earnings per share by $0.11.
Adjusted earnings per share of $1.61, which excludes $0.04 of noncash interest expense related to our 2023 convertible notes compared to adjusted earnings per share of $0.80 in the prior-year quarter.
Net income of $55.6 million compared to $29.1 million in the fourth quarter of 2019.
Adjusted EBITDA of $82.3 million or 13.1% of revenues compared to $58.3 million or 9.7% of revenues in the prior-year quarter.
The increase in EBITDA was primarily due to higher revenues in our Corporate Finance & Restructuring, Economic Consulting and Technology segments, which was partially offset by a decline in FLC and lower SG&A expenses due to a true-up of bonuses and lower travel and entertainment expenses.
These increases were only partially offset by higher compensation related to a 14.5% increase in billable headcount.
Now turning to our performance at the segment level for the quarter.
In Corporate Finance & Restructuring, revenues of $219.8 million increased 21.4% compared to Q4 of 2019.
Acquisition-related revenues contributed $19 million in the quarter.
Excluding acquisition-related revenues, the increase was primarily due to higher demand for restructuring services, largely in North America and EMEA as well as higher success fees.
This increase was partially offset by a $7.6 million decline in pass-through revenues due to a decline in billable travel and entertainment expenses.
Adjusted segment EBITDA of $35.4 million or 16.1% of segment revenues compared to $24.8 million or 13.7% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in compensation, primarily related to 38.6% growth in billable headcount and higher variable compensation.
Of note, the net year-over-year increase of 461 billable professionals includes continued organic hiring, 147 professionals from the acquisition of Delta Partners and the transfer of 66 professionals from our FLC segment into Corporate Finance, which occurred in the second quarter of 2020.
On a sequential basis, Corporate Finance & Restructuring revenues decreased 7.1% due to the decline in restructuring activity.
This decline was partially offset by a sequential increase in revenues from our transactions-related services.
Moving on to FLC.
Revenues of $127.2 million decreased 15.4% compared to the prior-year quarter.
The decrease was primarily due to lower demand for disputes and investigation services.
Adjusted segment EBITDA of $7.6 million or 6% of segment revenues compared to $17.4 million or 11.6% of segment revenues in the prior-year quarter.
This decrease was primarily due to lower revenues with lower staff utilization, which was partially offset by a decline in SG&A expenses.
Sequentially, FLC revenues increased 6.8% due to higher revenues in North America particularly driven by higher demand for our dispute services.
As with last quarter, we continue to see momentum steadily building with an increase in new matters being opened, the gradual reopening of courts and trial dates getting scheduled, though utilization is still below pre-COVID levels.
Economic Consulting's record revenues of $160.5 million increased 4.9% compared to Q4 of 2019.
The increase in revenues was primarily due to higher demand and realized bill rates for M&A-related and non-M&A-related antitrust services.
Adjusted segment EBITDA of $31.3 million or 19.5% of segment revenues was a record and compared to $17.3 million or 11.3% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, a reduction in our use of external affiliates and lower SG&A expenses.
Sequentially, revenues in Economic Consulting increased 3.5% as we continue to see higher demand for our non M&A-related antitrust services.
In Technology, revenues of $58.6 million increased 13.8% compared to Q4 of 2019.
The increase in revenues was largely due to higher demand for M&A-related second request services and litigation services.
Adjusted segment EBITDA of $10.2 million or 17.3% of segment revenues compared to $7.8 million or 15.1% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in compensation.
Lastly, in strategic communications, revenues of $60.5 million decreased 8.8% compared to Q4 of 2019.
The decrease in revenues was primarily due to a $4.8 million decline in pass-through revenues.
Adjusted segment EBITDA of $11.7 million or 19.4% of segment revenues compared to $9.9 million or 14.9% of segment revenues in the prior-year quarter.
This increase was primarily due to a decline in SG&A expenses compared to the prior-year quarter.
Sequentially, revenues in Strategic Communications increased 14.2%, primarily due to higher demand for corporate reputation and public affairs services in the EMEA region.
Now I will discuss certain cash flow and balance sheet items.
Net cash provided by operating activities; of $327.1 million compared to $217.9 million in the prior year.
Free cash flow of $292.2 million in 2020 compared to $175.8 million in 2019.
In 2020, we repurchased 3.3 million of our shares for a total cost of $353.4 million.
In Q4 alone, we repurchased 1.6 million shares at an average price per share of $105.84 for a total cost of $169.2 million.
And throughout 2020, we continue to invest in the business through both organic and inorganic investments, including attracting and developing senior managing directors through lateral hires and promotions and our acquisition of Delta Partners.
Despite using $353.4 million for share repurchases, a 14.5% increase in billable headcount and the acquisition of Delta Partners, we ended the year with our total debt, net of cash, up only $74.4 million compared to December 31, 2019.
Turning to our 2021 guidance.
As usual, we are providing revenues, GAAP earnings per share and adjusted earnings per share guidance for the year.
We estimate that revenues for 2021 will be between $2.575 billion and $2.7 billion.
We expect our GAAP earnings per share which includes estimated noncash interest expense related to our 2023 convertible notes of approximately $0.20 per share to range between $5.60 and $6.30.
We expect full-year 2021 adjusted EPS, which excludes the impact of the noncash interest expense, to range between $5.80 and $6.50.
You may notice that our guidance ranges are slightly wider than previous years.
And the low end of our guidance for adjusted earnings per share is up only slightly compared to our full-year 2020 performance after adjusting for the benefits of our tax strategy.
Our 2021 guidance range is shaped by several assumptions.
Globally, increased liquidity and moratoriums and insolvency have benefited even the most distressed companies.
Such that speculative debt default levels are at a record low.
We expect restructuring activity to be subdued in terms of new defaults, at least through the first half of 2021.
However, we believe that, eventually, moratoriums will be lifted and there may be limits to liquidity, resulting in an increase in restructuring activity but when such demand surfaces or to what extent is uncertain.
Conversely, we see the current backdrop of strong M&A activity continuing to favorably impact our Economic Consulting, Technology and Strategic Communications segments as well as our transactions business within our Corporate Finance & Restructuring segment.
We have also invested significantly in capacity in our business transformation and transactions businesses where we believe we have enormous growth potential.
The segment which was most impacted by COVID-19 in 2020 was FLC.
We're already seeing a recovery, albeit slow, and our current expectations are that we will continue to gain momentum.
We expect a higher effective tax rate in 2021.
We currently expect our full-year 2021 tax rate to range between 23% and 26%, which compares to 19.7% in 2020.
And we expect SG&A to gradually increase through the year as the pandemic eases.
Before I open the call to questions I, like Steve, would like to express my gratitude to our employees for their performance in 2020 in the face of COVID-19 and to our shareholders and clients for their continued support.
And now I'll close my remarks today by emphasizing a few key themes.
First, our business is resilient.
Because of our diverse mix of services, which uniquely positions us to help our clients as they navigate their most complex business challenges, regardless of business cycle.
Second, our business is strong, not only in North America, but also globally, our capacity to serve our clients in multiple jurisdictions is one of our distinct competitive advantages.
Both our EMEA and Asia Pacific regions had record revenues in 2020.
Our CAGR for revenues in EMEA since 2017 is a 23.9%.
As Steve said, we succeed by building positions around the most important market needs and attracting and supporting the best professionals.
Third, our leadership team remains focused on growth with strong staff utilization.
And finally, our business generates excellent free cash flow, and our balance sheet is exceptionally strong.
We have the capability to continue to boost shareholder value through share buybacks, organic growth and acquisitions when we see the right ones. | q4 earnings per share $1.57.
q4 revenue $626.6 million versus refinitiv ibes estimate of $617.6 million.
sees fy 2021 adjusted earnings per share $5.80 to $6.50.
sees fy 2021 earnings per share $5.60 to $6.30.
q4 adjusted earnings per share $1.61 excluding items. | 1 |
Joining me on the call today are Tim Hingtgen, Chief Executive Officer; Dr. Lynn Simon, President of Clinical Operations and Chief Medical Officer; and Kevin Hammons, President and Chief Financial Officer.
We will refer to those slides during this earnings call.
All calculations we will discuss also exclude gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal settlements and related costs, expense from settlement of legal expenses related to cases covered by the CVR and change in tax valuation allowance.
We achieved strong operational and financial results in the first quarter, during what was a milestone period for the healthcare industry as we marked the one-year anniversary of the onset of the COVID pandemic.
A year into this experience, we are still managing through extraordinary circumstances and adapting to constant change.
During the first part of the quarter, especially in January, COVID surges continued to impact volume in many of our markets.
In February, and certainly by March, COVID cases subsided and other volumes began to notably improve.
We provided care for approximately 9,500 inpatient COVID admissions in the first quarter.
This compares to approximately 8,000 COVID admissions during the third quarter and another 14,000 COVID admissions during the fourth quarter of 2020.
We finished the first quarter with good operational momentum, progress in many strategic initiatives which I will discuss in a minute and a sense of optimism that as vaccination rates increase and COVID cases decline, we will continue to move to a more normal operating environment.
In the first quarter on the topline, same-store net revenue growth increased 9.8%.
On a year-over-year basis, net revenue growth was driven by higher acuity and an easier comp, due to COVID related government restrictions on elective procedures that started in March of 2020 which impacted volumes in net revenues last year.
This quarter admissions and surgeries were negatively impacted by the high COVID case counts that we experienced in January as well as severe snow storms that hit much of the South in the middle of February.
During the month of March, we were very pleased with our strong volume recovery, further closing the gap to our pre-pandemic run rates.
We believe the rollout of the COVID vaccine also impacted demand during the quarter, while some patients waited for their turn to receive the vaccine prior to returning for elective scheduled Health Care Services.
Throughout the pandemic period, we have been actively encouraging patients who have been reluctant to seek healthcare, to return for any need to checkup, screening, postponed procedures and other deferred care.
For the fourth quarter year-over-year same-store admissions were down 4.9%, adjusted admissions were down 7.2% and surgeries were essentially flat.
ER visits continue to lag other volume metrics with same-store ER visits down 17%.
Our expense management initiatives remain on track and effective with more progress demonstrated during the first quarter.
Adjusted EBITDA was $495 million which increased 60% compared to the prior year.
Adjusted EBITDA margin of 16.4% improved 620 basis points year-over-year.
During the quarter, $82 million of pandemic relief funds were recognized.
If we exclude the pandemic relief funds from the quarter's results, adjusted EBITDA was $413 million with an adjusted EBITDA margin of 13.7%.
Since comparative results are affected when looking at the first quarter of 2020 because of the government restrictions on elective procedures that took effect then, more helpful perspective can be found in a comparison to the first quarter of 2019.
Excluding pandemic relief funds, first quarter 2021 adjusted EBITDA of $413 million, increased 6% compared to the first quarter of 2019, despite operating 21 fewer hospitals as a result of our portfolio rationalization program.
We believe this clearly demonstrates our progress so far and the underlying strength and growth potential of our go-forward portfolio.
We continue to fuel the portfolio with attractive capital investments based upon defined growth strategies and of course through the determination and hard work of our hospital leadership teams across the country.
The results of the quarter demonstrate that the transformation of the company that started a few years ago is progressing and we are excited about all of the opportunities in front of us as we look toward the future.
In the medium term, we continue to target 15% plus adjusted EBITDA margin, positive annual free cash flow generation and reducing our leverage below 6 times.
During the last quarter, we did lower our leverage and we made a number of other improvements across our capital structure, which, Kevin will highlight later.
Now I'd like to spend a minute on strategic initiatives and the opportunities in front of us, especially as our divestitures have been completed and we are completely focused on our core portfolio.
We have been making investments in these markets over time to enhance our competitive position and to drive long-term growth.
Our company's growth objective is to advance opportunities for both inpatient and outpatient care development, based upon each market's unique characteristics and opportunities.
On the inpatient side, we've recently opened two new hospitals in Indiana and Arizona and both are performing quite well.
Another new hospital will open in Fort Wayne later this year and one addition of de novo campus in Tucson early next year.
And over the past three years, we've added nearly 300 new beds to the core portfolio, along with more than 50 new surgical and procedural suites to meet increased demand and to drive higher acuity.
We have also added several new service lines at hospitals throughout our portfolio.
On the outpatient side.
We recently completed a comprehensive study of several key markets to identify our best investment opportunities and ambulatory access and services, including more primary-care, specialty care and urgent care locations as well as freestanding ERs and ambulatory surgery centers.
In terms of progress, we opened our 14th freestanding ER during the first quarter, with two more locations scheduled to open this year.
We have also added two additional ASCs to the portfolio so far this year and we will add a de novo center in our Knoxville market this summer.
Adding all of this together, we continue to manage a very robust development pipeline of opportunities that we believe align well with our inpatient services, expand our outpatient access more broadly across our markets and then improves our overall market position.
We continue to think strategically about capital investments and how that can drive high impact, high growth returns as we deliberately build out and advance our networks.
We are also investing in what we call connected care strategies.
We have been regularly sharing progress updates on our proprietary transfer center operations, since 2017.
We continue to see impressive results from this initiative and we are leveraging the visibility it provides into areas for facility expansion, physician recruitment or service line enhancements will enable us to provide care for even more patients within a region.
We are also implementing proprietary patient access centers, which initially provide centralized scheduling services for our primary care practices.
We are seeing good initial results, including volume improvement with nearly 600 providers not being served by the centralized scheduling centers.
Over time, our goal is to use these scheduling hubs to enable outbound patient outreach to close gaps in care and to provide other services to ensure that patients can more easily navigate the healthcare system and receive the services they need.
We believe all of our investments are generating the intended results and positioning us for greater success in the long run.
I'm extremely proud of the progress we've made in so many areas.
They continue to earn our respect and admiration every single day.
As Tim just mentioned, it was a strong start to the year.
We delivered good financial performance, continued meaningful improvements across our capital structure and made additional strategic progress during the first quarter.
Net operating revenues came in at $3,013 million on a consolidated basis, down 0.4% from the prior year due to divestitures.
On a same-store basis, net revenues increased 9.8%.
This was the net result of a 7.2% decrease in adjusted admissions and an 18.3% increase in net revenue per adjusted admission.
Similar to the back half of 2020, our net revenue per adjusted admission benefited from increased acuity, higher rates and better payor mix.
Adjusted EBITDA was $495 million, up 60.2%.
This included $82 million of pandemic relief funds.
Adjusted EBITDA, excluding the pandemic relief funds was $413 million, an improvement of 34% over the prior year and an improvement of 6% over the first quarter of 2019.
Our adjusted EBITDA margin was 13.7% versus 10.2% in the prior year and 11.6% in the first quarter of 2019.
We continue to make progress toward improving adjusted EBITDA margins.
During COVID, we experienced various ways of new COVID cases from month-to-month, which has impacted our volumes and increased our operating expenses.
Our hospital leadership teams have continued to adjust extremely well to the changing business environment and that was evident again this quarter, while effectively executing our cost reduction programs, we have seen increased expense related to certain supply cost, contract labor and other expenses related to COVID.
With COVID cases declining we expect these additional costs to decrease.
Switching to cash flow.
Cash flows provided by operations were $101 million for the first quarter of 2021.
This compares to cash flows from operations of $57 million during the first quarter of 2020.
Looking at the quarter-over-quarter increase, cash interest payments were approximately $60 million lower in the first quarter of 2021.
The company repaid approximately $18 million during the quarter related to Medicare accelerated payments due to divestitures and other increases and decreases including improved EBITDA and working capital changes were offset.
As we look at the rest of the year, we expect our cash flow from operations to improve.
During the first quarter, in addition to the first quarter being a historically lighter cash flow quarter due largely to the resetting of co-pays and deductibles and the timing of certain payments, our cash flow from operations is also negatively impacted by the COVID peak in January and the weather-related disruptions during February.
As such our strongest net revenue month during the quarter was March, and as a result, we expect our cash collections to improve moving forward into the second quarter.
Turning to capex for the quarter.
Our capex was $105 million compared to $99 million in the prior year, keeping in mind that we are operating fewer hospitals than a year ago.
We continue to invest capital into our core portfolio to strengthen our existing markets and we are excited about a number of our recent investments along with a number of future opportunities that are in the pipeline.
We are pleased to have completed our formal divestiture plan and we continue to receive inbound interest regarding potential transactions and we will continue to assess the benefits of any future deals.
But as we move forward, we are focused -- we are most focused on driving growth across our stronger portfolio, which we believe will continue to benefit from our targeted investment focus strategies in improving economic and population demographics within our markets.
In terms of liquidity.
At the end of the first quarter, the company had $1.3 billion of cash on the balance sheet.
At March 31, the company had no outstanding borrowings and approximately $633 million of borrowing base capacity under its ABL with the ability for that to increase up to $1 billion.
Switching to the CARES Act and the pandemic relief funds.
At the end of 2020, we had $104 million of unrecognized pandemic relief funds of which we recognized approximately $82 million during the first quarter of 2021.
As a reminder, we have not included the pandemic relief funds in our full-year 2021 guidance.
Moving to the balance sheet and capital structure.
We've made significant improvements.
At the end of the first quarter we had approximately $11.9 billion of total debt, which was approximately $300 million lower compared to the prior quarter.
On the capital structure side, as a reminder, through 2020 and the first quarter of 2021, we lowered our debt by over $1.3 billion, reduced our leverage ratio by over 2 turns down to 6 times levered compared to over 8 times last year and lowered our annual cash interest by approximately $190 million.
In the first quarter, we completed a number of capital market transactions that further lowered annual cash interest and removed near term maturities.
In January, we extended $1.8 billion second lien notes to 2029 and $1.1 billion first lien notes to 2031.
Following these transactions, we call the remaining $126 million of 2022 unsecured notes paying that with cash on hand.
During the past few quarters, we have significantly extended debt maturities, paid down debt and lowered our annual cash interest.
Our next maturity is now not due until June of 2024.
Now I'd like to quickly comment on our full-year 2021 guidance.
Net operating revenues are anticipated to be $11.7 billion to $12.5 billion, unchanged from our previous guidance and adjusted EBITDA is anticipated to be $1.65 billion to $1.8 billion, which does not include pandemic relief funds.
Overall, the first quarter was a good start to the year and as a result, we have tightened our adjusted EBITDA range by raising the low end of our EBITDA guidance.
As we look forward, we continue to expect our expense savings from our strategic margin program to build throughout the year with more significant cost reduction in the back half of 2021.
We also expect this program to drive incremental savings into 2022 and beyond, due to this program along with the net revenue initiatives that Tim mentioned, we expect to achieve our medium-term financial goals over the next several years, which will benefit all of our stakeholders. | 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. | 0 |
Before we get started, I'll draw your attention to Slide 2 and a brief cautionary statement.
We appreciate you joining us for our first-quarter earnings call.
Moving to the agenda for today's call on Slide 3.
I'll share a few operational highlights as well as an update on the two strategic transactions we announced in March.
Joe will provide a more detailed overview of first-quarter financial results.
Turning to Slide 4.
Today, we announced the first-quarter reported net loss of $2.39 per share.
This reflects special item net losses of $2.67 per share, primarily related to reporting WPD's discontinued operations this quarter.
Adjusting for special items, first-quarter earnings from ongoing operations were $0.28 per share, compared with $0.27 per share a year ago.
These results were in line with our expectations for the quarter.
Compared to last year, improved margins were the most significant driver of the increase, primarily due to more favorable weather compared to the mild winter we experienced in 2020.
Shifting to a few operational highlights.
Now over a year into the pandemic, I'm pleased to report that operationally, all seven of our utilities continue to perform extremely well with no operational issues to report.
We continue to operate in a very similar manner to last year with many of our team members continuing to work from home.
We continue to stress the importance of social distancing and mask wearing within our facilities and at our work site.
With vaccinations in full swing, we are beginning to turn our attention to return-to-office planning and protocols.
However, we are not expecting to deviate from our current mode of operations for at least a few more months and perhaps until the end of summer for some of our locations.
We've been able to operate extremely well during this virtual working environment, as evidenced not only by our strong operational performance, but also our ability to execute two significant strategic transactions simultaneously in a fully virtual manner.
Our number one priority has been and will continue to be the safety of our employees and our customers, so we will be very diligent in our return-to-office planning.
Moving to an update on the Kentucky rate case proceedings.
We reached unanimous settlement agreements subject to Kentucky Public Service Commission approval with all parties in our rate reviews for both LG&E and KU.
The agreements cover all matters in the review except for net metering.
We have a long track record of working constructively with the parties to our rate reviews to achieve positive outcomes that balance the interest of all our stakeholders, and this time was no exception.
The settlement agreements were filed with the KPSC on April 19, and hearings were held last week.
We expect KPSC orders on all settled matters by June 30 with new rates effective July 1.
I'll review the terms of the settlement agreements in a bit more detail on the next slide.
Moving to Pennsylvania, PPL Electric Utilities recently received the 2021 Energy Star Partner of the Year award from the EPA and Department of Energy.
This award recognizes outstanding corporate energy management programs and is the EPA's highest level of recognition.
It reflects PPL's commitment to protecting the environment and helping customers save energy and money.
In April, we also made a number of leadership changes to help further position the company for long-term success, especially as we plan for the integration of Narragansett Electric into the PPL family of regulated utilities.
Greg Dudkin was promoted to chief operating officer of PPL from his prior role as president of PPL Electric Utilities.
Under Greg's leadership over the past decade, PPL Electric Utilities has been focused squarely on creating the utility of the future.
The business has developed one of the nation's most advanced electricity networks, has consistently delivered award-winning customer satisfaction, and has firmly established itself as an industry leader in reliability.
This advanced grid that we've built at PPL Electric Utilities uniquely positions us to partner with the state of Rhode Island in support of their ambitious decarbonization goals of net zero by 2050, and potentially driving toward 100% renewable energy by 2030.
We continue to be very excited about the opportunity to bring our experience and expertise to an already very strong utility in Narragansett Electric.
Greg will also focus on driving continuous improvement and best practices across our already strong regulated utility operations.
Stephanie Raymond is succeeding Greg as the President of PPL Electric Utilities.
Stephanie has been a key member of PPL Electric Utilities leadership team for nearly a decade and has led both the transmission and distribution functions.
Our Pennsylvania customers are in very good hands with Stephanie now at the helm of PPL Electric Utilities.
We also hired Wendy Stark as our new senior vice president and general counsel.
Wendy replaces Joanne Raphael, who announced her retirement from the company effective June 1 after an impressive and distinguished 35-year career with our company.
Wendy joins PPL from Pepco Holdings, where she served as senior vice president, legal and regulatory strategy, and general counsel.
Wendy is an excellent addition to our team, and she's already making her presence known as we prepare for the regulatory approval process for the Narragansett acquisition.
She brings to PPL significant experience in leading legal teams and extensive background in regulatory matters and a deep knowledge of our industry.
I'm very excited about the strong leadership team that we've assembled here at PPL.
I believe it's the right team at the right time as we strategically reposition PPL for long-term growth and success.
Finally, I'll note that we continue to make good progress on the regulatory approval processes related to both the WPD sale and the Narragansett acquisition.
In the U.K., we remain on track to close the WPD sale by the end of July.
On April 22, National Grid shareowners voted overwhelmingly to approve the transaction.
And on May 4, we received the Guernsey approval, leaving just the Financial Conduct Authority approval outstanding in the U.K. While we have no assurance as to the timing of this final approval, the WPD sale could close as early as this month.
In the U.S., we've made all the required regulatory filings to secure approval for the Narragansett Electric acquisition.
We've requested the Rhode Island Division of Public Utilities and Carriers to decide on our petition by November 1, 2021.
While we cannot be assured the division will decide on our petition in that time frame, we remain confident in our ability to close on the acquisition by March of next year.
The transition teams for both PPL and National Grid have been formed and have actively begun planning to ensure a seamless transition for both employees and Rhode Island customers upon the approval and closing of the transaction.
The PPL transition team is being led by Greg Dudkin, with strong executive presence and experienced leaders on the team, who will oversee the eventual integration of Narragansett Electric into PPL.
I'll also note that we've had very constructive discussions with public officials in Rhode Island since our announcement.
These interactions have only strengthened my belief that PPL is well-positioned to drive real value for Rhode Island customers in their communities and to play a key role in helping the state achieve its ambitious decarbonization goals.
Turning to Slide 5 in a bit more detail on the settlement agreements in Kentucky.
We believe the agreements, which again require approval of the KPSC, represent constructive outcomes for all stakeholders and that they minimize the near-term rate impact on customers while still providing LG&E and KU the opportunity to recover their costs while providing safe and reliable service.
The settlements proposed a combined revenue increase of $217 million for LG&E and KU with an allowed base ROE of 9.55%.
These revenue increases enable LG&E and KU to continue modernizing the grid, strengthening grid resilience, and upgrading LG&E's natural gas system to enhance safety and reliability.
They include LG&E and KU'S proposed $53 million economic release store credit to help mitigate the impact of the rate adjustments until mid-2022.
The stipulation reflects the continuation of the currently approved depreciation rates for Mill Creek Units one and two and Brown Unit three for rate-making purposes, rather than using the depreciation rates proposed in our original applications.
We had initially requested the depreciation rates for these units to be updated with their expected retirement over the next decade as they reach the end of their economic useful lives.
This adjustment reduces the requested revenue increases by approximately $70 million.
In a related provision, the settlement agreements also proposed the establishment of a retired asset recovery rider to provide recovery of and on the remaining net book values of retired generation assets as well as associated inventory and decommissioning costs.
The rider would provide recovery over a 10-year period upon retirement as well as a return on those investments at the utilities than weighted average cost of capital.
As we announced in January, Mill Creek Unit 1 is expected to retire in 2024.
And Mill Creek Unit two and E.W. Brown Unit three are expected to be retired in 2028 as they reach the end of their economic useful lives.
These units represent a combined 1,000 megawatts of coal-fired generating capacity.
The settlements also proposed full deployment of advanced metering infrastructure.
I'll note that the capital cost of the proposed AMI investment is not included in the revenue requirements in these rate cases.
We'll record our investment in the AMI project as CWIP and accrue AFUDC during the AMI implementation period.
And finally, the settlement agreements include commitments that LG&E and KU will not increase base rates for at least four years, subject to certain exceptions.
I'll cover our first-quarter segment results on Slide 6.
regulated segment from our quarterly earnings walk.
First, we have adjusted the 2020 corporate and other amount to reflect certain costs previously reflected in the U.K. regulated segment, which was primarily interest expense.
The total amount of these costs was about $0.01 per share for the quarter.
In addition, beginning with our 2021 results, corporate-level financing costs will no longer be allocated for segment reporting purposes.
Those costs were primarily related to the acquisition financing of the Kentucky regulated segment and will also be reflected in corporate and other moving forward.
Now turning to the domestic segment drivers.
Our Pennsylvania regulated segment results were flat compared to a year ago.
During the first quarter, we experienced higher distribution, adjusted gross margins resulting primarily from higher sales volumes due to favorable weather compared to the prior year, a year in which we experienced a mild winter.
Weather in Pennsylvania was essentially flat to our forecast for Q1 2021, with quarterly heating degree days slightly below normal conditions.
Adjusted gross margins related to transmission were slightly lower for the first quarter.
Returns on additional capital investments were offset by lower peak transmission demand and a reserve recorded as a result of a challenge to the transmission formula rate return on equity.
Settlement negotiations related to the challenge are currently proceeding, but there can be no assurance that they will result in a final settlement.
Finally, we experienced lower O&M expense of about $0.01 per share in Pennsylvania during the first quarter compared to 2020.
Turning to our Kentucky regulated segment.
Results were $0.02 per share higher than our comparable results in Q1 2020.
The increase was primarily driven by higher sales volumes, primarily due to favorable weather.
And similar to Pennsylvania, weather was flat compared to our forecast.
Partially offsetting the increase from higher sales was higher operation and maintenance expense, primarily at our generation plants.
Results at corporate and other were $0.01 lower compared to a year ago, driven primarily by higher interest expense from the additional debt we issued at the start of the pandemic to ensure we had adequate liquidity to navigate the uncertainty.
We expect our interest expense to be reduced significantly after we complete the liability management following the closing of the WPD sale.
In summary, we continue to deliver electricity and natural gas safely and reliably for our customers during the pandemic.
We're on pace to close our strategic transactions within the expected time frames while making good progress on the integration and transition planning for Narragansett Electric.
And we remain very excited about the opportunity we have in front of us to reposition PPL for future growth and success.
With that, operator, let's open the call for Q&A. | compname reports qtrly loss per share $2.39.
qtrly loss per share $2.39.
adjusting for special items, q1 2021 earnings from ongoing operations (non-gaap) were $0.28 per share.
continues to advance strategic repositioning of company; transactions remain on track to close. | 1 |
Joining me in the call today are Dushyant Sharma, our founder and CEO, and Matt Parson, our CFO.
In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, and adjusted EBITDA, our non-GAAP financial measures.
These non-GAAP financial measures, which we believe are useful on Paymentus' performance and liquidity, should be considered in addition to, not as a substitute for, or an isolation from, GAAP results.
I'm very excited, and it's my pleasure to talk to you for our first earnings call as a public company.
I'm also grateful for our clients and partners who put their faith in us every single day.
We are very proud of you.
I'm very pleased with our second-quarter results.
The progress we have made on IPN, including the signing of definitive agreements to acquire Payveris and Finovera, that puts us at the heart of the bill payment ecosystem for financial institutions of all sizes.
Before covering our second-quarter highlights and talking more about each of these exciting items, I would like to provide a summary of our business for those who aren't familiar with Paymentus.
I founded Paymentus to power the next-generation ecosystem for electronic payments by simplifying them for both consumers and dealers, and with an eye to do the same for financial institutions and consumer platforms.
We took a very deliberate approach through strategy over the years in three different horizons.
During the first horizon, we built an agent platform and targeted the middle market billers with it.
In the second horizon, we moved up market and expanded the functionality of our product.
With the recent introduction of our Instant Payments Network, we entered our third horizon, which allows us to put all the pieces in place to create a modern payment ecosystem.
The IPN leverages our biller network and extends it outside of those billers to financial institutions, retailers, and technology companies that can access Paymentus payments for their customers.
In essence, IPN creates the paradigm shift in the bill payment industry and creates a multi-sided network effect for our business.
Our objective is to be the central modern-age bill payment ecosystem for the entire payments industry, including banks, credit unions, and other financial institutions.
To that effect, we have taken a major step toward the strengthening of our IPN presence in the financial institutions market.
This week, as we are pleased to announce, that we have signed a definitive agreement to acquire Payveris.
Payveris is a modern money movement platform for banks and credit unions.
What that means is that any customer of a bank on Payveris platform can pay any bills from the bank, including the largest billers to smallest businesses like their lawyers, accountants, send money to anyone in the U.S., using their person-to-person transfer capabilities, and move money between their own accounts, bank accounts, across multiple financial institutions using their account-to-account transfer capabilities.
Payveris serves over 265 national institutions.
What this means to Payveris -- this transaction means Payveris that it provides a unique offering for financial institutions when combined with Paymentus' unique Instant Payment Network, and therefore accelerate payment -- Payveris' customer acquisition strategy.
And what that means to Paymentus is that this allows us to accelerate our IPN strategy for banks by having nearly 300 financial institutions join our network.
In addition to that opportunity, there is another equally exciting opportunity where each of these nearly 300 FIs can be direct billers on our platform, which will add to our existing base of direct billers.
In addition to agreeing to acquire Payveris, we have also signed an agreement to acquire Finovera, a technology provider that aggregates consumers' bills, including faster statements in one place.
This is a platform that is already being utilized by Payveris and many of the financial institutions.
We believe the combination of Finovera and Payveris with our IPN, was already favor offering for financial institutions as we provide a robust coverage of billers, whether they are currently utilizing Paymentus platform or not.
This will continue to allow our sales team to prioritize biller outreach for direct onboarding onto our platform based on the bill volumes.
We anticipate that both of these acquisitions will close by end of Q3 and have been considered in the outlook that Matt will share shortly.
On our core horizon one horizon two strategies, we continue to execute very successfully.
Our second-quarter performance was strong.
Revenue grew 30% over the same period in 2020 to $93.5 million.
Q2 contribution profit grew 25% to $37.4 million.
Adjusted gross profit in the quarter was $30.1 million, which was a 24% increase over Q2 of last year.
And the transaction processed grew over 39% year over year.
Matt will provide more color on the financials shortly.
We continue to execute on all three strategic horizons I described earlier.
From the first horizon, small to medium billers continue to be a focus of ours, and we completed a multitude of implementations in the quarter.
As an example, we implemented a midsized public utility in Arizona, resulting in an improved customer experience and access to new payment methods.
The utility was very pleased with our product and implementation process and have offered us to implement other departments in the field.
In the second quarter, we also continue to build on our more than 350 integrations divisions by adding new partners, including completing an integration with a leading provider of software to midsized telecommunication companies.
Going forward, Paymentus will be the preferred provider of payments to their clients.
In the second horizon, which targets larger, more diverse billers, we implemented several new billers, including a large auto finance company.
And we also continue to make progress in our partnership with UPS, adding them to our platform in the U.S. this quarter.
is an addition to other countries around the world already live for UPS on our platform.
We are excited about this partnership and how we look UPS and Paymentus can co-create a leading experience for business clients.
Beyond the implementations, we also have the opportunity to expand at existing clients.
This growth occurs as clients migrate additional divisions to acquire companies and convert them to us, all by adding new payment types and features such as AutoPay.
Beyond new implementations, we also have the opportunity to expand at existing clients.
Two examples of expansion are a large utility with over 2 million customers, which added advanced payment methods like PayPal to provide their customers with more choices.
And a software utility which moved its AutoPay payments to Paymentus to improve its customers' experience by combining one-time and recurring payments under Paymentus' platform.
In addition to new sales and the same-store sales expansion, we completed several key renewals, including extending our relationship with the leading provider of insurance to the jewelry industry.
Through the addition of IPN, we ended our third horizon with a focus of building out our partner network.
IPN expands our reach beyond billers to FIs, technology partners, and retailers who originate transactions that we process.
PayPal, one of our founding IPN partners, continues to focus on introducing enhanced bill payment functionality across its platform.
We are also really excited about IPN across -- other IPN partners, and especially, our extended reach to nearly 300 financial institutions with the Payveris transaction.
In summary, I'm very pleased with the financial results of this quarter and the progress we have made through the acquisition of Payveris and Finovera to move closer to our original long-term vision: to be that ecosystem for consumers, dealers, financial institutions and partners.
You all are the reason for the strong Q2 financial results that I have the privilege of sharing today.
As a quick reminder, today's discussion includes non-GAAP financial measures.
Before I talk about the second quarter's financial results and our outlook for 2021, let me remind you about our business model.
As Dushyant [Audio gap] we get paid when our clients get paid, so the key indicator to measure the performance of the business is the number of transactions processed.
For the vast majority of our clients, transaction fees are the same regardless of the payment amount.
For example, we would receive a $1.50 for a utility payment of $50 and the same $1.50 for a payment of $275.
Interchange fees may vary by bill or industry and type of payment among other things, but in most cases, we have caps on interchange and payment amounts to help us manage the costs.
These transaction fees can be paid by the biller, the consumer, or a combination of both, and we generally do not charge for implementation or customization fees for our platform, so professional services revenue is minimal.
Now turning to the quarter.
We processed $64.2 million transactions, representing a year-over-year increase of approximately 39%.
This transaction growth drove a 30.3% increase in revenue over the same period in 2020, which resulted in revenue of $93.5 million.
As we've explained before, as we see larger -- as we sign larger and larger billers, we anticipate the mix shift of fees will continue.
Contribution profit for Q2 was $37.4 million, a 24% increase over the same period last year.
Adjusted gross profit for the second quarter was $30.1 million and this was an increase of 24% from Q2 of 2020.
Contribution profit growth and adjusted profit growth can vary more than revenue growth due to the change in interchange cost.
As a reminder, there are certain external factors that impact interchange, such as the average payment amount in a particular month or quarter.
For example, hot summers or cold winters may increase utility bills, which increases our interchange cost.
And we also have property tax payments that see large amounts twice per year.
Adjusted EBITDA was $8.3 million, which represents a 22.2% margin on contribution profit.
The 5% decline in adjusted EBITDA from the second quarter of 2020 is due to cost increases related to being a public company, as well as increased investments in R&D and sales and marketing.
The adjusted EBITDA margin for Q2 was higher than anticipated as a result of the higher contribution profit than anticipated for Q2.
And the fact that travel and concerts did not start back as soon as we thought, as well as the ongoing tightness in the U.S. labor market making hiring more challenging than expected.
Operating expenses rose $7.8 million to $24.8 million for Q2 of 2021.
R&D expense increased $1.9 million or 32.4% as we continue to invest in new features and functions in our payments platform and we build out IP with additional partners.
Over half of the operating expense increase, or $4 million, was in G&A and was driven by public company cost, as well as continuing to build out the public company infrastructure.
Sales and marketing increased $1.9 million or 24.5% as we ramped up selling activity relative to the same time last year in the middle of the COVID uncertainty.
Our GAAP net income and earnings per share for Q2 was slightly lower than we anticipated due to one-time discrete tax items that arose as a result of going public.
These two one-time tax items totaled approximately $2 million or about $1 million each.
As a result of these two discreet one-time items that hit GAAP tax expense in our Q2, our effective tax rate for the quarter was approximately 86%.
Excluding these two discreet one-time tax items, our net income for the quarter would have been $2.6 million.
As of June 30, 2021, we had $266.4 million of cash and cash equivalent on our balance sheet.
Now, from our Q2 results, let's turn to our 2021 full-year outlook.
Inclusive of our Payveris and Finovera acquisitions, our revenue outlook for 2021 is in the range of $378 million to $382 million, which represents growth between 25% and 27% year over year.
For contribution profit, our full-year outlook is between $152 million and $154 million, or approximately 26% to 28% growth.
For both revenue and contribution profit, we expect Q4 to see almost all the benefit due a full quarter of Payveris.
As you may recall, we typically see the highest average payment amounts of the year in Q3 as a result of the summer heat, combined with some semi-annual per-year tax payments.
In fact, in Q3 of 2020, we actually saw a slight sequential reduction in contribution profit.
While we do not anticipate a sequential reduction this year, we do anticipate similar factors that will influence our Q3 results.
For full-year 2021, we also see adjust EBITDA in the range of $25 million to $28 million, with an adjusted EBITDA margin of 16.5% to 18.5% on contribution profit.
labor market, making hiring more challenging than in the past several quarters.
With respect to taxes, we do not anticipate any further impacts on the one-time discrete items or any other one-time discrete items this year.
However, as a result of the items mentioned for Q2, we expect that our full-year effective tax rate for 2021 will be approximately 47%.
Federal tax laws or rates.
And this is due to fact that a large majority of our revenue is in the U.S., so it represents the U.S. federal statutory rate combined with various state income taxes.
Look, overall, we are very pleased with the financial and strategic progress we have made this quarter, especially in the expansion of our IPN ecosystem deeper into the financial institutions market.
We continue to execute across our three-horizon strategy and drive organic growth.
With Payveris and Finovera, we'll continue to accelerate the breadth of our IPN offering.
We'll now open the call to questions. | penske automotive group q1 earnings per share $4.46.
qtrly total revenue increased 8.8% to $6.5 billion.
qtrly total revenue increased 8.8% to $6.5 billion from $6.0 billion.
q1 earnings per share $4.46. | 0 |
I'm going to give an overview of our fourth quarter and year-end results.
Afterward, I'll pass the call to George for his comments.
We reported funds from operations or FFO of $17.5 million or $0.16 per share for the fourth quarter of 2020 and $79.4 million or $0.74 for the year ended December 31, 2020.
During the fourth quarter, we worked with tenants that were impacted by the pandemic and had a significant write-off of one large tenant that filed for bankruptcy in late December that resulted in a $3.1 million charge against our revenue.
As part of making decisions on write-offs, we determine whether a lease is collectible or not.
If we determine it's not collectible, we write off the receivables and don't report any current rents, unless they're paid in cash.
So, part of the loss we wrote-off is from receivables, which is more of a one-time charge and part of the loss are current rents that we didn't collect.
These write-offs reduced revenue on the income statement.
During Q4, we had write-offs and lost rent of about $3.1 million which is primarily from a tenant bankruptcy that I noted and on a year-to-date basis, the total write-offs were about $3.8 million or about 1.5% of our annual rental income.
Going forward, the amount of lost rents from tenants we wrote off would be reduced by any cash rents we receive from them.
We also reached agreements with a number of tenants on rent deferrals using lease amendments, modifications and other tenant agreements.
The total of rents deferred by us during Q4 were about $300,000 and for the year totaled about $1.75.
These agreements generally result in us being repaid or made whole -- with the whole -- as part of the $1.75 million we did occur about $200,000 of GAAP and FFO impact from them this year.
We're working with other tenants that are having issues and we'll provide updates periodically like we have here.
Turning to our balance sheet at December 31, '20, we had $923.5 million of unsecured debt, excluding [Phonetic] $3.5 million drawn on our line of credit.
In December, we sold a property in North Carolina for $89.7 million and applied $87.3 million of the proceeds against debt.
We will be providing more color on that transaction later.
With the proceeds from the sale, we applied $50 million against $150 million term loan that matures in November and the remainder one against the drawn balance of our line of credit.
At year-end, between cash on hand and availability on our line, we had total liquidity of about $601 million.
We disclosed some ratios in our supplemental filing that were impacted by the $3.1 million write-off we incurred in late December.
Our net debt to EBITDA ratio was impacted because the charge reduces EBITDA and we then annualize that for the fourth quarter for this measure.
Excluding this charge, our net debt-to-EBITDA ratio would have been 7.8 times compared to 8.5 times at September 30 and that decrease would be primarily a result of the debt reduction.
Our interest and debt service coverage ratios were also impacted and would have been 3.26 times.
We disclose our calculations of ratios in our supplemental filing and the calculations I'm referring to are in the footnotes on Pages 4 and 10 in case you're interested in looking at them.
As a reminder, all of our debt is unsecured and we have no debt maturities until November when $155 million of term loans will be due.
Our debt is at fixed rates other than the $3.5 million on the line which is at a floating rate.
I would like to start my portion of this earnings call by recognizing the many different people that contributed to helping Franklin Street successfully navigate the challenges of our business in 2020 that was so impacted by the COVID-19 pandemic.
It has been one of the most challenging and collaborative efforts I have ever seen in business.
All of these efforts are ongoing as we begin 2021 and at the end of the day, are ultimately directed toward FSP's customers, our valued tenants, each one of them grappling with their own challenges, responses and business realities resulting from the pandemic.
For 2021, we are focused on two primary objectives; leasing progress and debt reduction.
From a leasing perspective, we anticipate the potential for growing office space demand in our markets as a result of improved economic situation due to increasing access to both therapeutics and of course now the vaccines.
We believe that users of office space are now reconsidering the office densification trends of the past approximately 20 years.
We also believe that even with the continuation of some planned for level of remote work-from-home flexibility, the potential reversal or slowing of office densification could bode well for future office space absorption.
Our 2021 leasing focus includes both increased economic occupancy and longer-term renewals of existing tenants.
John Donahue will give more color to these leasing thoughts in just a minute.
As for debt reduction efforts in 2021, FSP intends to pursue several property dispositions from its portfolio where valuation objectives have been met and where we believe embedded value may not be accurately reflected in the price of our common stock and then apply those proceeds from dispositions, primarily for the repayment of debt.
We believe that further debt reduction will provide greater financial flexibility and position the Company for stronger shareholder returns.
Accordingly, we have introduced full-year 2021 disposition guidance in the range of approximately $350 million to $450 million in aggregate gross proceeds.
Jeff Carter will talk about this more later in the call.
At the end of the fourth quarter, the FSP portfolio including redevelopment properties was approximately 83.8% leased which is a decrease from 84.3% leased at the end of the third quarter.
The decrease was primarily attributable to the disposition of Emperor Boulevard in December.
The average leased occupancy of the portfolio for calendar 2020 was approximately 83.6%.
FSP leased approximately 1.130 million square feet during calendar 2020, which included 368,000 square feet of new leases and approximately 150,000 square feet of expansions with existing tenants.
During the fourth quarter, we finalized over 500,000 square feet of renewals and expansions with existing tenants.
Although demand for office space had slowed down during the holidays in the fourth quarter, the prospective tenant activity at FSP assets in January and February has been gaining momentum, specifically for the Sunbelt assets.
FSP is currently tracking approximately 700,000 square feet of potential new leases and renewals.
There are approximately 300,000 square feet of new tenant prospects that have shortlisted FSP properties.
In addition, we are engaged with existing tenants for approximately 400,000 square feet of renewals.
Barring any surprises, the potential for total net absorption over the next three months to six months is approximately 200,000 square feet.
This includes new prospects, and potential expansions.
We here at Franklin Street Properties hope that everyone is safe and healthy in these uncertain times.
I wanted to start my comments today by sharing four key priorities for FSP during 2021.
The first will be ongoing efforts to work as partners with our tenants to navigate the COVID-19 pandemic together.
FSP recognizes and appreciates that our tenants' health and safety are essential.
The second is to continue working to lease vacancies and on renewing or expanding existing tenants in order to grow occupancy and value within our portfolio.
The third will be to build upon our December 23 sale of Emperor Boulevard with additional but select dispositions, estimated to be in the range of $350 million to $450 million for full-year 2021 and then to utilize such proceeds primarily for the repayment of debt in order to gain greater financial flexibility and to position FSP for stronger shareholder returns.
I will describe our thoughts on this subject further in my comments ahead and fourth will be a continued commitment to our strategy of owning high-quality office properties within the US Sunbelt and Mountain West where we continue to see strong long-term job and population growth potential.
More specifically on the dispositions front and following the sale of Emperor Boulevard in December, FSP will look to pursue additional dispositions of select properties, particularly where we believe that embedded value exists, that may not be appropriately reflected within our current share price and then to utilize such proceeds primarily for the repayment of debt under our revolving line of credit and term loan facilities as well as for any special distributions necessary to meet REIT requirements.
The determining factor for FSP on potential dispositions in 2021 will be an assessment of whether a respective property has achieved its near-term valuation objective.
We believe that further debt reduction will provide greater financial flexibility and position FSP for stronger shareholder returns.
With this in mind, we are currently refining our target list of properties within our portfolio that we believe may have met their respective near-term valuation goals.
We anticipate that these potential disposition assets are likely to include properties from our smaller opportunistic markets as well as some from our larger markets and we wish to point out that regardless of where any specific properties are sold during 2021 that FSP remains committed to our Sunbelt and Mountain West strategic market emphasis where we believe that long-term business and population growth has the potential to exceed the national average.
At this time, the highest likelihood is that the majority of potential sales would occur in the second half of 2021.
Proceeds from potential dispositions under review are currently estimated to be in the range of $350 million to $450 million for full-year 2021, which again would be intended primarily to be used for the repayment of debt.
We will update the market regularly on our efforts with this objective, which will be influenced by the COVID-19 pandemic and resulting investor appetite.
And at this time, we'd like to open up the call for any questions. | franklin street properties corp - $0.16 ffo (funds from operations) per share for fourth quarter 2020.
franklin street properties - anticipated dispositions in 2021 estimated to result in gross proceeds in range of about $350 million to $450 million. | 1 |
Today, I'm joined by Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer.
Brian will lead off, followed by Britt, and then we will move to a question-and-answer session.
We are happy to report another strong quarter for McKesson, driven by continued market improvements and underlying fundamentals of our businesses.
We achieved double-digit adjusted operating profit growth in all four segments based on a strong operating performance and alignment across the enterprise.
As a result of our second quarter performance our confidence in the second half of the fiscal year and McKesson's continue to role in the COVID-19 response efforts, we are raising our guidance range for fiscal 2022 adjusted earnings per diluted share from $19.80 to $20.40 to a new range of $21.95 to $22.55.
We continue to believe we will see a return to pre-COVID pharmaceutical prescription and patient engagement levels in the second half of our current fiscal year.
We're encouraged by the trends we continue to see across primary care, specialty, and oncology patient visits in addition to overall prescription volumes.
We are pleased to see our markets are recovering in line with our original expectations.
Our enterprisewide focus on our company priorities is driving operating performance and furthering the advancement of our long-term growth.
I'd like to take the time today to talk about each of our company's priorities.
First, we have a focus on our people and the culture, which is guided by our ICARE and ILEAD values.
These values include a commitment to both our local and global communities, our customers and the healthcare industry to innovate and deliver opportunities that make our customers more successful.
All for the better health of patients.
Along with these values, we're committed to fostering an inclusive workplace that celebrates our differences and respects the diverse world in which we live and work.
As an organization, we continue to be committed to diversity, equity and inclusion.
Through a more diverse and inclusive workplace we are a stronger, a more creative and a more productive team.
At McKesson our priority has been the health and safety of our employees and we're deeply committed to supporting our team members across the organization, which why I'm incredibly pleased to have announced McKesson's first ever day of wellness, which we call Your Day, Your Way.
This will take place this Friday, November 5th.
We understand that mental, physical and emotional well-being are at most importance to our team, so we made the decision to set aside a special day to help ensure our employees can rest, recharge and take time for themselves.
We're so grateful for all the contributions from the team over the last 19 months.
McKesson employees continue to be in the center of the fight against COVID-19 and we want to make sure everyone gets a chance to take a well-deserved break.
Our second priority is to strengthen our core pharmaceutical and medical supply chain businesses across North America, we have a best-in-class pharmaceutical supply chain.
As a reminder, in the US, we have a scaled distribution presence that delivers roughly one-third of prescription medicines each day.
Our operational excellence and our ability to leverage our scale with global suppliers is one of the many reasons why McKesson continues to be the partner of choice for hospitals, health systems and pharmacies of all size.
We strengthen our business when we strengthen our customers and partners.
This past quarter we held our Annual McKesson ideaShare educational event which brought together independent pharmacy operators to help them learn new skills, how to grow strategically and how to operate efficiently.
The virtual experience helped 2,000 independent pharmacies, prioritize education and networking, which we believe will shape the future of community, pharmacy and strengthen the independent business for the better.
In Canada, we've been the leader in healthcare-related logistics and distribution for 100-years and we support hospitals, community and retail pharmacies to ensure that medication is always available.
We're a leader in medical distribution to alternate site markets and our footprint in the US healthcare is underpinned by our strong sourcing and supply chain capabilities, we deliver medical and surgical supplies and services to over 250,000 customers.
Our pharmaceutical and medical distribution businesses continue to play an integral role in the pandemic response efforts, and our capabilities have been highlighted through our evolving partnership with US government's COVID-19 vaccine distribution, kitting and storage programs.
I'm glad to say that the Fundamentals in our core business remain solid and our execution has continued to improve as we accelerate our growth and work to deliver high quality resilient supply chains to our customers.
Our third company priority is to simplify and streamline the business.
We're prioritizing the areas where we have deep expertise and are central to our long-term growth strategies, largely within the North American market.
As a result we made the decision to fully exit McKesson's businesses in the European region.
In July, we announced that we have entered into an agreement to sell our European businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia to the PHOENIX Group.
Today, we're announcing that McKesson has made the decision to sell our UK retail and distribution businesses as a whole.
The transaction is expected to close in Q4 of fiscal 2022 subject to customary closing conditions, including receipt of required regulatory approvals.
We believe this step toward a full exit of our European business is an important milestone in our strategy as a streamlined, efficient focused organization.
Building upon the foundation of a strong company culture and a stable business the last company priority encompasses our two strategic growth pillars.
We are investing to advance our oncology and biopharma services, which includes building integrated ecosystem that leverage our differentiated assets and capabilities and our strategic focus on these two pillars is important as both of these areas have good inherent growth opportunities.
McKesson's oncology ecosystem supports over 14,000 specialty physicians through distribution and GPO services, and we are the leading distributor in the community oncology space.
We have over 1,400 physicians in the US Oncology Network spread over approximately 600 sites of care in the US.
Within our oncology ecosystem Ontada generates insights at the intersection of technology and data and supports community providers with precise cancer care by improving patient outcomes and delivering evidence and insights to help accelerate life sciences research.
The ecosystem helps the clinicians to provide better care in an increasingly complicated oncology care landscape, by helping them grow their businesses, attract more patients and produce better health outcomes.
We can then leverage interconnected technology and real world insights to feed data back upstream to manufacturers, which can help them, think about identifying new products, innovations and new markets.
Within the biopharma ecosystem the Prescription Technology Solutions businesses leverage technology networks and access to provider workflows, to serve biopharma and life sciences partners and patients.
We have built this ecosystem over many years as it includes assets like RelayHealth Pharmacy, CoverMyMeds and RxCrossroads, it allows us to connect providers, payers and patients together to focus on access, adherence and affordability solutions.
Our two strategic pillars of oncology and biopharma services are not just businesses or products, but fundamentally a suite of solutions that solve long-standing problems in ways that bring more speed, impact and efficiency.
We will continue to invest and accelerate the execution against those strategies, which support a long-term growth for McKesson.
I'm confident in the progress against our company's priorities that they will enable the advancement of our growth.
Before I turn to our second quarter results just a brief update on our Board of Directors.
Dr. Carmona has a strong focus on improving public healthcare and extensive experience in clinical sciences, healthcare management and emergency preparedness, which led to his nomination and unanimous senate confirmation as the 17th Surgeon General of the United States from 2002 until 2006.
Currently, Dr. Carmona is Chief of Health Innovations at Canyon Ranch and a Professor of Public Health at the University of Arizona.
His hands on healthcare experience will be invaluable for McKesson's Board of Directors.
Now I want to turn to the business performance within the second quarter.
We are pleased with our strong second quarter performance and we remain encouraged by the underlying fundamentals in our business.
Let me start with US Pharmaceutical, while our solid results for the second quarter reflected continued improvement of prescription trends, which were in line with our expectations.
Within specialty oncology visits, we saw an exit rate of pre-COVID levels, which again was in line with our expectations.
The US Pharmaceutical segment saw a 12% adjusted operating profit growth, which was underpinned by the distribution of specialty products to providers and health systems and the contribution from our successful COVID-19 vaccine distribution operations.
We are in a strong position to continue to support the government and private enterprise in the future for distributing COVID and flu vaccines and our investments in the distribution business continue to be showcased through our successful vaccine response.
Through October 28th, our US Pharmaceutical business has successfully distributed over 311 million Moderna and Johnson & Johnson COVID-19 vaccines to administration sites across the United States and to support the US government's international donation mission.
In Prescription Technology Solutions, the business continued to perform well this quarter as our technology and service offerings have accelerated the support and growth of our biopharma customers, and we've been successful in adding new brands to our platforms.
The segment had excellent momentum and delivered a 38% increase to adjusted operating profit growth during the second quarter.
In addition to the operational strength, I'm proud to say that we are helping patients get access to the therapies through our market leading technology offerings in this patient care visits and we announced we are expanding our work with the US government through a new kitting and storage contract.
Our Medical-Surgical business remains well positioned to continue to support the government as needed.
The growth in our Medical-Surgical segment is reflective of strong topline performance and underlying business improvement.
As it relates to international, the segment had solid adjusted operating profit growth, benefiting from both local COVID programs and a new partnership with one of Canada's largest retailers.
Distribute and administer COVID-19 vaccines and through September, we've distributed over 58 million vaccines to administration sites in select markets across our international geographies.
As a reminder, excluding our planned divestitures in Europe, we have businesses in Norway, Austria, Denmark and Canada in our international segment.
For our remaining European businesses, we are exploring strategic alternatives as we align future investments to our growth strategies.
Before I close, I would like to update you on the status of the proposed opioid settlement.
Recently, we announced that enough states have agreed to settle to proceed to the next phase, which is the subdivision sign-on period.
During this phase, each participating state will offer its political subdivisions, including those that have not sued the opportunity to participate in the settlement for an additional 120-day period, which ends January 2nd, 2022.
We are pleased with this important step and we believe the settlement framework will allow us to focus our attention and resources on the safe and secure delivery of medications and therapies, while expediting the delivery of meaningful relief to the affected communities.
In closing, I am encouraged as we continue to make progress and accelerate growth as we advance our company priorities.
Our underlying distribution business have stable fundamentals, great teams and strong execution.
We are investing in what we believe are two good growth markets where we have differentiated capabilities and we look forward to sharing more of those successes and proof points with you at our upcoming Investor Day.
I'm pleased to be here today to discuss our fiscal second quarter results, which reflect strong performance and momentum across the business, driven by operational excellence and execution against our growth strategies.
This momentum could be seen in each of our segments.
Let me start with an update on Europe.
The ultimate proceeds from this transaction are subject to certain adjustments under the agreement.
Therefore, the proceeds may differ from the announced purchase price.
The customer will continue to operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in our fourth quarter of fiscal 2022, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals.
The assets involved in this transaction contributed approximately $7.8 billion in revenue and $64 million in adjusted operating profit in fiscal 2021.
The net assets included in the transaction will be classified as held for sale, and held for sale accounting will be effective beginning with our fiscal 2022 third quarter.
We will remeasure the net assets to the lower of carrying amount or fair value, less cost to sell, and we estimate that this will result in a GAAP only charge of between $700 million to $900 million in our third quarter of fiscal 2022.
Due to held for sale accounting treatment, we will discontinue recording depreciation and amortization on the assets involved in the transaction.
This impact is not included in the fiscal 2022 outlook provided today.
This transaction provides us the focus to pursue the growth strategies of oncology and biopharma services in North America and as Brian mentioned, we remain committed to a full exit of our European businesses, which includes announced transactions to the Phoenix Group and Aurelius, as well as our remaining operations in Norway, Austria and Denmark.
Let me now turn to our second quarter results.
Before I provide more details on our second quarter adjusted results, I want to point out two additional items that impacted our GAAP only results in the quarter.
First, we recorded a GAAP only after tax charge of $472 million related to our agreement to sell certain European businesses to the Phoenix Group to account for the remeasurement of the net assets to lower of carrying amount or fair value, less cost to sell.
This transaction is expected to close within the next 12-months.
Also during the quarter we recorded an after-tax loss of $141 million on debt extinguishment related to the successful completion of a bond tender offer.
Moving now to our adjusted results for the second quarter, beginning with our consolidated results, which can be found on Slide seven.
Our second quarter results were highlighted by strong operating performance, which included record revenue and double-digit adjusted operating profit growth across all segments.
We are encouraged by the ongoing market improvement in both prescription volumes and patient visits, which we observed in our second quarter.
These improvements are supported by our strategic agenda setting us on a path of disciplined approach.
And our work to support US government's COVID-19 domestic and international vaccine and kitting efforts continues to contribute to growth in addition to the momentum we have built across the business.
Second quarter adjusted earnings per diluted share was $6.15, an increase of 28%, compared to the prior year.
This was -- this result was driven by the contribution from COVID-19 vaccine and kitting distribution and growth in the Medical-Surgical Solutions segment partially offset by a higher tax rate.
Second quarter adjusted earnings per diluted share, also includes net pre-tax gains of approximately $97 million or $0.46 per diluted share associated with McKesson Ventures equity investments, as compared to $49 million in the second quarter of fiscal 2021.
Consolidated revenues of $66.6 billion increased 9% above the prior year.
Principally driven by growth in US Pharmaceutical segment, largely due to increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers to partially offset by branded to generic conversions.
Adjusted gross profit was $3.3 billion for the quarter, up 12% compared to the prior year.
Comparable adjusted gross margins for the quarter was up 10 basis points versus the prior year.
Adjusted operating expenses in the quarter increased 4% year-over-year.
and adjusted operating profit of $1.3 billion for the quarter was an increase of 34%, compared to the prior year and reflected double-digit growth in each segment.
Interest expense was $45 million in the quarter, a decline of 10%, compared to the prior year driven by the net reduction of debt in the quarter.
Our adjusted tax rate was 18.8% for the quarter, which was in line with our expectations.
In wrapping up our consolidated results second quarter diluted weighted average shares were 155.8 million, a decrease of 5% year-over-year.
Moving now to our second quarter segment results, which can be found on Slides eight through 13, and I'll start with US Pharmaceutical.
Revenues were $53.4 billion, an increase of 11% year-over-year as increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers were partially offset by branded to generic conversions.
Adjusted operating profit increased 12% to $735 million, driven by growth in the distribution of specialty products to providers and health systems and the contribution from COVID-19 vaccine distribution.
The contribution from our contract with the US government-related to the distribution of COVID-19 provided a benefit of approximately $0.28 per share in the quarter, which is above our original expectations.
In the Prescription Technology Solutions segment revenues were $932 million, an increase of 40% driven by higher biopharma service offerings, including third-party logistics services and increased technology service revenue, partially resulting from the growth of prescription volumes.
Adjusted operating profit increased 38% to $144 million, driven by organic growth from access and adherence solutions.
Moving now to Medical-Surgical Solutions, revenues were $3.1 billion, an increase of 23%, driven by increased sales of COVID-19 tests and growth in the primary care business.
Adjusted operating profit increased 52% to $319 million, driven by growth in the primary care business, increased sales of COVID-19 tests, and the contribution from kitting, storage and distribution of ancillary supplies for the US governments COVID-19 vaccine program.
The contribution from our contract with US government-related to the kitting, distribution and storage of ancillary supplies for COVID-19 vaccines provided a benefit of approximately $0.14 per share in the quarter, which was above our original expectations.
Next, let me address our international results.
Revenues in the quarter were $9.1 billion, a decrease of 5%, primarily driven by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance, partially offset by volume increases in the pharmaceutical distribution and retail businesses.
Excluding the impact from the contribution of our German wholesale business, which was completed in the third quarter of fiscal 2021.
Segment revenue increased 13% year-over-year and was up 9% on an FX adjusted basis.
Adjusted operating profit increased 41% year-over-year to $163 million.
On an FX adjusted basis adjusted operating profit increased 34% to $155 million, driven by the discontinuation of depreciation and amortization on certain European assets classified as held for sale beginning in the second quarter of fiscal 2022.
The held for sale accounting in our international business contributed $0.13 to adjusted earnings in our second quarter of fiscal 2022.
Moving on to Corporate.
Adjusted corporate expenses were $83 million, a decrease of 39% year-over-year, driven by gains of approximately $97 million or $0.46 from equity investments within our McKesson Ventures portfolio.
This quarter we had fair value adjustments related to multiple portfolio companies within McKesson Ventures, compared to fiscal 2021 gains from McKesson Ventures contributed $0.24 year-over-year.
As previously discussed it's difficult to predict when gains or losses on our Ventures portfolio companies may occur and therefore our practice has been, it will continue to be to not include Ventures portfolio impacts in our guidance.
We also reported opioid related litigation expenses of $36 million for the second quarter and anticipate that fiscal 2022 opioid-related litigation expenses will be approximately $155 million.
Consistent with the proposed settlement announced in July, we also made the first annual payment into escrow of approximately $354 million during the quarter.
Let me now turn to our cash position, which can be found on Slide 14.
We ended the quarter with a cash balance of $2.2 billion for the first six months of the fiscal year, we had negative free cash flow of $109 million.
In Q2, we completed several debt transactions.
In July, we redeemed EUR600 million denominated note prior to maturity.
In August, we completed a cash funded upsize tender offer, which resulted in the redemption of $922 million principal outstanding debt.
And finally, we completed a public offering of a note in the principal amount of $500 million at 1.3%.
These actions aligned with our previously stated intent to modestly delever and to further strengthen our balance sheet and financial position.
Year-to-date, we made $279 million of capital expenditures, which included investments to support our strategic pillars of oncology and biopharma services.
For the first six months of the fiscal year, we returned $1.4 billion in cash to our shareholders through $1.3 billion of share repurchases and the payment of $134 million in dividends.
We have $1.5 billion remaining on our share repurchase authorization and continue to expect diluted weighted average shares outstanding to range from 154 million to 156 million for fiscal 2022.
Let me transition now and speak to our outlook for the remainder of fiscal 2022.
As a result of our strong first half performance and our outlook for the remainder of the year, we are raising our previous adjusted earnings per share guidance range for fiscal 2022 to $21.95 to $22.55, which is up from our previous range of $19.80 to $20.40.
Our updated outlook for adjusted earnings per diluted share reflects 27.5% to 31% growth from the prior year.
And our guidance assumes growth across all of our segments.
Additionally, fiscal 2022 adjusted earnings per diluted share guidance includes $2.30 to $3.05 of impacts attributable to the following items: $0.50 to $0.70 related to the US governments COVID-19 vaccine distribution, which is an increase from the previous range of $0.45 to $0.55; $0.80 to $1.10 related to the kitting storage and distribution of ancillary supplies, an increase from the previous range of $0.50 to $0.70 as discussed at recent conference; $0.50 to $0.75 related to COVID-19 tests impairments for PPE related products; and approximately $0.49 from gains or losses associated with McKesson Ventures equity investments within our corporate segment year-to-date.
Excluding the impact of these items from both fiscal 2022 guidance and fiscal 2021 results this indicates 20% to 29% forecasted growth.
Let me provide a few additional assumptions related to our guidance.
We continue to expect prescription and patient engagement volumes will return to pre-COVID levels in the second half of our fiscal 2022, which is in line with our original guidance.
In US Pharmaceutical segment, we now expect revenue to increase 8% to 11% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year.
We continue to see stable fundamentals.
Specifically, our outlook for branded pharmaceutical pricing remains consistent with our original guidance and the prior year of mid single-digit increases in fiscal 2022 and our views that the generics market remains competitive yet stable, as our volumes have continued to improve in the September quarter.
Our guidance includes contribution related to our role as a centralized distributor for the US governments COVID-19 vaccine distribution.
This includes we're preparing vaccines for international missions.
Our current outlook remains in mind to the volume distribution schedule provided by the CDC and the US government.
The current guidance excludes booster shots, due to the timing of the recent approvals, as well as vaccines for pediatrics, which have not been approved by the CDC.
We will continue to update you on the progress and contribution from this program.
When excluding COVID-19 vaccine distribution in the segment, we expect approximately 3% to 6% adjusted operating profit growth.
In addition, our investments in our leading and differentiated position in oncology will continue to represent an approximate $0.20 headwind in fiscal 2022.
In our Prescription Technology Solutions segment, we see revenue growth of 31% to 37%, and adjusted operating profit growth of 23% to 29%, this growth reflects the strong service and transaction momentum in the business.
Now transitioning to Medical-Surgical our revenue outlook assumes a 8% to 14% growth and adjusted operating profit to deliver 35% to 45% growth over the prior year.
As mentioned previously, our outlook includes $0.80 to $1.10 related to the contribution from the US government's distribution of ancillary supply kits and storage programs, and $0.50 to $0.75 related to COVID-19 tests and PPE impairments related products.
Excluding the impacts from these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 13% to 19% forecasted growth.
One additional note related to our US distribution businesses.
One of the pillars of our enterprise strategy is talent, the ability to attract and retain the best workforce in healthcare.
The labor market remains competitive and we have assumed a modest expense impact to ensure there is continued service continuity through the holiday season and the back half of our fiscal year.
Therefore, the guidance that we're providing today includes approximately $0.10 to $0.20 of adjusted operating expense impact for labor investments in our US distribution businesses in the second half of the year.
Finally in the international segment, our revenue guidance is 1% decline to 4% growth as compared to the prior year.
As a reminder, this reflects the impact of the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance.
For adjusted operating profit our guidance reflects growth in the segment of 39% to 43%, which includes approximately $0.38 of expected adjusted earnings accretion in fiscal 2022, as a result of the held for sale accounting related to our agreement to sell certain European assets to the Phoenix Group.
It also includes our strong performance in the second quarter and the contribution from COVID-19 vaccine distribution in the segment.
Turning now to the consolidated view.
Our increased guidance assumes a 8% to 11% revenue growth and 18% to 22% adjusted operating profit growth, compared to fiscal 2021.
Our full-year adjusted effective tax rate guidance of 18% to 19% remains unchanged.
And we anticipate corporate expenses in the range of $610 million, $660 million.
On our May 6th earnings call we outlined an initiative to rationalize office space in North America to increase efficiencies and to support employee flexibility.
We've made good progress against this initiative.
And based on this progress we now expect earlier benefits from these actions, resulting in the realization of annual operating expense savings of approximately $15 million to $25 million in the second half of fiscal 2022, with annual savings of $50 million to $70 million, when fully implemented.
These savings will be realized across all of our segments.
[Technical Issues] which is net of property acquisitions and capitalized software expenses.
As a reminder, historically we generate the majority of our cash flows in the fourth quarter of our fiscal year.
This strong cash flow generation provides the financial flexibility to execute a balanced capital allocation approach; investing in our strategies of oncology and biopharma services; positioning our business for long-term growth, while remaining committed to returning capital to shareholders through our dividend and share repurchases.
Our investment grade credit rating remains a priority and underpins our financial flexibility.
In closing, we are encouraged by our strong performance in the first half of our fiscal year.
The momentum across the business, including our partnership with the US government positions us to deliver the updated fiscal 2022 outlook provided here today.
Finally, we're looking forward to providing additional details on our strategies and the strength of our businesses at our upcoming Investor Day on December 8th. | compname posts quarterly revenue of $66.6 billion.
qtrly adjusted earnings per diluted share of $6.15.
qtrly total revenues of $66.6 billion increased 9%.
increased fiscal 2022 adjusted earnings per diluted share guidance range to $21.95 to $22.55.
fiscal 2022 adjusted earnings per diluted share guidance includes approximately $2.30 to $3.05 of impacts. | 1 |
We will start by going through some of the highlights of the quarter, then Jack will go through the operating results and the segments, our balance sheet and cash flow, and guidance for the second quarter.
I will then share some concluding thoughts before we start our Q&A session.
But before we proceed, Jack will now cover the safe harbor language.
These statements are based on management's current expectations or beliefs.
It has been one year since we first referred to the unfolding uncertainty of COVID-19 and the resulting lockdowns in many of our markets.
At that time, we all had little idea of the magnitude of what lay ahead or what the road to recovery in the most challenging operating environment in our history would look like.
From that moment on we were determined to mitigate the impact on our financial results with early and strong actions and continue our investments in strategic initiatives, so we emerge stronger when the pandemic ends.
Those priorities have enabled us to start 2021 in a good position as we see that the signs of recovery continue to play out in many markets.
That said, the recovery is uneven and although many markets are steadily strengthening other markets, particularly in Europe, continue to experience COVID-19 related difficulties, which are resulting in the need for more restrictions and which is impacting the rate of recovery.
Overall, we believe we are heading in the right direction and expect continued improvement.
Turning to our financial results.
In the first quarter revenue was $4.9 billion, up 1% year-over-year in constant currency.
We saw increased demand in many of our key markets and this resulted in a better than expected financial performance.
On a reported basis, we recorded an operating profit for the quarter of $98 million.
Excluding restructuring charges in the prior year, operating profit was up 8% in constant currency, marking a significant sequential improvement from the operating profit decline of 24% in the fourth quarter.
Operating profit margin was 2%, up 120 basis points from the prior year on a reported basis, and after excluding restructuring charges in the prior year operating profit margin increased 10 basis points.
Earnings per diluted share was $1.11.
Excluding restructuring charges in the prior year period, this reflects a constant currency increase of 28%.
The improving demand for our services also correlates to the recent results of our Q2 2021 ManpowerGroup Employment Outlook Survey, which indicated broad-based improvements in hiring intentions by employers.
Our survey of 42,000 employers in 43 countries noted positive net employment trends across the majority of markets, a markedly different and improved outlook compared to the same time last year.
77% of employers anticipate returns to pre-pandemic hiring levels before the end of 2021, which is also a significant improvement from previous quarter surveys.
Among the major markets, the U.S. topped the list in terms of overall hiring intentions for the second quarter.
As the demand for skilled workers continues to strengthen, technology-related roles continue to be in demand as has been the case throughout much of the crisis.
However, we are now seeing strengthening demand also for talent within the manufacturing sectors as evidenced by the strong manufacturing PMI data in March.
Even the industries most impacted by the pandemic, hospitality, entertainment, and airlines are showing positive signs of rehiring with indications they will see significant increases in the second half of this year.
Logistics also shows no signs of reverting back to pre-crisis levels as the consumer shift to online retail is likely structural.
As workplaces reopen and workers return in phases, we are seeing demand for HR skills, especially with a greater focus on hiring and wellbeing.
And this is evidenced in the significantly improved demand for our RPO services.
Organizations that were reducing staff levels in 2020 are now seeking strategic and operational flexibility as they optimize their workforce plans, reassess talent needs, and implement hybrid work models.
We are well-positioned to provide the expertise and services to meet this rising demand.
Revenues in the first quarter came in above our constant currency guidance range.
Our gross profit margin came in at the midpoint of our guidance range.
Our operating profit was $98 million representing an increase of 161% or 146% on a constant currency basis.
Excluding restructuring charges in the prior year, operating profit increased 14% or 8% on a constant currency basis.
This resulted in an operating profit margin of 2%, which was 50 basis points above the high end of our guidance.
Breaking our revenue trend down into a bit more detail, after adjusting for the positive impact of currency of about 6%, our constant currency revenue increased 1%.
After considering net dispositions and fewer billing days, the organic days adjusted revenue increase was 2%.
This represented a significant improvement from the fourth quarter revenue decline of 6.5% on a similar basis.
Turning to the earnings per share bridge on Slide 4.
Earnings per share was $1.11, which significantly exceeded our guidance range.
Walking from our guidance mid-point, our results included improved operational performance of $0.42, slightly lower than expected foreign currency exchange rates, which had a negative impact of $0.01, a slightly better than expected effective tax rate that added $0.01 and a lower weighted average share count from share repurchases that also added $0.01.
Looking at our gross profit margin in detail, our gross margin came in at 15.6%.
Underlying staffing margin contributed to a 10 basis point reduction.
A lower contribution from permanent recruitment also contributed 10 basis points of GP margin reduction, which was offset by a higher mix of MSP gross profit on very strong growth in the quarter.
Next, let's review our gross profit by business line.
During the quarter, the Manpower brand comprised 63% of gross profit, our Experis professional business comprised 21% and Talent Solutions brand comprised 16%.
During the quarter, our Manpower brand reported an organic constant currency gross profit growth of 2%.
This was a significant improvement from the 11% decline in the fourth quarter.
Gross profit in our Experis brand declined 6% year-over-year during the quarter on an organic constant currency basis, which represented an improvement from the 14% decline in the fourth quarter.
Talent Solutions includes our global market-leading RPO, MSP, and Right Management offerings.
Organic gross profit increased 6% in constant currency year-over-year, which is an improvement from the 1% growth in the fourth quarter.
This was primarily driven by our MSP business with double-digit GP growth.
Our RPO business experienced significant improvement during the quarter and crossed back to low single-digit percentage growth in gross profit.
Our Right Management business continues to see a run-off in previous outplacement activity as recovery strengthens and experienced a reduction in gross profit of about 1% year-over-year.
Our SG&A expense in the quarter was $670 million and represented a 2% decline on a reported basis from the prior year.
Excluding restructuring charges in the prior year, SG&A was flat on a constant currency basis.
Currency changes reflected an increase of $35 million.
The remaining underlying decrease was driven by $1 million from net dispositions and $2 million of operational cost reductions.
SG&A expenses as a percentage of revenue represented 13.6% in the first quarter reflecting first quarter seasonality in revenues.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was $1 billion, an increase of 1% in constant currency.
OUP was $44 million.
Excluding restructuring costs in the prior year, OUP increased 52% in constant currency and OUP margin increased 150 basis points to 4.4%.
The U.S. is the largest country in the Americas segment, comprising 61% of segment revenues.
Revenue in the U.S. was $609 million, representing a flat trend compared to the prior year.
Adjusting for franchise acquisitions and days, this represented a 1% increase, which is an improvement from the 5% decline in the fourth quarter.
Excluding restructuring charges in the prior year, OUP for our U.S. business increased 122% year-over-year to $29 million in the quarter.
OUP margin was 4.8%.
Within the U.S., the Manpower brand comprised 35% of gross profit in the quarter.
Revenue for the Manpower brand in the U.S. increased 7% when adjusted for days and franchise acquisitions, which represents a significant improvement from the 2% decline in the fourth quarter.
The Experis brand in the U.S. comprised 29% of gross profit in the quarter.
Within Experis in the U.S., IT skills comprised approximately 80% of revenues.
Experis U.S. revenues declined 11% on a days-adjusted basis during the quarter, representing an improvement from the 14% decline in the fourth quarter.
The U.S. Experis business experienced revenue trend improvement during the quarter and exited the quarter in single-digit percentage declines and we expect to cross over to growth late in the second quarter.
Talent Solutions in the U.S. contributed 36% of gross profit and experienced revenue growth of 6% in the quarter.
This was driven by RPO, which experienced significant double-digit revenue growth as hiring programs continued to strengthen.
MSP business continued to perform well and experienced mid-to-high single digit revenue growth in the quarter.
Career transition activity continued to run off, which contributed to revenue reductions in Right Management in the U.S., as other Talent Solutions offerings experienced solid growth.
Provided there are no significant business restrictions impacting our clients across the U.S., in the second quarter, we expect ongoing underlying improvement and revenue growth for the U.S. in the range of 23% to 27% year-over-year.
Our Mexico operation experienced a revenue decline of 4% in constant currency in the quarter, representing an improvement from the 6% decline in the fourth quarter.
As discussed last quarter, Mexico is in the process of advancing labor legislation that could prohibit certain types of temporary staffing not considered specialized services.
The proposed legislation is in the process of review by the Senate.
When the legislation is adopted in final form, we will assess the potential impact on our business.
It is possible the legislation could be finalized before the end of April, and we would expect the effective date would be a number of months following enactment of the new law.
We will provide a further update during our second quarter earnings call.
Mexico represented between 2.5% and 3% of our global revenues in 2020.
Revenue in Canada increased 3% in days-adjusted constant currency during the quarter.
This represented an improvement from the fourth quarter days-adjusted revenue decline of 10%.
Revenues in the Other Countries within Americas increased 9% in constant currency reflecting improvement from the 4% increase in the fourth quarter.
This was driven by significant constant currency revenue growth in Argentina, Brazil, and Chile.
Southern Europe revenue comprised 44% of consolidated revenue in the quarter.
Revenue in Southern Europe came in at $2.2 billion, crossing over to growth of 2% in constant currency.
This reflects ongoing improvement from the fourth quarter trend driven by France, Italy, and Switzerland.
OUP equaled $73 million.
Excluding restructuring costs in the prior year, OUP increased 2% in constant currency and OUP margin was flat at 3.4%.
France revenue comprised 55% of the Southern Europe segment in the quarter and increased 1% in days-adjusted constant currency.
Although increased restrictions slowed the rate of underlying revenue improvement, the French business performed well in a challenging environment.
This reflects a days-adjusted constant currency decline of about 9% to 10% in January and February and growth of 27% in March as we began to anniversary the onset of the pandemic.
OUP was $43 million in the quarter and OUP margin was 3.6%.
As we begin the second quarter, despite the increased restrictions in France, we are holding associates on assignment relatively steady and cautiously anticipate modest improvement in activity during the quarter.
We are estimating a year-over-year constant currency increase in revenues in the range of 68% to 72% in the second quarter overall, as we anniversary the bottom of the pandemic.
Comparing estimated second quarter revenues to pre-crisis levels in constant currency, this represents an 11% decline compared to 2019 levels in the second quarter using the midpoint of our guidance.
Revenue in Italy equaled $403 million in the quarter, reflecting an increase of 14% in days-adjusted constant currency, which was a significant improvement from the 3% growth in the fourth quarter.
Excluding restructuring costs in the prior year, OUP increased 13% year-over-year in constant currency to $19 million and OUP margin was flat to the prior year.
Italy is already performing above pre-crisis 2019 levels in the first quarter.
We estimate that Italy will continue to perform very well in the second quarter with year-over-year revenue growth in the range of 42% to 46%.
Revenue in Spain increased 5% in days-adjusted constant currency from the prior year.
This represents a reduction from the significant growth in the fourth quarter, which reflected significant seasonal year-end logistics activity.
Revenue in Switzerland increased 7% in days-adjusted constant currency from the prior year in the quarter.
This represents a significant improvement from the 14% decrease in the fourth quarter.
Our Northern Europe segment comprised 23% of consolidated revenue in the quarter.
Revenue declined 2% in constant currency to $1.1 billion, representing a significant improvement from the 11% decline in the fourth quarter driven by all major markets.
Excluding restructuring costs in the prior year, OUP decreased 14% in constant currency and OUP margin decreased 10 basis points to 0.4%.
Our largest market in Northern Europe segment is the U.K., which represented 38% of segment revenue in the quarter.
During the quarter, U.K. revenues grew 6% in days-adjusted constant currency, which represented a significant improvement from the 7% decline in the fourth quarter.
Our U.K. business continues to see strong public sector activity and increased demand across all brands.
The U.K. is already performing above pre-crisis 2019 levels in the first quarter.
We expect growth in the 30% to 35% constant currency range year-over-year in the second quarter, which also reflects significant new customer activity.
In Germany, revenues declined 16% in days-adjusted constant currency in the first quarter, which represented a significant improvement from the 31% decline in the fourth quarter on the same basis.
Although Germany continues to be a difficult market for our industry, we expect to see ongoing revenue improvement in Germany with year-over-year growth in the second quarter.
In the Nordics, revenues declined 1% in days-adjusted constant currency, representing an improvement from the 6% decline on the same basis from the fourth quarter.
Revenue in the Netherlands decreased 4% in days-adjusted constant currency, representing an improvement from the 12% decline on the same basis in the fourth quarter.
Belgium experienced a days-adjusted revenue decline of 14% in constant currency during the quarter, which also reflects improvement from the 25% decline on the same basis from the fourth quarter.
Other markets in Northern Europe crossed over to growth in the quarter.
Revenue increased 18% in constant currency, which represents ongoing improvement from the fourth quarter increase of 9% in constant currency.
This was driven by strong revenue growth in Poland, Russia, and Ireland.
The Asia Pacific Middle East segment comprises 13% of total company revenue.
In the quarter, revenue was flat in constant currency to $627 million.
OUP was $19 million.
Excluding restructuring costs in the prior year, OUP decreased 7% in constant currency and OUP margin decreased 30 basis points to 3%.
Revenue growth in Japan was up 6% in days-adjusted constant currency, which represents a slight improvement from the 5% growth rate in the fourth quarter.
Our Japan business continues to perform very well and we expect ongoing revenue growth in the second quarter.
Revenues in Australia were flat in days-adjusted constant currency.
This represented an improvement from the 2% decline on the same basis in the fourth quarter.
Revenue in Other Markets in Asia Pacific Middle East declined 7% in constant currency, which was equal to the rate of revenue decline in the fourth quarter.
Now that ManpowerGroup Greater China Limited has released their 2020 Annual Report, we'd like to provide a brief update on their results.
As we previously disclosed, we remain the largest shareholder and record our approximate 37% share of earnings below operating profit.
In 2020, the company successfully managed an extremely challenging environment and recorded year-over-year revenue growth of 6%, which included 28% staffing revenue growth in Mainland China and achieved an increase in profits attributable to owners.
We are very pleased with the progress of ManpowerGroup Greater China Limited.
I'll now turn to cash flow and balance sheet.
During the first quarter, free cash flow equaled $128 million compared to $172 million in the prior year quarter, reflecting more significant accounts receivable declines in the prior year quarter.
At quarter end, days sales outstanding decreased year-over-year by almost four days to 56 days.
Capital expenditures represented $13 million during the quarter.
During the first quarter, we purchased 1.1 million shares of stock for $100 million.
As of March 31st, we have 2.2 million shares remaining for repurchase under the 6 million share program approved in August of 2019.
Our balance sheet was strong at quarter-end with cash of $1.52 billion and total debt of $1.08 billion representing a net cash position of $440 million.
Our debt ratios at quarter end reflect total gross debt to trailing 12 months adjusted EBITDA of 2.33 and total debt to total capitalization at 31%.
Our debt and credit facility did not change in the quarter.
In addition, our revolving credit facility for $600 million remained unused.
Next, I'll review our outlook for the second quarter of 2021.
Our guidance continues to assume no material additional lockdowns or business restrictions impacting our clients in any of our largest markets beyond those that exist today.
On that basis, we are forecasting earnings per share for the second quarter to be in the range of $1.36 to $1.44, which includes a favorable impact from foreign currency of $0.10 per share.
Our constant currency revenue guidance growth range is between 27% and 31%.
The midpoint of our constant currency guidance is 29%.
A slight increase in billing days in the second quarter is partially offset by the slight impact of net dispositions, and as a result, our outlook for organic days adjusted revenue growth is also 29% at the midpoint.
Adding the context with comparisons to pre-crisis activity levels, this would represent a second quarter organic constant currency decline in the range of minus 4% to minus 6% compared to 2019 revenues.
We expect our operating profit margin during the second quarter to be up 180 basis points at the midpoint compared to the prior year.
This reflects another quarter of continued strong sequential underlying improvement.
We estimate that the effective tax rate in the second quarter will be 34%.
Based on improved earnings mix, we are now estimating the full-year effective tax rate will be approximately 34%, a 1% improvement from our previous estimate of 35%.
As usual, our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be 55.4 million.
The challenging operating environment has not slowed our investments and plans to accelerate our diversification, digitization, and innovation initiatives.
Our plans to simplify and prioritize or helping us realize improved efficiencies.
Amidst all the disruption, what we knew all along has been confirmed and it is the combination of technology and people-first approach of our teams that allows us to confidently manage global uncertainty, deliver locally and collaborate both personally and remotely as necessary.
A good example of this is the recent recognition by industry analyst ALM for our Digitally Enabled, Data Driven Workforce Solutions in ManpowerGroup Talent Solutions.
We are the only company in our industry to have received the Pacesetter designation and it serves as a good example of the strength of our Powersuite technology platforms.
ESG is a very important component of our strategy and we're also proud to have been recognized around the globe for our commitment to driving positive change for people and societies and for our responsible business practices.
We have been awarded the highest recognition by EcoVadis, a provider of trusted business sustainability ratings.
Our France and Norway businesses achieved the global Platinum Award level placing us in the top 1% of all companies assessed.
We now have platinum, gold and silver EcoVadis ratings in more than 20 countries.
For the 12th year, ManpowerGroup has also been recognized by Ethisphere as a World's Most Ethical Company, again we are the only company in the industry to earn this award.
These recognitions are testament to the dedication and commitment of our people to keep the world of work turning in a sustainable and ethical way placing millions of people into jobs during a global pandemic, living our purpose that meaningful and sustainable employment has the power to change the world.
I'd now like to open the call for Q&A. | compname posts quarterly ffo per share $0.45 excluding items.
quarterly ffo per share $0.45 excluding items.
mall portfolio occupancy was 89.7% at december 31, 2020 compared to 94.0% at december 31, 2019.
sees 2021 ffo per share-diluted $2.05 - $2.25. | 0 |
On Slide 3, in order to provide improved transparency into the operating results of our business, we provided non-GAAP measures adjusted net earnings, adjusted earnings per share, and adjusted segment earnings that exclude the severance and restructuring charges related to aligning our business to current market conditions.
Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up question per turn.
If you have multiple questions, please rejoin the queue.
Before I summarize the quarter and Chuck goes through the results, I want to express how proud I am of our global team.
We faced challenges and complexities to our business that we have never faced before.
Our number one goal was and remains to keep our employees safe while delivering our essential products to our customers.
I say confidently that our team met and often exceeded my expectations.
You truly make A. O. Smith a remarkable company.
The business performed in the second quarter is largely in line with what we saw in April.
Continuing the pace of growth we saw in the first quarter, our North America water treatment business organically grew 19%.
Direct-to-consumer and retail sales were particularly strong as consumers became more health conscious during the pandemic and the shelter-in-place orders confined many of us to our homes.
As expected, industry volumes of residential water heaters in the U.S. held up notably well.
Based on our June shipments, we estimate industry volumes were flat to slightly up [Phonetic] in the quarter compared to last year.
Due to construction project delays and postponements in North America, we saw commercial water heater and boiler volumes decline, in line with our estimates of the industry declines of 20% to 25% in the quarter compared with last year.
Consumer demand for our products in China was flat to slightly positive compared to the second quarter of 2019 as restaurants and shopping malls reopened and retail foot traffic increased.
We remained operational with no significant disruptions.
Our Juarez, Mexico plant, which we voluntarily closed in April, reopened in May and ramped up production over the latter portion of the quarter.
We have taken numerous and meaningful steps to protect our employees, suppliers, and customers in the pandemic.
These important steps, in many cases reduced efficiencies, and include continuous communication and training to our employees on living and working safely in a COVID-19 world, client [Phonetic] accommodations and reconfiguration to maintain social distancing, masks for all employees, implementation of sanitizing stations, temperature taking, and regular proactive deep cleaning and sanitization of our facilities.
Our global supply chain remain operational.
We continue to monitor and manage our ability to operate effectively as tariffs and the evolving nature of the COVID-19 pandemic and the related stresses on the supply chain and periodic marketplace disruptions impact our operation.
To align our business with current market conditions, primarily in China and to a lesser extent in North America, we reduced headcount and incurred other restructuring costs totaling $6 million in the second quarter.
Second quarter 2020 sales of $664 million declined 13% compared to the second quarter of 2019.
The decline in sales was largely due to lower water heater volumes in China and lower commercial water heater and boiler volumes in North America driven by the COVID-19 pandemic.
As a result of lower sales, second quarter 2020 adjusted earnings of $73 million and adjusted earnings per share of $0.45 declined significantly compared with the same period in 2019.
Sales in our North America segment of $481 million declined 8% compared to the second quarter of 2019.
Organic growth of approximately 19% in North America water treatment sales was more than offset by lower commercial water heater volumes, lower boiler volumes, and a water heater sales mix composed of more electric models which have a lower selling price.
Rest of the World segment sales of $190 million declined 24% compared to the same quarter of 2019.
China sales declined 20% in local currency related to higher mix of mid-price products and further reductions in customer inventory levels.
Consumer demand for our products in China was flat to slightly positive compared with the second quarter of 2019.
China currency translation negatively impacted sales by approximately $6 million.
Our sequential sales in China improved through the quarter and China was profitable in May and June.
India sales declined significantly as the economy was shut down during a majority of the quarter to minimize the spread of the virus.
On Slide 7, North America adjusted segment earnings of $108 million were 12% lower than segment earnings in the same quarter in 2019.
The decline in earnings was driven by lower volumes of commercial water heaters, lower boiler volumes, and a mix skew to electric water heaters.
Certain costs directly related to the pandemic including temporarily moving production from Mexico to the U.S., paying employees during temporary plant shutdowns, facility cleaning, paying benefits for furloughed employees and other costs were $5.5 million in the second quarter.
Adjusted earnings exclude $2.2 million in pre-tax severance costs.
As a result, second quarter 2020 segment -- adjusted segment margin of 22.4% declined from 23.5% achieved in the same period last year.
Rest of the World adjusted segment loss of $2 million declined significantly compared with 2019 second quarter segment earnings of $22 million.
The unfavorable impact to profits were lower China sales and a higher mix of mid-price products which have lower margins more than offset the benefits to profits from lower SG&A expenses.
These results exclude $3.9 million in pre-tax severance and restructuring costs.
As a result of these factors, adjusted segment margin was negative compared with 9% in the same quarter of 2019.
Our corporate expenses of $10 million and interest expense of $3 million were similar to last year.
Cash provided by operations of $179 million during the first half of 2020 was higher than $144 million in the same period of 2019 as a result of lower investment in working capital, including deferral of our April estimated federal income tax payment to July, which was partially offset by lower earnings compared with the year ago period.
Our liquidity and balance sheet remained strong.
We had cash balances totaling $569 million and our net cash position was $288 million at the end of June.
Our leverage ratio at the end of the second quarter was 14.5% as measured by total debt to total capital.
We had $332 million of undrawn borrowing capacity on our $500 million revolver.
[Technical Issues] the second quarter and our share repurchase activity continues to be suspended.
During the first half of 2020, we repurchased approximately 1.3 million shares of common stock for a total of $57 million.
Our 2020 adjusted earnings per share guidance excludes $0.03 per share in severance and restructuring costs included that were incurred in the second quarter.
Our adjusted guidance assumes the conditions of our business environment and that of our suppliers and customers is similar for the remainder of the year to what we are currently experiencing and does not deteriorate as a result of further restrictions or shutdown due to the COVID-19 pandemic.
We expect our cash flow from operations in 2020 to be approximately $350 million compared with $456 million in 2019, primarily due to lower earnings.
Our 2020 capital spending plans are between $60 million and $70 million and our depreciation and amortization expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $47 million in 2020, slightly higher than 2019 primarily due to lower interest income on investments.
We expect our interest expense to be $9 million in 2020 compared with $11 million in 2019.
Our effective income tax rate is expected to be between 23% and 23.5% in 2020.
Our assumptions assume no additional share repurchase resulting in an average diluted outstanding shares in 2020 of approximately 162.5 million.
Our outlook for 2020 includes the following assumptions.
We project U.S. residential water heater industry volumes will be flat in 2020 driven by resilient replacement demand and similar levels of new home constructions as last year.
We expect commercial industry water heater volumes will decline approximately 10% as job sites and business closures due to the pandemic delay or defer new construction and discretionary replacement installation.
It is encouraging to see consumer demand for our China product similar, if not a little higher than last year over the last four months.
We are also seeing sequentially quarterly improvement in market share both online and offline for water heater and water treatment products driven by our mid-price range products.
We took additional charges in Q2 for further restructuring of the business.
We believe these restructuring charges are largely behind us.
We continue to target closure of 1,000 existing stores while targeting to open 500 small store relationships in Tier 4 through 6 cities.
Cost actions and restructuring activity are projected to result in $35 million of savings in 2020 over 2019, $15 million of which will be realized in the second half of 2020.
We expect year-over-year declines in local currency sales of 18% to 20% and protract sequential quarter-over-quarter growth in the second half of the year as China appears to be making sustainable progress in reopening their economy and keeping the virus in check.
We expect our North America boiler sales will decline approximately 10% for the full year.
Commercial boilers represent 65% to 70% of our boiler sales.
With many job sites temporarily closed during the second quarter, we believe as job sites reopen, the orders will sequentially improve in the second half of the year.
We project 20% to 22% sales growth in our North America water treatment products which include incremental Water-Right sales.
We ended 2019 with a $2.6 million loss in India and expect a similar loss in 2020 as a result of the pandemic.
Please advance to Slide 11.
We project revenue will decline by 7% to 8% in 2020 as strong organic North America water treatment sales and resilient North America residential water heater volumes are more than offset by weaker North America commercial water heater and boiler volumes and lower China sales, largely due to the pandemic.
We expect North America segment margin to be between 22.5% and 23% and Rest of World segment margins to be negative 1% to negative 2.5%.
We believe particularly in these uncertain times A. O, Smith is a compelling investment for a number of reasons.
We have leading share positions in our major product categories.
We estimate replacement demand represents approximately 80% to 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China, a broad product offering in our key product categories, broad distribution, and a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long-term with investments in automation, innovation, and new products as well as acquisitions and returning cash to shareholders.
We will continue to proactively manage our business in this uncertain environment.
We see improving consumer demand trends emerge in China where we were first impacted by the pandemic and see China operations pivot to profitability for the remainder of the year.
In North America, as the economy begins to reemerge after [Phonetic] the economic shut down, persistent COVID-19 cases and related potential implications to returning to a more stable environment in the market, workplace and supply chain will continue to be challenging throughout the remainder of the year.
We have a strong and dedicated team, which has navigated successfully through prior downturns and I'm confident in our ability to execute similarly through COVID-19. | compname reports q1 earnings per share $0.60.
q1 earnings per share $0.60.
q1 sales rose 21 percent to $769 million.
sees fy 2021 revenue up 14 to 15 percent. | 0 |
An audio recording of today's call will be available on the internet for a limited time and can also be accessed on the VPG website.
Turning to Slide 2.
Today's remarks are governed by the safe harbor provisions of the 1995 Private Securities Litigation Reform Act.
For a discussion of the risks associated with VPG's operations, we encourage you to refer to our SEC filings and the Form 10-K for the year ended December 31, 2018, and our other recent SEC filings.
On the call today are Ziv Shoshani, CEO and president; and Bill Clancy, CFO.
I will begin with some commentary on VPG's consolidated results and our sales trends and operational highlights by segment.
Bill will provide financial details and then our Q1 2020 outlook.
Moving to Slide 3.
The fourth quarter capped the second best year in VPG's history in terms of revenue and profitability.
In spite of some macro headwinds after beginning the year in Q1 with one of our strongest quarters ever, business trends and our revenue slowed in the second half of the year reflecting a global economic slowdown that impacted many of our end markets.
Despite the headwinds, we achieved solid results for fiscal 2019 with sales of $284 million and adjusted operating margin of 11.7% and adjusted earnings per share of $1.69 and $20.4 million of adjusted free cash flow.
Moving to Slide 4.
For the fourth quarter, sales of $69.1 million were at the high end of our expectations and grew 2.6% sequentially.
Bookings were strong as total orders for the fourth quarter of $79.8 million grew 24% from the third quarter and reflected growth in all three segments.
The result was an overall book-to-bill of 1.15 in the fourth quarter, an improvement from 0.96 in Q3.
Looking at our fourth-quarter business trends by market.
In test and measurement, demand for our precision resistors in semiconductor test applications rebounded.
In the general industrial market, we saw continuous softness in oil and gas and in industrial process applications.
In transportation, where we focus on track in one market orders for our VPG onboard weighing solutions were solid in both the avionics, military and space market or AMS and steel market trends continue to be directionally positive, but our orders reflected the project-driven nature of our products.
In the industrial wing and other markets which includes precision, agriculture, construction and medical applications, we saw signs of bottoming as customers replenished their inventories.
From an operation and financial perspective, our profits in the fourth quarter were impacted by a number of factors.
First, our results include -- included $1.7 million of an acquisition-related charges and costs associated with the addition of Dynamic Systems, Inc. or DSI in November of 2019.
Second, we recorded a restructuring charge of $1.7 million which primarily relates to the closing and downsizing of facilities as part of our ongoing strategic initiative to align and consolidate our manufacturing operations.
Third, our margins were further affected by approximately $1.1 million related to inventory reductions as well as one-time inventory adjustments, mainly for manufacturing relocations and system implementations.
The results of these factors was an operating income in the fourth quarter of $1.8 million or 2.5% of revenues, and adjusted operating income was $5.2 million or 7.5% of revenues.
Fourth-quarter earnings per diluted share was $0.28.
And adjusted net earnings per diluted share was $0.27.
Moving to Slide 5.
Looking at our reporting segments in detail.
Sales of foil technology products of $29.6 million declined 7.7% sequentially and were 19.3% lower than the fourth quarter a year ago.
The quarter-to-quarter decline was due to lower sales of precision resistors in the test and measurement market.
However orders for these products grew robustly in the fourth quarter of 2019 for both test and measurements and AMS customers as they place their semi-annual and annual orders.
The result was a book-to-bill ratio of 1.18 for foil technology products in the fourth quarter which was up significantly from 0.91 in the third quarter.
Gross margin for foil technology products of 34.9% declined from 37.3% for the third quarter due to lower sales volume of $1.5 million, unfavorable product mix of $300,000 and the one-time inventory adjustment of $200,000 which was partially offset by a reduction in manufacturing costs of $700,000.
Looking at the force sensors segment, sales in the fourth quarter of $15.1 million declined 7.1% sequentially and were down 11.4% from the fourth quarter of 2018.
The sequential decline was primarily due to OEM destocking in the precision weighing and force measurement markets.
Book-to-bill for force sensors was 1.11 which grew from 0.94 in the third quarter of 2019.
Fourth-quarter gross profit margin for force sensors of 24.2% decreased from 30.4% in the third quarter of 2019.
The lower sequential gross profit reflected lower volume of $600,000, approximately $400,000 related to inventory reductions and $200,000 of one-time inventory adjustments.
For the Weighing and Control Systems segment, fourth-quarter sales of $24.4 million increased 28.1% from the third quarter and were 5.2% higher than the fourth quarter a year ago.
The sequential growth in revenue was primarily attributable to the addition of two months of BSI sales and continued good performance in both our process weighing business in Europe and our legacy steel business.
Book-to-bill for weighing and controls was 1.15 which compared to 1.04 in the third quarter of 2019.
The fourth-quarter gross profit margin for WCS segment of 41.6% or 46.8% excluding the purchase accounting adjustments of $1.3 million for the DSI acquisition, was in line with prior quarter's profit margins.
Moving to Slide 6.
Before turning the call to Bill for some additional financial details for the quarter, I would like to provide an update on a few of our -- of the strategic initiatives that are key elements of value-creation strategy.
Turning to Slide 6.
First, I would like to elaborate on the progress we are making to realign our manufacturing footprint.
I already referenced facility closure and downsizing in the fourth quarter of 2019 which relate to transition of manufacturing of force sensors to India and China.
We expect these moves to yield approximately $1.6 million of cost savings in 2020 excluding normal inflation and wage increases.
In addition, our consolidation project in Modi'in, Israel is on track and we expect to start the relocation in the third quarter of 2020 and to complete the transition as we enter 2021.
As we have discussed before, this is a major initiative that not only gives us an additional capacity we need to support the future growth of our advanced sensor business, but also consolidate certain legacy operations which will provide manufacturing efficiencies as the facility ramps production in 2021.
We expect to incur approximately $2 million of start-up costs in the second half of this year as we complete the transition.
Second, we are pushing forward on a number of VPG-specific growth initiatives.
We continue to have a good customer engagement with respect to our advanced sensors as we grew sales of these products, 20% in 2019 compared to 2018.
As we have described before, the unique design capabilities and cost-effective manufacturing platform of the advanced sensor business are enabling us to pursue higher volume opportunities which we were not able to address before.
Another key initiative relates to our TruckWeigh and VanWeigh overload protection technology which grew 30% in 2019 from the prior year.
We expect demand for this product to be further driven by adoption of new regulations in the EU that will require all trucks and vans with load capacities of more than three and a half tons to have this capability.
While the regulation are still being finalized, they are expected to go into effect in the first half of 2021.
We believe we are in the leading position in terms of our products capability, reliability and robustness, and we are already working with all the large OEMs to develop solutions that meet the new regulations.
Third, among the strategic highlights for the quarter was the acquisition of Dynamic Systems, Inc. which was accretive in the fourth quarter.
DSI is a great example of a bolt-on M&A opportunity.
We believe we'll create value for VPG shareholders.
It is an established, highly profitable company with a great novel technology that complements our existing footprint in the steel industry.
We believe we have a great platform and a solid balance sheet to support value creating M&A, and we hope to make additional acquisitions in 2020.
On Slide 7 of the slide deck.
In the fourth quarter of 2019, we achieved revenues of $69.1 million, operating income of $1.8 million or 2.5% of revenues and net earnings per diluted share of $0.28.
On an adjusted basis which exclude $1.7 million of costs and purchase accounting adjustments related to the DSI acquisition and $1.7 million of restructuring costs, our adjusted operating margin was $5.2 million or 7.5% of sales and adjusted net earnings per diluted share was $0.27.
Continuing on Slide 7.
Our fourth-quarter 2019 revenue of $69.1 million increased by 2.6% as compared to $67.4 million in the third quarter, and we were down 10.2% as compared to $77.0 million in the fourth quarter a year ago.
Foreign exchange negatively impacted revenues by $500,000 for the fourth quarter of 2019 as compared to a year ago and had no impact as compared to the third quarter of 2019.
Our gross margin in the fourth quarter was 35%.
Excluding $1.3 million related to purchase accounting adjustments for the DSI acquisition, our gross margin on adjusted basis was 36.8% which declined from 38.3% in the third quarter.
Our operating margin was 2.5% for the fourth quarter of 2019.
If we exclude the above-mentioned purchase accounting adjustments, acquisition cost of $400,000 and restructuring expense of $1.7 million related to the facility closures and downsizing, as Ziv mentioned, our fourth-quarter adjusted operating margin was 7.5% as comparted to 10% in the third quarter of 2019.
The adjusted gross margin for the fourth quarter of 2019 included approximately $1.1 million of inventory reductions and inventory-related adjustments which are not expected to reoccur.
Excluding these inventory-related factors, adjusted gross margin would have been 38.5%, above the 38.3% we reported in the third quarter of 2019.
Selling, general and administrative expenses for the fourth quarter of 2019 were $20.2 million or 29.2% of revenues.
This compared to $20.9 million or 27.2% for the fourth quarter last year and $19.1 million or 28.3% in the third quarter.
The higher sequential SG&A in the fourth quarter reflected the inclusion of two months of SG&A expenses for DSI which were partially offset by a reduction in bonus accrual reserves.
The adjusted net earnings for the fourth quarter of 2019 were $3.7 million or $0.27 per diluted share compared to $5.0 million or $0.37 per diluted share in the third quarter of 2019.
While impact of foreign exchange rates for the fourth quarter was modest compared to the third quarter, they had a much bigger effect compared to the fourth quarter a year ago, impacting net earnings by $900,000 or $0.07 per diluted share.
We generated adjusted free cash flow of $4.1 million for the fourth quarter of 2019 as compared to $4.8 million for the third quarter of 2019.
We define free cash flow as cash generated from operations which was $6.3 million for the fourth quarter of 2019, less capital expenditures of $2.6 million and sales of fixed assets of $400,000.
We recorded a tax benefit of $3.4 million in the fourth quarter of 2019 related to the acquisition of DSI, utilizing our deferred tax liabilities against deferred tax assets.
We are assuming an operational tax rate in the range of 27% to 29% for our 2020 planning purposes.
Reflecting the $40.5 million paid for DSI, we ended the fourth quarter with $86.9 million of cash and cash equivalents and total long-term debt of $44.5 million.
With a net leverage ratio of about one time, we believe that our balance sheet remains very strong and we have ample liquidity to support our business requirements and to fund additional M&A opportunities.
Turning to our outlook.
While we see signs of bottoming in some of our industrial markets, there continues to be a number of uncertainties in the macroeconomic environment including the potential spread of the coronavirus.
We currently expect net revenues in the range of $63 million to $70 million for the first fiscal quarter of 2020 which reflect the portions of our project-driven business and customers longer lead time orders that are expected to ship in the quarter and assumes constant fourth-quarter 2019 exchange rates.
In summary, our sales for the fourth quarter were at the high end of our expectations, and we ended the quarter with a very strong book-to-bill.
Our manufacturing consolidation projects are on track for on-schedule completion.
And we believe we have the long-term growth and cost strategies in place to achieve our three-year financial targets. | compname reports q1 earnings per share of $0.24.
q1 adjusted earnings per share $0.29.
q1 earnings per share $0.24.
q1 revenue fell 11.5 percent to $67.7 million.
sees q2 2020 revenue $56 million to $62 million.
vishay precision group - expect financial results in q2 of 2020 will be negatively impacted by covid-19 pandemic.
majority of co's operations have been able to maintain full or partial operations.
vishay precision group - received approval from indian government to resume partial operations at co's manufacturing facility on may 4, 2020.
expects reduction in its india operations to reduce force sensors revenues by $5 million to $7 million in q2.
vishay precision - if operating restrictions on indian facility not lifted on may 17, anticipate additional negative impact on results of operation.
vishay precision group - as of may 5, 2020, all of co's facilities, with exception of facility in india, are operating fully. | 0 |
These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements.
He will provide an update on our strategy and highlights from the last quarter.
And Karen Holcom, senior vice president and chief financial officer, who will walk us through our earnings performance.
There will be an opportunity for Q&A at the end of the call.
For those participating, please limit your remarks to one question and one follow-up, if necessary.
Our team delivered another strong performance in the second quarter of fiscal 2022.
For the second consecutive quarter, we delivered net sales growth of 17%, and we maintained our gross profit margin at 41.7%, consistent with the first quarter.
And compared to last year, we increased diluted earnings per share by 22%.
Despite the cost challenges, we were able to convert our sales growth into operating profit and net income by effectively leveraging operating expenses.
The world remains complicated.
Although our demand environment is strong, costs continue to be volatile, and we are continuously dealing with the ongoing pressures resulting from the global component shortages.
In spite of this, our team continues to execute well, and this is reflected in our performance.
Both ABL and Spaces are performing admirably.
Our decisions to prioritize shipments by investing in electrical components and transportation are resulting in higher sales and operating profits, albeit at slightly lower margins.
Now, I want to move to talk to our progress at both ABL and Spaces.
First, in ABL, I'm happy to report that some things are returning to the way they used to be.
In March, we hosted our first in-person sales conference in three years, NEXT '22.
It was great to be back together with our independent sales network, who have performed exceptionally through the ups and downs of the last two years.
We have the best agents in the industry, and it was a great opportunity to talk about our strategic vision for Acuity Brands Lighting, share many new products, and engage our agency partners around our EarthLIGHT initiative.
This was the first time that many of our associates and agents had seen each other in person since the pandemic started.
While we have been incredibly productive working virtually with our channel, it was great to spend some quality time together in person.
It was hard not to be struck by the levels of energy and enthusiasm throughout the event and the consistency of the feedback from our agents.
They said, "Acuity is delivering".
Our investments in service have allowed us to prioritize delivering for our customers when others have been unable to.
At the same time, our investments in product vitality have allowed us to continue to create compelling new products that are both innovative and market-moving.
As I said last quarter, we have done this by focusing on three main areas.
First, by focusing on strategic supplier relationships, the current environment has reminded us all that it really matters who you do business with.
Because we are the largest lighting company, we have certain advantages over our direct competitors.
But those same components are also used by larger industries.
Consequently, we are making investments in people, time, and resources.
We have recruited a new head of strategic sourcing for ABL.
We are working with our key suppliers on effective planning and allocation management, and we are investing in inventory.
Second, by empowering our teams to prioritize access and speed over cost on available components, we have been able to ensure continuity of supply across many of our existing product lines, while also supporting our ongoing product vitality efforts across our product portfolio.
Finally, as I said last quarter, our engineering teams continue their Herculean efforts to redesign products to the available components.
At the same time, these teams have also managed to introduce around 220 new, or significantly upgraded, lighting and lighting control products over the last two years.
We expect the challenges around access to and costs of components to continue into the foreseeable future.
Our strategy around product vitality and the dexterity of our engineering teams inflecting to the changing requirements of the component shortages have been a significant part of why we are leading in this market, and we expect to continue these efforts.
Another highlight of the NEXT conference was our focus on EarthLIGHT.
EarthLIGHT is an important part of our strategy.
Our product vitality efforts are not just about improving the functionality of our products.
It is also about redesigning products to reduce customer energy consumption, reducing packaging and waste, and improving transportation efficiency.
This quarter, we announced a new initiative that brings together both technology and sustainability to significantly reduce paper use by introducing scannable QR code instructions across our products.
At NEXT, we also expanded our community outreach by packing a thousand bags of food for a local Atlanta organization together with our agents.
It was one of the highlights of the event.
Now, moving to the Intelligence Spaces Group, Spaces had another solid quarter of growth.
In both Distech and Atrius, we have a strong product roadmap to make Spaces smarter, safer, and greener.
Distech continues to win in the building controls market against significant competition.
Through the ECLYPSE Controller products, Distech is at the forefront of the technology curve with a presence in key markets and recognized leadership built on open-protocol technology.
In the last quarter, Distech won projects across North America and Canada and saw significant project wins in key verticals, including in education, commercial infrastructure, and in data centers.
Distech is now a key supplier to two of the largest cloud providers.
We also continue to develop the Atrius platform, including progress on Atrius Building Insights, and we expect to expand the portfolio over time.
We continue to add talent to this team.
Finally, I want to update you on our capital allocation.
Our capital allocation priorities remain the same.
We expect to continue to prioritize investments for growth in our current businesses, to invest in acquisitions, to maintain our dividend, and to allocate capital to share repurchases when there is an opportunity to create permanent value for our shareholders.
This quarter, the board of directors authorized additional capacity for share repurchases to increase our remaining authorization from 3 million to 5 million shares.
Since May of 2020, we have repurchased approximately 13% of our shares outstanding.
I would also like to announce the appointment of Sachin Sankpal, our senior vice president of growth and transformation.
Sach joins us to manage our technology organization, to deploy our better, smarter, faster company operating system, and to lead the integration efforts for future acquisitions.
Sach comes to us with distinguished experience at leading companies, including Trimble and Honeywell.
We're excited to have Sach on our team.
Each quarter, we are faced with new challenges, and our team continues to deliver.
Our continued focus on service and product vitality is allowing us to take advantage of the strong demand environment.
I am so impressed by their flexibility and ability to drive results.
We delivered strong performance in the second quarter of 2022.
We grew net sales.
We managed margins effectively despite a volatile cost environment.
And we leveraged our operating expenses.
Net sales were $909 million, an increase of 17% compared to the prior year.
This performance was driven by our focus on service levels and product vitality, a continued recovery in the end markets of both of our business segments, and the benefits of recent price increases and acquisitions.
Gross profit was $379 million, an increase of $43 million or 13% over the prior year.
This improvement was driven by revenue growth and by offsetting the significant increase in input costs through price increases and product and productivity improvements.
Gross profit as a percent of sales was 41.7%, a decrease of 170 basis points from 43.4% in the prior year, but flat sequentially from the first quarter of 2022.
I will talk more about the current cost environment later on in the call.
Reported operating profit was $102 million, an increase of $11 million or 12% over the prior year.
Reported operating profit margin was 11.3% of net sales for the second quarter of fiscal 2022, a decrease of 40 basis points over the prior year.
Adjusted operating profit was $123 million, an increase of $14 million or 13% over the prior year.
Adjusted operating profit margin was 13.5% of net sales, a decrease of 50 basis points against the prior year.
Adjusted operating profit margin was lower than the prior year, as the decline in gross profit margins was partially offset by leveraging operating expenses.
Finally, we saw continued improvement in diluted earnings per share for the second quarter of fiscal 2022.
Diluted earnings per share of $2.13 increased $0.39 or 22% over the prior year.
And adjusted diluted earnings per share of $2.57 increased $0.45 or 21% over the prior year.
Our share repurchase program favorably impacted adjusted diluted earnings per share by $0.06.
Now, moving on to our segments.
During the quarter, our Lighting and Lighting Controls segment saw sales increase, 17% to $863 million over the prior year.
This was driven by the improvements within our independent sales network, which grew approximately 12%, and an increase of 5% in our direct sales network.
Additionally, sales in the corporate account channel increased approximately 105% over the prior year.
Recall that last year, customers had paused their renovations due to the pandemic.
That activity has now restarted as you can see from the growth this quarter.
We also had growth in our other channel of 83% over the prior year, due primarily to the acquisition of OSRAM.
Sales in the retail channel declined approximately 2% in the current quarter.
This was due to some of our inventory being delayed in transit or held up in the ports, resulting in longer lead times than we anticipated.
We should start to see growth in this channel in the upcoming quarters.
ABL's operating profit for the second quarter of 2022 was $117 million, an increase of 14% versus the prior year, with operating margin declining 30 basis points to 13.5%.
Adjusted operating profit of $127 million improved 13% versus the prior year, with adjusted operating profit margin declining 50 basis points to 14.7%.
ABL has demonstrated the ability to grow sales while leveraging our operating expenses.
Moving on to the results for our Intelligent Spaces Group.
For the second quarter of 2022, sales in Spaces increased approximately 16% to $50 million, reflecting growth in both the Distech and Atrius.
Spaces operating profit in the second quarter of 2022 increased approximately $400,000 to $1.2 million.
Adjusted operating profit of $6 million increased approximately $1 million versus the prior year as a result of the strong sales growth and continued investment in the business.
Our business model continues to be highly productive, generating $127 million of net cash flow from operating activities in the first half of fiscal 2022.
This was a decrease of $85 million compared to the prior year due primarily to an increased investment in working capital primarily related to inventory.
Inventory days are up over the end of our fiscal year, with approximately half of the increase due to increased lead times on source finished goods and, to a slightly lesser extent, increased purchases of electronic components.
We are managing our inventory levels to support our growth, as well as insulate our production facilities from inconsistent supply availability.
We also invested $24 million or 1.3% of net sales and capital expenditures during the first six months of fiscal 2022.
Finally, we have continued to repurchase shares in the second quarter.
As a result, since May of 2020, we have bought back approximately 13% of our company shares at an average price of approximately $120 per share.
I would now like to spend a few minutes focusing on the remainder of the year.
As Neil stated, we expect the current environment to continue for the foreseeable future with strong demand, while access and cost of components will remain a challenge.
Our focus throughout will continue to be on growing sales and leveraging our operating expenses.
In relation to the recent instability in Europe, we have no direct sales exposure either to Russia or Ukraine.
However, the conflict does add to the existing supply chain pressures.
Additionally, we are experiencing increases in transportation costs, driven by expected increases in oil prices.
In the last 15 months, we have strategically introduced six price increases in addition to driving product and productivity improvements.
Before I hand you over to the operator, I want to leave you with our key takeaways.
We have continued to demonstrate strong sales growth and effective management of gross margins in a volatile cost environment.
We've leveraged our operating expenses.
And finally, we have continued to allocate capital effectively. | q1 adjusted earnings per share $2.85.
q1 earnings per share $2.46. | 0 |
Today's call will be led by Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Matt Garth.
And I'll also point out the Safe Harbor disclaimer on this slide.
Statements related to future performance by members of our team are subject to these limitations, cautionary remarks, and conditions.
We appreciate you joining today's call to discuss our first quarter 2021 results, and I hope you're all staying safe and healthy.
I'll take you through the sales and operating highlights of our strong start to the year and touch on current market trends.
I'll finish up the call today by outlining the progress we're making with a broad range of growth initiatives.
Last year, our teams throughout the world, worked hard to efficiently operate our facilities, to protect our employees, serve our customers, and simultaneously position us to capitalize on the recovery.
As a result of these actions and our continued focus on responding to this dynamic environment, we're well positioned to leverage the momentum from the end of the year to deliver a strong first quarter.
Before going through the quarter highlights, I wanted to share that we will be discussing our business results today in three operating segments rather than four.
I'll take you through this further when I speak about our growth highlights.
Our first quarter performance was highlighted by sales and operating growth in every segment.
Specifically, we drove solid geographic growth in our core product lines, increased volumes through capacity expansions and new PCC satellite start-ups, and improved sales from recently commercialized value-added products.
In addition, we continued with our proactive operational measures including pricing and productivity improvements and overhead cost control, all of which drove income and cash flow higher compared to last year.
Demand in many of our major end markets continued to trend upward.
Several of our markets recovered to pre-COVID levels.
These dynamics helped drive sales of $453 million, an increase of 5% sequentially and up 8% compared to last year.
Generated $59 million of operating income and earnings per share of $1.17, up 4% and a record first quarter earnings per share for our company.
In addition, cash from operations and free cash flow were up 68% and 142% respectively over last year.
As we discussed on our earnings call in February, we expected the demand conditions in our end markets would continue to strengthen through the first quarter and that's how conditions played out.
Consumer-oriented markets such as Pet Care, Fabric Care, and food and pharmaceutical remained robust through the first quarter, continuing our growth trajectory.
Automotive and residential construction markets remained strong.
Steel markets further improved from the fourth quarter with utilization rates reaching close to 80% in the US, and our paper end markets continue to rebound from a slow 2020.
Project oriented businesses including Environmental Products and Building Materials are recovering and indications point to continued improvement through the second quarter.
These mostly favorable end market conditions drove sales growth across the majority of our product lines.
Performance Materials, sales in our Household Personal Care and Specialty business increased 14% driven by our Global Pet Care platform, but also double-digit increases in other specialty applications that we've been investing in to enhance our technology and manufacturing capabilities, including Fabric Care, Personal Care and edible oil purification.
Metalcasting business performed well, as sales grew 32% driven by strong demand in both North America and Asia from foundries serving automotive, heavy truck, and agriculture markets.
In both regions, improved foundry conditions that we saw in the fourth quarter maintained that trajectory through the first.
Specifically, Metalcasting sales in Asia were up 52% over 2020 with much of this growth coming in China.
Penetration of our blended products has also accelerated in China, and sales increased 62% compared to last year.
In addition, we continue to extend our value proposition with customers beyond China.
Last quarter in India, which is this -- which is the second largest casting market globally, sales of our blended products were up 21% over 2020.
Within our Specialty Minerals segment, our Specialty PCC business had another strong quarter with sales up 17% over last year.
Our new capacity expansions are supporting increased customer demand for our food and pharmaceutical and high performance sealant products.
In addition, we benefited from exceptionally strong demand, higher than usual in a first quarter for our Ground Calcium Carbonate and Talc products that serve the automotive and residential construction markets.
Paper PCC sales increased 5% driven by improving end market conditions and the ramp up of new satellites.
In fact, the net of the mill closures over the past year, the new capacity additions that occurred in 2020, paper PCC volumes this quarter were slightly above the first quarter of 2019.
Finishing up our sales highlights, our refractory segment had a great quarter with sales increasing 7% over 2020 and margins remaining at 16.2%.
This was achieved despite lower laser equipment sales, commissioning of new orders continues to be difficult due to COVID travel restrictions.
We also had a solid operating quarter.
Our performance reflects our team's disciplined execution with managing costs, implementing pricing measures, and driving productivity improvements.
As a result, margins expanded across the majority of our businesses.
Strategically implemented price increases across our portfolio, these increases have fully offset the higher raw material, energy, and logistics costs we are beginning to see.
Our margins dipped slightly for the company as a whole this quarter, this was primarily due to higher corporate expenses.
We see margins above 14% in the second quarter, and have the potential to move higher toward the second half of the year with continued improvement across our businesses.
I will review our first quarter results, the performance of our segments, as well as our outlook for the second quarter.
Now let's begin by reviewing the first quarter results.
Overall sales in the first quarter were 5% higher sequentially and 8% higher than the prior year as the majority of our end markets remained strong and each of our segments grew sales versus the prior year, now that we combined the Energy Services segment into environmental products within the Performance Materials segment this quarter.
Operating income was $58.8 million or 1% higher than the prior year.
As Doug mentioned, operating margins improved across the majority of our businesses as shown in the margin bridge on the bottom right of this page.
However, a few discrete items impacted our overall margin in the quarter.
First, our Environmental Products and Building Materials businesses have yet to experience a meaningful recovery due to ongoing project delays and COVID related restrictions.
Lower contribution from these businesses had an unfavorable impact on our margin of approximately 80 basis points in the quarter.
Second, while our underlying corporate expenses were stable, we experienced higher than usual mark-to-market adjustments related to the change in stock price during the quarter.
This is a normal adjustment we make every quarter, and we are calling it out today because of the size of the variance, which was approximately $3.5 million year-over-year.
Adjusting for these impacts, the rest of MTI grew operating margin by 60 basis points over the prior year.
Continued pricing actions more than offset inflationary cost pressures on raw materials, energy, and logistics.
In addition, we continue to drive productivity with a 6% year-over-year improvement in the number of hours worked per ton.
Going forward, we expect operating margin to expand as our project oriented businesses recover and corporate expenses return to a more normal level.
Earnings per share of $1.17 was a record for our first quarter, and was 4% above prior year and 8% above the fourth quarter, excluding special items.
Our effective tax rate for the quarter was 18% and we expect our full year effective tax rate to be approximately 20%.
Now let's review the segments in more detail starting with Performance Materials.
First quarter sales for Performance Materials were $230.9 million, 5% higher sequentially and 9% higher than the prior year.
Metalcasting sales increased 6% sequentially and 32% versus the prior year as foundry demand remained strong in both North America and China.
Household, Personal Care, and Specialty product sales increased 7% sequentially and 14% versus the prior year on double-digit growth across several consumer-oriented product lines.
Building material sales grew 11% sequentially and were 18% lower than the prior year as project activity started to increase late in the first quarter.
Meanwhile, environmental products moved through a challenging quarter with sales down 4% sequentially and 29% versus the prior year.
Operating income for the segment was $29.8 million, 9% higher than the prior year.
Operating margin was 12.9% of sales, at the same level as the prior year.
Just as a note, these results include the consolidation of energy services into the segment.
Operating margin was impacted sequentially by seasonally higher energy and mining costs.
I'd like to take a moment to provide some insight on the strength of the margins in this business.
Excluding Environmental Products and Building Materials, which had a weaker quarter than last year, operating margins for the rest of this segment were above 15% in the quarter.
As our project oriented businesses recover, we expect overall segment margins to improve accordingly.
And looking to the second quarter, we expect continued strength in household and personal care with some leveling off from a strong start to the year.
Meanwhile, the Environmental Products and Building Materials product lines are seeing signs of recovery as more of the types of projects that we serve are getting under way.
Now overall for the segment, we expect a strong second quarter with sales at similar levels to the first quarter.
We also expect operating margin to improve on a sequential basis, primarily due to incremental contribution from our project oriented businesses, continued pricing actions, and continued productivity.
Now let's move to Specialty Minerals.
Specialty Mineral sales were $147.8 million in the first quarter, 6% higher sequentially and 8% higher than the prior year.
Paper PCC sales were 8% higher sequentially and 5% higher than the prior year, as paper mill operating rates continue to improve and all regions grew sales sequentially.
In addition, ramp ups continued for our three new Paper PCC satellite plants in China, India and the United States.
Specialty PCC sales increased 4% sequentially and 17% versus the prior year as automotive, construction, and consumer demand remains strong.
Process Mineral sales increased 5% sequentially and 10% versus the prior year on strength in residential construction and automotive markets.
Segment operating income was $21.1 million, 4% higher than the prior year.
Operating margin was 14.3% of sales, and was temporarily impacted by seasonally higher energy costs.
Looking ahead to the second quarter, we expect continued strength in specialty PCC and processed minerals.
Second quarter is typically a seasonally stronger quarter for these product lines as construction activity ramps up.
However, the seasonal dynamics may play out differently this year given the strong start we saw in the first quarter.
We expect Paper PCC demand to remain steady, and our new satellites will continue to ramp up.
We expect a temporary impact on volumes as North American paper makers take their typically scheduled maintenance outages in the second quarter.
Now overall for the segment, we expect second quarter sales to be similar sequentially, and we expect higher margin on more favorable operating conditions and continued pricing actions.
Now let's turn to the Refractories segment.
Refractory segment sales were $73.9 million in the first quarter, at same level as the fourth quarter, and 7% higher than the prior year, as continued improvement in steel mill utilization rates was offset by fewer laser measurement equipment sales compared to the fourth quarter.
Segment operating income was $12 million and represented 16.2% of sales compared to 15% in the fourth quarter and 16.2% in the prior year.
Mill utilization rates improved to 78% in North America and 72% in Europe in the first quarter, up from 75% and 70% respectively in the fourth quarter.
And looking ahead, we expect the second quarter to be similar from a market perspective.
Note that there are several customer furnace relines scheduled for the second quarter, and these relines [Phonetic] result in temporarily lower demand for refractory products.
In addition while our laser equipment sales are typically weighted to the second half of the year, we're also facing delays on laser equipment installations and servicing during the ongoing COVID restrictions.
And overall for the segment, we expect sales to be relatively flat on a sequential basis and operating margins to remain strong.
Now let's take a look at our cash flow and liquidity highlights.
First quarter cash from operations was $51 million versus $30 million in the prior year, and free cash flow was $33 million versus $14 million in the prior year.
We deployed $18 million of capital during the quarter to grow the business, develop our mines, and improve our operations.
We used a portion of free cash flow to repurchase $20 million of shares in the first quarter, and we have repurchased $37 million so far under our current $75 million program.
The company is in a solid financial position with over $650 million of liquidity and a net leverage ratio of 1.8 times EBITDA.
Our balance sheet strength provides us with significant flexibility for how we deploy capital to the most attractive opportunities.
Now let me summarize our outlook for the second quarter.
In Performance Materials, we expect continued strength across the segment with the recovery of our project oriented businesses, which will improve segment margins.
Specialty Minerals, we expect similar market conditions and typical North American paper mill maintenance outages.
Our new PCC satellites will continue to ramp up, including a new packaging satellite in Europe starting at the end of the first quarter -- second quarter, and our margin should also benefit from improved operating conditions and pricing.
In refractories, we expect market conditions to remain strong with temporarily lower refractory products volume due to the timing of scheduled customer furnace relines [Phonetic].
And overall for the company, we expect second quarter sales to be similar to the first quarter.
We see continued strength and recovery across our end markets and in particular our project oriented business should start to see meaningful increases in activity.
The only area of uncertainty is the potential impact of semiconductor shortages that may temporarily impact automotive and steel market end demand.
Now from an operating margin perspective, we expect to return to above 14% of sales as we continue to implement pricing actions, proactively manage inflationary cost increases, and drive productivity improvements.
We also expect another quarter of strong free cash flow.
In summary, we have the elements in place to deliver another strong performance in the second quarter.
With that, I'll pass it back over to Doug to discuss the progress on our growth strategy.
Before opening the call to Q&A, let's take a few minutes to highlight the progress we continue to make with our strategic growth initiatives.
As I touched on earlier, our portfolio of consumer products which represents approximately 25% of our total sales, remains a key part of our growth strategy, and we delivered double-digit sales increases in these core business.
We continue to see opportunities to organically grow them.
Geographic expansion of our core product lines is one of our growth strategies and Asia is a key region for that growth.
The first quarter sales in Asia increased 33% with all of our major countries contributing.
It was driven by broad base of businesses, new PCC capacity coming online at our sites in China and India, continued penetration of our green sand bond products, and an expanding customer base in Fabric Care, Pet Care, and edible oil purification.
Specific highlight in the quarter was our PCC growth where we signed a contract with buying paper for a 50,000 ton satellite in China, which should be operational in the second quarter of 2022.
200,000 tons of new production capacity that came online at the end of last year in China and India will further contribute to volume growth this year as they fully ramp up.
We're also on track to commission two additional satellites this year totaling over 70,000 tons, one for our packaging application in Europe and another for a standard PCC plant in India.
For the past several years, we've invested in developing new technologies for treating industrial waste water and other environmental water challenges.
Our FLUORO-SORB product that addresses PFAS contamination is one example of these newer technologies.
As I mentioned earlier, we realigned energy services into environmental products.
With this combination, we will accelerate the deployment of these technologies, as we bring together the technical knowledge and capabilities in our current Environmental Products business with the high flow rate processing expertise that we've built in Energy Services.
This new structure will improve collaboration and better align complementary technologies and capabilities to further drive growth.
New product development is an integral part of our growth strategy and we've taken significant steps to improve the speed of execution, increase the number of products commercialized, and enhance the impact of our latest solutions.
[Indecipherable] mention our new product pipeline, our total portfolio comprises over 300 products from early stage development to commercialization, representing around $800 million of revenue at full potential.
This is an increase of about 30% compared to where we were two years ago.
We continue to expand sales of our latest specialty PCC products which are supported by our capacity expansions.
Specific to the first quarter, we launched several new bentonite based formulations for construction drilling applications.
Acquisitions are also an important part of how we intend to grow and move MTI to a higher return, more balanced portfolio.
Continue to see a strong pipeline of minerals based opportunities that align with our strategic initiatives, and we have the balance sheet strength and flexibility to pursue them.
As always we'll maintain our disciplined approach to M&A.
To summarize our call today, the COVID pandemic has challenged our normal ways of working, and higher virus rates continue to affect several of our regions.
Our culture of connectivity and collaboration has enabled us to differentiate MTI with our customers, maintain our strong safety and operating culture.
We'll continue to build on these strengths during 2021.
Even though a few of our end markets are only now beginning to improve, we had a solid first quarter with strong momentum across the majority of our businesses.
With favorable demand trends in our markets, our new technology launches, capacity additions, and continued strong operating performance, we have the elements in place to go from one of our most challenging years to one of our strongest.
With that, let's open up the call to questions. | compname posts q1 earnings per share of $1.17.
compname reports first quarter 2021 earnings of $1.17 per share.
q1 sales rose 8 percent to $452.6 million.
q1 earnings per share $1.17. | 1 |
For a list of factors which could affect our future results, including our earnings estimates.
In addition, we will also be presenting certain non-GAAP financial measures.
Our third quarter reflected strong demand for our products and services, with order trends accelerating during the period.
The strength of our business was even more impressive considering the ongoing headwinds created by the COVID-19 pandemic, which continued to disrupt economic activity around the world.
We've been able to maintain cohesion throughout the EnerSys workforce despite a number of positive, symptomatic and close contact cases among our employee base.
Those cases can lead to disruption in daily production schedules as workers are sent home in order to comply with COVID-19 protocols.
EnerSys continues to emphasize social distancing, hygiene, the use of masks and reminding our employees to follow the same guidelines in their personal activities, which has helped to mitigate the impact compared to many companies, but we have not been immune.
Despite the ongoing challenges caused by COVID-19, the demand for EnerSys products was clear during the period as we reported strong third quarter fiscal '21 adjusted earnings of $1.27 per diluted share, which included a $0.10 benefit from the settlement of our claim related to the September 29 fire in our Richmond, Kentucky facility less $0.03 per share in foreign currency losses.
Energy Systems benefited from telecom driven 5G growth in the Americas and our motive power business saw marked revenue and earnings improvement over the second fiscal quarter.
Our specialty segment continued its positive momentum in our third quarter, bolstered by our growing transportation backlog.
I'd now like to provide a little more color on some of our key markets.
But before I begin, I would like to comment on how many of our customers across all of our lines of business have signaled increasing demand and alerted us to be ready.
There seems to be pent-up demand which should accelerate near-term growth.
Our largest segment, Energy Systems, has struggled in recent quarters from slow broadband orders.
The MSOs had focused on increasing node capacity for their work-from-home demand.
Those MSOs have now resumed strong orders for our products, which increased their networks power capacity.
Even more encouraging, MSO participation in recent wireless spectrum auctions and their enunciation of their intention to carry their 5G and 4G traffic on their own networks validates the broadband growth assumptions of our Alpha acquisition strategy.
Telecom 5G growth is also accelerating in the Americas, confirming their commitment to invest in their networks to increase capacity and reliability.
Our 5G small cell powering project collaboration with Corning is progressing even better than we had hoped.
In this quarter, we believe the network investment in 5G has, for the first time, surpassed the existing 4G network spend.
It is also encouraging to see data center markets improving.
In addition to our traditional businesses, renewable energy markets continue to expand with incredible opportunities for storage applications.
The new administration has clearly focused on this emerging market.
We plan to respond by updating our product offering using the same modular approach from our other lines of business.
We will share more specifics with you on how we will participate in renewable energy storage and EV charging in coming calls.
When you consider forklifts, we are currently the leader in charging electric vehicles globally, and this technology is easily transferred.
Lastly, we are beginning to see the positive impact of the global alignment of the Energy Systems organization as we leverage regional expertise and key account development.
Our motive power business showed considerable improvement in the period compared to the second quarter, delivering higher sequential revenue and operating earnings.
Our order rates have surpassed the pre-COVID levels of a year ago despite sporadic pandemic-related restrictions, particularly in EMEA.
The Hagen, Germany restructuring is ahead of schedule and forecasted to beat its budget.
Although those restructuring benefits have not yet impacted our earnings, they will grow in magnitude throughout calendar year 2021, reaching nearly a $20 million annual run rate by the end of fiscal year 2022.
Another exciting development is the launch of our NexSys iON lithium motive power batteries.
Several OEMs continue to accelerate their adoption of this chemistry, and our sales team is focusing efforts for NexSys iON products on the portions of the market with the most demanding duty cycles.
The third segment of our business, Specialty, maintained its positive momentum with another strong quarter, which was slowed only by the ongoing impact of COVID on our capacity ramp, thereby delaying our ability to meet surging demand.
Our transportation backlog continued to grow as we added a significant number of customers to the ODYSSEY channels.
We currently are working with nearly every major player in the aftermarket distribution channel, along with many key truck OEMs and fleet operators.
TPPL gained further traction in the quarter.
The high-speed line is up and running, and we are adding a second shift to our Springfield plant and bringing on additional oxide and pasting capacity.
We're also encouraged by several new awards in our aerospace and defense business.
Before wrapping up, I'd like to take a minute to talk about some exciting advancements we've made on the technology front.
We mentioned our lithium launch for motive power.
Our customers have begun to order our new NexSys iON products, and initial customer feedback is very positive.
We have also achieved our first OEM approval and continue to work with other material handling manufacturers.
The demand for fully integrated products has significantly increased for our Energy Systems group.
To ensure necessary product development keeps up with the market's pace of change, we are aggressively hiring engineers.
Our emphasis is on telecom, home and industrial energy storage.
Moreover, we are accelerating the development of high-voltage electric vehicle fast-charging stations using batteries to speed the process.
A considerable number of the building blocks have already been developed for our material handling program, allowing extension into these new markets with substantial growth potential.
Our ability to stay on the cutting-edge of new technology development, while continuing to leverage core lead acid products, will further enhance our competitive edge in the quarters and years ahead.
In conclusion, I continue to be humbled by our employees' ability deliver in the face of the ongoing global pandemic, quickly adapting to unforeseen challenges by remaining focused on delivering the products and services our customers have come to expect.
Our overall strategy remains unchanged: one, to accelerate higher-margin maintenance-free motive power sales with NexSys iON and NexSys PURE; two, to grow the portfolio of products in our Energy Systems business, particularly in telecom, with fully integrated DC power systems and small cell site powering solutions which will accelerate our growth from 5G; three, to increase transportation market share in our Specialty business; and finally, to reduce waste through the continued rollout of our EnerSys operating system.
As we continue to execute on each of these initiatives, the strength of the EnerSys platform and our position as the global leader in stored energy solutions will drive additional long-term value for our shareholders for years to come.
With that, I'll now ask Mike to provide further information on our third quarter results and fourth quarter guidance.
I am starting with slide eight.
Our third quarter net sales decreased 2% over the prior year to $751 million due to a 3% decrease from volume, net of a 1% increase from currency.
On a line of business basis, our third quarter net sales in the motive power were down 4% to $304 million, while Energy Systems net sales were down 2% at $337 million, while specialty increased 7% in the third quarter to $109 million.
Motive power suffered a 5% decline in volume due to the pandemic, net of a 1% increase in FX.
Energy Systems had a 4% decrease from volume, net of a 2% improvement from currency.
Specialty added 6% in volume improvements and 1% increase from currency.
There were no notable changes in pricing, and we had no impact from acquisitions.
On a geographical basis, net sales for the Americas were down 1% year-over-year to $499 million, with a 1-point decrease from currency.
EMEA was down 4% to $194 million on a 9% volume decline, net of a 5% improvement in currency, while Asia was flat at $58 million.
Please now refer to slide nine.
On a sequential basis, third quarter net sales were up 6% compared to the second quarter, driven by volume improvements.
On a line of business basis, Specialty increased 5%, with NorthStar continuing to contribute its capacity for transportation sales.
And motive power was up 15% as it rebounds from the pandemic, while Energy Systems was down 1%.
On a geographical basis, Americas was up 4%, EMEA was up 13% and Asia was up 4%.
Now a few comments about our adjusted consolidated earnings performance.
As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding the highlighted items.
Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.
On a year-over-year basis, adjusted consolidated operating earnings in the third quarter increased approximately $15 million to $78 million, with the operating margin up 210 basis points.
On a sequential basis, our third quarter operating earnings improved $12 million or 110 basis points to 10.4%.
We settled our claim for the Richmond fire, which was -- which resulted in a $6 million benefit in the quarter.
$4 million was a gain on the replacement of equipment reflected in operating expenses from the property policy, while $2 million was a final recovery on the business interruption policy and is credited to cost of sales.
Operating expenses when excluding highlighted items were at 14.8% of sales for the third quarter compared to $16.4 million in the prior year as we reduced our spending by $15 million year-over-year and by 100 basis points sequentially.
Excluded from operating expenses recorded on a GAAP basis in Q3, our pre-tax charges of $22 million, primarily related to $6 million in Alpha and NorthStar amortization and $12 million in restructuring charges for the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany.
Excluding those charges, our motive power business achieved operating earnings of 13.3% or 330 basis points higher than the 10% in the third quarter of last year, due primarily to the insurance claim recovery of $6 million described earlier.
On a sequential basis, motive power's third quarter OE also increased 420 basis points from the 9.2% posted in the second quarter, due primarily to sequential increases of nearly $5 million in recovery of the business interruption and other proceeds from the Richmond fire.
OE dollars for motive power increased nearly $9 million from the prior year despite lower volume due to its lower operating expenses and $6 million in insurance recovery, while OE increased $16 million from the prior quarter on higher volume and $5 million for more in insurance recovery.
The Richmond fire damage which has since been repaired or replaced and now a more capable, safer facility is in operation.
Please see our 10-Q for more specifics on cash received and the related accounting.
Meanwhile, Energy Systems operating earnings percentage of 7.4% was up from last year's 6.3%, but down from last quarter's 8.8%.
OE dollars increased $3 million from the prior year, primarily from lower operating expenses, but decreased $5 million from the prior quarter on lower volume and higher operating expenses.
Specialty operating earnings percentage of 11.9% was up from last year's 10.1% and up from last quarter's 11.4%.
OE dollars increased nearly $3 million from the prior year on higher volume and lower operating expenses while increasing $1 million from the prior quarter on higher volume.
Please move to slide 11.
As previously reflected on slide 10, our third quarter adjusted consolidated operating earnings of $78 million was an increase of $15 million or 23% from the prior year.
Our adjusted consolidated net earnings of $55 million was nearly $11 million higher than the prior year.
Improvements in the adjusted net earnings reflect the rise in operating earnings, net $3 million in foreign currency losses, primarily on unfavorable rate changes on intercompany borrowings.
Our adjusted effective tax rate of 17% for the third quarter was slightly higher than the prior year's rate of 16%, but in line with the prior quarter's rate of 17%.
Discrete tax items caused most of these variations.
Fiscal 2019's full year rate was 17%, while our fiscal 2020 rate was 18%, which is consistent with our current expectations for fiscal 2021.
EPS increased 22% to $1.27 on higher net earnings.
We expect our final quarter of fiscal 2021 to increase slightly -- the outstanding shares to it increased slightly from the third quarter as higher share prices increased dilution from employee stock programs.
As a reminder, we still have nearly $50 million of share buybacks authorized, but have no immediate plans to execute any repurchases with perhaps the exception of the modest annual repurchase made to offset employee stock plan dilution.
Our recently announced dividend remains unchanged.
We have also included our year-to-date results on slides 12 and 13 for your information, but I do not intend to cover these in detail.
Our balance sheet remains strong, and we are well-positioned for us to navigate the current economic environment.
We now have nearly $489 million of cash on hand, and our credit agreement leverage ratio is below 2.0 times, which allows over $600 million in committed additional borrowing capacity.
We expect our leverage ratio to remain below 2.0 times for the balance of fiscal 2021.
We generated over $218 million in free cash flow through three quarters of fiscal 2021.
Our Q3 free cash flow generation was very strong at $41 million despite the drag of rising working capital from increased revenue.
Capital expenditures year-to-date of $54 million were at our expectations.
Our capital expectation for fiscal 2021 of $75 million has expanded again slightly as the economic outlook improved.
Our major investment programs, those being: the lithium battery development; continued expansion of our TPPL capacity, including the NorthStar integration; the integration of our high-speed line and the transition in NorthStar products for European markets to our French factory are all progressing as planned.
Our high-speed line has completed its commissioning and is expanding to a second shift this month.
Even with these investments, we have also retained the agility to flex our manufacturing footprint as needed.
Our closure announced last November of our Hagan, Germany facility has progressed better than our expectations in terms of speed and cost.
So we believe we will begin enjoying about half of the expected $20 million per year of savings next fiscal year, with the full benefit thereafter.
We anticipate our gross profit rate to remain near 25% in Q4 of fiscal 2021 as lower utilization in some of our factories over the holidays and from enhanced COVID restrictions will impact our P&L in Q4.
We have initiated price increases in our fourth quarter to mitigate the rising costs of many of our non-led inputs, which should maintain our margins.
As David has described, we believe motive power markets are recovering, while our Energy Systems and Specialty markets continue to have bright prospects.
With some of the uncertainty from our election and the pandemic behind us, we currently feel we have enough visibility to provide guidance in the range of $1.25 to $1.31 in our fourth fiscal quarter. | qtrly adjusted earnings per share $1.27. | 1 |
pseg.com, and our 10-Q will be filed shortly.
We will discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with Generally Accepted Accounting Principles in the United States.
At the conclusion of their remarks, there will be time for your question.
PSEG reported non-GAAP operating earnings for the third quarter of 2020 of $0.96 per share versus $0.98 per share in last year's third quarter.
PSEG's GAAP results for the third quarter were $1.14 per share compared with $0.79 per share in the third quarter of 2019.
Our results for the third quarter bring non-GAAP operating earnings for the year-to-date to $2.78 per share, up 5.3% compared to the $2.64 per share in the first months of 2019.
This performance reflects the strong contribution from our regulated operations at PSE&G, cost controls at both the utility and PSEG Power, lower pension expense and the favorable settlement of tax audits I mentioned last quarter.
We delivered a solid quarter at both PSE&G and PSEG Power.
We are updating PSEG's non-GAAP operating earnings guidance for 2020 to a range of $3.35 to $3.50 per share, which removes $0.05 per share from the lower end of our original guidance range.
Last month, The New Jersey Board of Public Utilities -- I'll refer to them as the BPU -- approved the settlement of the energy efficiency component of our Clean Energy Future filed.
As you know, we proposed the comprehensive filing covering energy efficiency, energy cloud and electric vehicles and storage in October 2018, to help deliver on the goals of New Jersey's Clean Energy Act.
The BPU's landmark decision on energy efficiency will enable PSE&G to invest $1 billion over three years to help bring universal access to energy efficiency for all New Jersey customers.
These programs will lower customer bills, shrink their carbon footprint and give them greater control of their energy usage.
PSE&G's Clean Energy Future Energy Efficiency program will also establish a clean energy jobs training program, create over 3,200 direct jobs and enable everyone in New Jersey to benefit from the avoidance of 8 million metric tons of carbon emissions through 2050.
The $1 billion of remaining CEF programs we proposed to implement, which in the energy cloud or otherwise known as advanced metering infrastructure, to expand electric vehicle infrastructure and energy storage, are entering hearing stages later this year and we expect them to conclude in the first quarter of 2021.
Our service area experienced significantly warmer weather during the first half of the summer, which along with the continued reopening of the New Jersey economy, served to moderate the 7% load loss seen earlier in the year caused by the COVID-19 pandemic.
New Jersey has aggressively managed its positivity rates since the spring with some recent resurgence that continues a phased reopening of businesses, schools and activities that will determine the pace of economic recovery going forward.
Recognizing the extraordinary economic stress the pandemic has placed on many of our customers, PSE&G, in partnership with governor Murphy and the BPU, extended a non-safety related shut-off moratorium till March of 2021, for residential, electric and gas service.
The shut-off moratoriums for commercial and industrial customers will continue through November 15th.
PSE&G, as always, will work with customers on alternative payment plans, as needed, to maintain essential services and inform customers about assistance programs that are available, such as LIHEAP.
PSEG continues to provide the latest health and safety information and protocols to all of its employees.
And we recently launched the new mobile app that includes a health questionnaire for employees and contractors who physically report to a PSEG location.
Many of our employees continue to effectively work remotely and our responsible reentry planning is ongoing.
Our cross-functional executive crisis management team continues to monitor business impacts of COVID-19 going into these critical winter months.
In early August, tropical storm, Isaias, wreaked havoc across the New York, New Jersey area with powerful winds and heavy rains; and the fast-moving storm did left approximately 1 million of our customers in New Jersey and Long Island without power.
This was by far the most damaging storm we had experienced since superstorm Sandy in 2012.
And its impact was made worse on several fronts by COVID-19 restrictions.
PSE&G and PSEG Long Island worked around the clock alongside nearly 3,000 mutual aid personnel in New Jersey and over 5,000 on Long Island to restore service.
In New Jersey, we restored 90% of our customers within 72 hours.
The storm was mostly a wind event which caused significant physical damage to poles and wires.
PSE&Gs transmission system did not experience any outages during the storm event, underscoring the reliability and resiliency benefits of our transmission investment programs.
The PSEG Long Island experience was more challenging.
We were able to restore 80% of customers who lost service within 72 hours.
However, our customer communications and restoration time estimates were simply not up to our standards, and we are fixing that.
We have spent the past six years making dramatic improvements to customer service on Long Island.
And JD Power recently recognized PSEG Long Island as the most improved utility nationally in customer service metrics over this period.
Our commitment to continuous improvement remains in place and lessons learned from tropical storm Isaias will be leveraged to further improve customer satisfaction.
On the regulatory front, we are continuing confidential settlement discussions with the BPU and other parties concerning the return on equity related to PSE&Gs Federal Energy Regulatory Commissions formula rate for transmission.
At the state level, the energy efficiency decision authorizing a $1 billion investment over three years represents an annual run rate of about $350 million, which is nearly a tenfold increase from our previous annual energy efficiency spend.
These investments will receive recovery of and on capital through a clause mechanism at the current authorized return-on-equity of 9.6% and be amortized over 10 years with no incentives or penalties applied during the first five years from the start of the program.
The 10-year energy efficiency programs approved by the BPU will help New Jersey achieve its preliminary energy savings target of 2.15% for electricity and 1.1% for gas within five years.
In addition, as part of the energy efficiency settlement, the BPU approved a Conservation Incentive program to provide a lost revenue recovery mechanism for sales variations due to energy efficiency, weather and other variables.
This Conservation Incentive program will begin in June 2021 for electric revenues and in October 2021 for gas revenues.
On the Power side, current market conditions continue to be influenced by lower loads due to COVID-19, low natural gas prices and ample generation.
These persistent conditions kept PJM day ahead around the clock prices in the mid-teens to low $20 per megawatt hour for most days during the third quarter, despite a few weather-driven spikes above $30 per megawatt hour over the summer.
Persistently low PJM day ahead power prices made the economic pressures on our baseload carbon-free nuclear units even more challenging.
PSEG Power recently submitted its application to extend the Zero Emission Certificates program -- I'll refer to that as ZEC -- into 2025, as specified in the 2018 ZEC law.
A BPU final decision is expected in April of 2021.
Our application filed on October 1 demonstrates the financial need for the zero-carbon attribute payment has increased in the last two years, as energy prices has further declined and continue to pressure the economic viability of our New Jersey nuclear units.
The addition of the next jury hearings for the second ZEC proceeding will improve transparency and we believe our application supports the need for more than a $10 per megawatt attribute repayment for the Salem and Hope Creek units.
A new Brattle report estimates that preservation of our New Jersey nuclear units through an extension of the $10 per megawatt hour attribute payment saves customers approximately $175 million per year in lower energy costs over the next 10 years.
The New Jersey Department of Environmental Protection also weighed in through a recently issued report evaluating the states progress in reducing its greenhouse gas emission with a goal of 80% by the year 2050.
One of the recommendations in the DEPs 80/50 report, is to retain existing carbon-free resources, including the Stage 3 nuclear power plant.
And that's a direct quote.
And they called it a key path to reducing emissions from the electric power generation sector.
As our state and region move increasingly toward carbon-free energy, preserving existing nuclear generation, currently the reliability backbone of New Jersey's zero-carbon energy mix, will grow in importance.
On the ESG front, I'm pleased to announce that we have incorporated equity into our diversity and inclusion programs, expanding our commitments for new and ongoing initiatives to ensure that all employees have access to the benefits and opportunities the company offers, and promoting equity in our lower income communities.
And regarding governance, we continue to garner first tier scores for our contributions disclosure and transparency, as cited in the 2020 update of the Corporate Political Disclosure and Accountability Index, also known as the CPA-Zicklin Index, with a score of 85.7, which exceeds both the S&P 500 company average as well as the Utility average score of 77.2.
Turning to earnings guidance.
As I mentioned, we are narrowing PSEG's non-GAAP operating earnings guidance for full year 2020 by removing $0.05 per share off the lower end.
This updates our guidance range to $3.35 to $3.50 per share, based on solid results through the first nine months of the year and our ongoing confidence that we can effectively manage costs at both businesses, continue executing our PSE&Gs investment programs and provide New Jersey with safe, reliable sources of efficient and zero-carbon sources of electricity.
We continue to expect regulated operations to contribute nearly 80% of total non-GAAP operating earnings for the year, reflecting the benefits of PSE&Gs ongoing investments in New Jersey's energy infrastructure.
We also remain on-track to execute on the PSEG five-year $13 billion to $15.7 billion capital plan without the need to issue new equity, and our liquidity position at September 30 stood at nearly $5 billion.
PSEG continues its due diligence and negotiations with Orsted, in preparation of making a final recommendation to our Board of Directors on whether to invest up to a 25% equity stake in the Ocean Wind project.
We expect to announce our decision later this year.
Before moving to the financial review, I'd also like to mention that since our late July announcement that PSEG is exploring strategic alternatives for Power's non-nuclear generating fleet, we have received positive feedback from investors and regulators.
Our intent to accelerate the transformation of PSEG into a primarily regulated electric and gas utility and contract to zero-carbon generation is proceeding as planned.
We are still in the early stages of this process and we expect to begin marketing a potential transaction in one or a series of steps by the end of this year.
If successful, we should be able to complete the process during 2021.
As Ralph said, PSEG reported non-GAAP operating earnings for the third quarter of 2020 of $0.96 per share versus $0.98 per share in last year's third quarter.
We provided you with information on Slide 9 regarding contribution to non-GAAP operating earnings by business for the quarter.
Slide 10 contains a waterfall chart that takes you through the net changes quarter-over-quarter in non-GAAP operating earnings by major business.
And I will now review each company in more detail, starting with PSE&G.
PSE&G reported net income of $0.61 per share for the third quarter of 2020 compared with net income of $0.68 per share for the third quarter of 2019, as shown on Slide 14.
Utilities third quarter results reflected ongoing growth from our investment programs, offset by certain items, largely reflecting tax adjustments that are timing in nature.
For the year-to-date period, PSE&G results are on-track to achieve our full year guidance driven by revenue growth from ongoing capital investment programs, low pension expense and cost control.
Investment in transmission added $0.04 per share third quarter net income.
Electric margin was a $0.01 per share favorable compared to the year-earlier quarter, driven by higher weather normalized residential volumes, mostly offset by lower commercial and industrial demand.
Summer 2020 weather was a $0.01 per share ahead of weather experienced in the third quarter of 2019.
O&M expense was $0.03 unfavorable versus the third quarter of 2019, primarily reflecting our internal labor costs on tropical storm Isaias and timing of certain maintenance activities, partly offset by the reversal of certain COVID-19-related cost recognized in prior quarters.
In July, the BPU authorized PSE&G to defer certain expenses incurred because of the COVID-19 pandemic.
To reflect that order, PSE&G deferred certain COVID-19-related O&M and gas bad debt expense previously recorded and established a corresponding regulatory asset of approximately $0.05 per share for future recovery.
Obviously, offsetting this timing item, PSE&G reversed a $0.04 accrual of revenue under the weather normalization costs for collection of lower gas margins resulting from the warmer-than-normal winter earlier in the year due to recovery limitations under that quarters earnings test.
Distribution-related depreciation lowered net income by a $0.01 per share and non-operating pension expense was a $0.01 per share favorable compared with last year's third quarter.
Flow through taxes and other items lowered net income by $0.07 per share compared to the third quarter of 2019, driven largely by timing of taxes and taxes related to bad debt expense.
The majority of these tax items are expected to reverse about half in the fourth quarter, with taxes related to bad debts reversing in the future based upon the timing of actual write-offs.
Summer weather in the third quarter is measured by the Temperature-Humidity Index, was nearly 18% warmer than normal and 7% warmer than the third quarter of 2019.
Weather normalized electric sales for the quarter declined by approximately 1% versus last year, again reflecting the increases that we've seen in residential volumes, which only partially offsets lower commercial industrial sales.
Residential weather normalized sales were up 7% due to the COVID-19 work-from-home impact.
However, C&I sales declined by approximately 6% with many parts of the New Jersey economy not yet fully reopened.
On a net margin basis, however, residential margins -- which are driven by volumes, are 5% year-to-date, weather normalized -- have offset the margin impact of lower C&I demands.
PSE&Gs capital program remains on schedule.
PSE&G invested approximately $700 million in the third quarter and $1.9 billion through September 30th, as part of its 2020 capital investment program of approximately $2.7 billion in infrastructure upgrades to its transmission and distribution facilities to maintain reliability, increase resiliency and replace aging energy infrastructure.
The Clean Energy Future Energy Efficiency Investment will begin later this year and ramp up to approximately $125 million in 2021 before reaching a full annual run rate of about $350 million in 2022.
We continue to forecast that over 90% of PSEGs planned capital investment will be directed to the utility over the 2020 to 2024 timeframe.
Earlier this month, PSE&G filed its annual transmission formula rate update with FERC to reflect, among other updates, net plant additions.
PJM cost reallocations will more than offset the higher revenue requirements of approximately $119 million and result in a net reduction in costs to PSE&G customers when implemented in January of 2021.
PSE&Gs forecast of net income for the full year has been updated to $1,325 million to $1,355 million from $1,310 million to $1,370 million.
Now, move on to Power.
PSEG Power reported non-GAAP operating earnings for the third quarter of $0.33 per share, and non-GAAP adjusted EBITDA of $349 million.
This compares to non-GAAP operating earnings of $0.29 per share and non-GAAP adjusted EBITDA of $322 million for the third quarter of 2019.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization expenses.
And we've also provided you with more detail on generation for the quarter and for year-to-date 2020 on Slides 21 and 22.
PSEG Power's third quarter non-GAAP operating earnings were positively affected by several items that have improved results by $0.04 per share compared to the year ago quarter.
The scheduled rise in PJM's capacity revenue on June 1, increased non-GAAP operating earnings comparison by $0.03 per share compared with the third quarter of 2019.
Reduced generation volumes lowered results by $0.02 per share versus the third quarter of '19, reflecting the sale of the Keystone and Conemaugh coal units last year, as well as some lower market demand.
Recontracting and market impacts reduced results by $0.02 per share versus the year ago quarter.
And gas operations were $0.02 per share higher.
Lower O&M expense was $0.03 per share favorable compared to last year's third quarter, reflecting lower fossil maintenance costs, including the absence of a major outage at Lindon that occurred in the third quarter of 2019.
Lower interest and depreciation expense combined to add a $0.01 per share versus the year ago quarter.
And also during the quarter, New Jersey enacted an increase in the corporate surtax to 2.5% as part of the fiscal year 2021 budget, which lowered comparisons of $0.01 per share for the third quarter of 2019.
Gross margin for the third quarter was $33 per megawatt hour, an improvement of $2 per megawatt hour over the third quarter of 2019, nearly reflecting the scheduled increase in capacity prices with the new energy year that began June 1st.
Power prices and natural gas prices stayed low through the summer as reduced commercial activity across PJM, New York and Maryland experienced lower loads and countered most of the weather-related demand surge.
Turning to Power's operations.
Total generating output declined 9% to 14.9 terawatt hours for the third quarter, reflecting the sale of Keystone and Conemaugh.
PSE&G Power's combined cycle fleet produced 6.7 terawatt hours of output, down 7%, reflecting lower market demand driven by ongoing COVID-19-related impacts on economic activity in the state.
The nuclear fleet operated at an average capacity factor of 95.9% -- I'm sorry, 95.7% for the quarter, producing 8.2 terawatt hours, up 5% over the third quarter of '19, and represent 55% of total generation.
PSE&G Power continues to forecast total output of 2020 of 50 to 52 terawatt hours.
For the remainder of 2020, Power has hedged approximately 95% to 100% of production at an average price of $36 per megawatt hour.
For 2021, Power has hedged 75% to 80% of forecast production of 48 to 50 terawatt hours, at an average price of $35 per megawatt hours.
And Power is also forecasting output for 2022 of 48 to 50 terawatt hours, and approximately 35% to 40% of Power's output in 2022 is hedged at an average price of $34 per megawatt hour.
We are updating the forecast of both Power's non-GAAP operating earnings for 2020 to a range of $385 million to $430 million from $345 million to $435 million, and estimate of non-GAAP operating EBITDA to a range of $980 million to a $1,045 million from $950 million to $1,050 million.
I'll briefly address operating results from Enterprise and other.
We reported net income of $8 million or $0.02 per share for the third quarter of 2020 compared to net income of $6 million or $0.01 per share in the third quarter of 2019.
Net income for the quarter reflects ongoing contributions from PSEG Long Island and lower taxes that were partially offset by a small loss on the sale of the Powerton and Joliet investments at Energy Holdings.
And the forecast for PSEG Enterprise and other for 2020 has been updated to a net loss of $10 million from a net loss of $5 million.
PSEG ended the third quarter with over $4.9 billion of available liquidity, including cash on hand of about $966 million and debt representing 52% of our consolidated capital.
In August, PSEG issued $550 million five-year senior notes at 80 basis points and $550 million 10-year senior notes at 1.6%, and retired $500 million of the 364-day term loan agreements issued in the spring.
PSEG has also offered $700 million of floating rate term loans that will mature in November 2020.
Also, in August, PSE&G issued $375 million of 30-year secured medium term notes at a coupon rate of 2.05% and retired $250 million of MTN's at maturity.
Following PSEG's announcement that it would explore strategic alternatives for Power's non-nuclear fleet, S&P lowered PSEG Power's credit ratings to BBB with a stable outlook from BBB plus with a stable outlook.
Turning its view that PSEG Power was no longer viewed as core to PSEG.
S&P's rationale reflects family rating methodology that had previously provided a one notch uplift to Power due to that core designation.
And Moody's also published updated issuer comments following the announcement and left Power's credit ratings unchanged at Baa1 with a stable outlook.
Power's debt as a percentage of capital declined to 28% at September 30th, and we still expect to fully fund PSEG's five-year $13 billion to $15.7 billion capital investment program over the 2020 to 2024 period without the need to issue new equity.
And as Ralph mentioned, we've narrowed our non-GAAP operating earnings guidance for the full year by removing $0.05 per share from the lower end of the original guidance, and updated range to $3.35 per share to $3.50 per share.
That concludes my comments.
And Sylvia, we are now ready to answer questions. | raises fy non-gaap operating earnings per share view to $3.40 to $3.55.
net loss for q2 of 2021 of $177 million, or $0.35 per share.
non-gaap operating earnings for q2 of 2021 were $356 million, or $0.70 per share.
raises bottom end of full year 2021 non-gaap operating earnings guidance range to $3.40 - $3.55 per share. | 0 |
On the call today are Blake Krueger, our Chairman and Chief Executive Officer; Brendan Hoffman, our President; and Mike Stornant, our Senior Vice President and Chief Financial Officer.
These disclosures were reconciled in attached tables within the body of the release.
I hope everyone on the call is safe and well.
E-commerce led the way, growing 84% during the quarter as our global digital strategy continued to deliver results.
Our two largest brands exceeded expectations with Merrell up nearly 25% year-over-year, and Saucony up nearly 60% in the quarter.
Both brands easily beat their 2019 Q1 revenue levels with Saucony up over 75% versus 2019.
The Company's international business was up 40% with every region growing over 35%.
Our DTC channels are outpacing the market and our wholesale order book is very healthy.
As we look to the rest of the year, demand for our brands is very strong and we've raised our full year guidance on the strength of this demand and robust outlook.
For today's call, I'll start by providing some additional insight on our Q1 performance and then Mike Stornant will detail our financial results, and update you on our financial outlook for the year.
Finally, Brendan Hoffman will share the latest on our strategic growth priorities, before I conclude.
In the first quarter, the Wolverine Michigan group revenue was up 20.1% on a reported basis and up 18.2% on a constant currency basis.
The Wolverine Boston group revenue was up 10.3% on a reported basis and up 8.2% on a constant currency basis.
Let me now focus on key brand performance starting with Saucony.
Saucony grew revenue nearly 60% and expanded operating margin nearly 800 basis points in Q1, a great start to what we anticipate will be a spectacular year for the brand.
All regions delivered strong growth, led by North America and EMEA [Phonetic].
Saucony.com revenue increased by over 150% driven by compelling digital storytelling and impactful product launches.
Product design and innovation remain at the core of Saucony's growth momentum, delivering both superior technical product in trend-right lifestyle collections to the global marketplace.
The brand's road running category nearly doubled in Q1 with the launch of new models for several of its biggest product franchises.
The new Guide 14 and Kinvara 12 drove significant growth with the Guide more than doubling year-over-year.
New colors and collection packs also drove excellent growth and freshness for the innovative Endorphin series.
Saucony also grew its trail running business with the launch of the Peregrine 11, which received the coveted Runner's World Editors' Choice Award.
New product launches that are fueling momentum in the brand's technical product category with existing runners and with the many new enthusiasts to the sport.
Saucony Originals, the brand's heritage lifestyle sneaker business also grew double-digits in Q1.
The brand continues to leverage its Italian product design and marketing hubs to build on its pinnacle positioning and success in Europe with elevated trend right product.
The new Jazz Court, a sneaker made with 100% natural materials and zero plastic launched at the end of Q1, driving substantial buzz in social media and immediately becoming the brand's top-selling product on Saucony.com.
Looking ahead, Saucony will continue its steady introduction of new product launches.
Both the new Ride 14 and Freedom 4 launched within the last few weeks and are off to a fast start.
Over the next several months, the brand will also roll out the next generation of all three models of the Endorphin collection, the Pro, the Speed and the Shift which has quickly become one of its largest franchises.
The brand will also introduce the new Triumph 19, a follow up to the award winning predecessor.
The momentum in the Saucony business continues to accelerate across both its performance and lifestyle offering.
Revenue grew nearly 25% in the quarter.
All regions delivered increases led by especially strong performance in EMEA.
North America grew double-digits, including DTC with Merrell.com up approximately 135% and Merrell stores comping up 30%.
Merrell kicked off its Future 40 campaign at the start of the quarter, celebrating the brand's 40th anniversary and amplifying its inclusive commitment to sharing the power of the outdoors with everyone.
The brand announced a significant partnership with Big Brothers Big Sisters of America aiming to provide greater accessibility to the outdoors for nearly 200,000 youth.
Merrell continues to focus on cultivating its well-established product franchises, as well as delivering innovation across new product introductions.
In Q1, performance footwear grew by nearly 30% as the brand continued to advance its vision of faster and lighter footwear for the trail.
Building on the unmatched success of the world's number one hiker, the Moab, Merrell launched the all-new Moab speed and Moab flight collections, quickly exceeding sell through expectations, including selling out on Merrell.com and helping to drive very strong double-digit growth for the Moab franchise overall.
The Antora 2 and Nova 2 trail runners also continued to perform exceptionally well in the quarter.
Merrell has a steady stream of new performance offerings scheduled for the remainder of the year.
Merrell's lifestyle business grew approximately 20% in the quarter driven by the growth of the classic Jungle Moc and newer hydro Moc which more than tripled year-over-year.
The brand plans to continue to leverage the easy on-off trend throughout 2021 with new products in the Hydro Moc, Hut Moc and Jungle Moc franchises.
Merrell is well positioned with both its outdoor performance and lifestyle businesses, and we expect the brand's growth will continue to accelerate going forward.
Our work business, which represented almost 20% of our revenue in Q1 also delivered significant growth led by Wolverine, up nearly 30% and Cat footwear up over 30% with strong contributions from a couple of our smaller brands.
We are the market share leader in the U.S. work boot category which is currently trending with consumers and it's been an important consistent performer for the Company over time.
We expect growth in this category to accelerate in Q2.
Turning now to Sperry.
Revenue was down approximately 10% in Q1, a continued sequential improvement compared to prior quarters.
Despite more than $10 million of expected revenue which slid into Q2.
During the quarter, Sperry.com was up 40% and Sperry stores grew more than 20%.
The brand's full price business remains very healthy with gross margin expanding nearly 500 basis points in Q1.
Looking ahead, Sperry is back on the growth path for the remainder of the year.
Sperry possesses unique elasticity across genders, product categories and price points.
Its new float collection, a fun and affordable injected version of the boat shoe for younger consumers launched at the end of the quarter and quickly became Sperry.com's best selling product introduction in several years.
The brand expects to build on the success of the float throughout the year with seasonal drops, including the cozy float collection this fall.
Sperry also plans to capitalize on the easy on-off trend with the launch of the new Moc Sider collection later this summer and to drive energy through several product capsules, leveraging fashion, entertainment and pop culture icon, including collaborations with John Legend, Rebecca Minkoff, and the Netflix hit series, Outer Banks, Good Humor Popsicles Ice-cream and Rowing Blazers.
Before Brendan and I share some additional insight regarding our strategic growth priorities, I'm going to hand it off to Mike to review the first quarter financial results in more detail.
Let me start by providing additional detail on the Company's first quarter performance, and then some insight on our improved outlook for 2021.
First quarter revenue of approximately $511 million represents growth of 16% compared to last year.
As Blake pointed out, most elements of our global growth agenda delivered excellent year-over-year growth on the strength of expanding digital platforms and innovative product offerings.
This strong growth performance was achieved despite a meaningful shift of customer shipments into the second quarter.
Adjusted gross margin improved 290 basis points versus the prior year to 44.3%, due to our continued e-commerce expansion and favorable wholesale product mix.
Adjusted selling, general and administrative expenses of $174.4 million in the quarter were about $23 million more than last year, primarily due to the higher mix of DTC revenue, $8 million of additional investment in digital e-commerce marketing and more normalized incentive compensation costs.
Q1 adjusted operating margin was 10.2%, an improvement of 330 basis points over last year, as a result of healthy operating leverage.
Net interest expense was up $1.9 million and the effective tax rate was 16%.
Adjusted diluted earnings per share were $0.40 compared to $0.28 in the prior year.
Reported diluted earnings per share were $0.45 versus $0.16 last year, and reflect a partial settlement of certain insurance claims related to our ongoing legacy litigation, offset by a legal defense costs and specific COVID related costs.
Let me now shift to the balance sheet.
At the end of the quarter, inventory was down approximately 21% year-over-year.
Our global sourcing team continues to adjust to the supply chain headwinds, impacting our industry.
Our inventory position has improved nicely in the second quarter allowing us to fill nearly all of the orders that slipped from Q1 into Q2.
In Q1, we generated $26.3 million of cash flow from operating activities.
The Company finished the quarter with $506 million less debt compared to the prior year and total liquidity of approximately $1.2 billion, including $365 million of cash on hand and nearly $800 million of revolver capacity.
Our bank defined leverage ratio continued to improve, ending the quarter at a low 1.5 times.
I will now provide details on our improved outlook for 2021.
As we have shared, the trends in our business remained very encouraging, with revenue assumptions improving since we offered our annual guidance in February.
Our wholesale order book remains strong.
Our D2C business is performing well.
International regions have returned to strong growth and our inventory position continues to improve.
All of this provides us with a heightened level of confidence as we manage the business and invest in future growth.
As a result the Company now expects fiscal 2021 revenue in the range of $2.24 billion to $2.30 billion.
Growth of 25% to 28% compared to the prior year.
At the high end of the range, this is a raise of $50 million from our original outlook and nicely exceeds 2019 revenue.
We now expect reported diluted earnings per share in the range of $1.70 to $1.85 and adjusted diluted earnings per share in the range of $1.95 to $2.10.
In the face of unpredictable near term supply chain delays, the Company will continue to invest in air freight to ensure our ability to service the very strong demand we are seeing in the business.
These COVID-19 related air freight costs above normal levels are included in our updated guidance and will be adjusted from our reported results for the remainder of the year.
The Company is in an enviable position to invest in meaningful growth for 2021 and to continue to drive momentum in our brands.
With that, I'm going to hand it over to Brendan to share additional insight on our strategic growth drivers.
As we emerge from the pandemic, the power and relevance of our brands is evident as we execute our global growth agenda across the portfolio.
With roughly two-thirds of our business in running, outdoor and work, our brands are well positioned in the lifestyle and performance-oriented product categories favored by consumers and macro trends.
In addition to the unique positioning of our brand portfolio, our global growth agenda is driving strong momentum through three key pillars.
First, the brand's new product and marketing stories are resonating well with consumers including Sperry's Float, Merrell's Moab Speed and Moab Flight and Saucony's Guide 14, new Endorphin collections and several other new launches.
Our brands are focused on developing big, innovative and impactful product collections based on consumer insights, trend intel [Phonetic] and testing.
And recent investments in our advanced concepts and innovation Center of Excellence are proving invaluable.
Second, our ongoing investments in digital capabilities continues to fuel e-commerce growth, which is exceeding our expectations at this early stage in the year as we track toward our bold revenue goal of $500 million through our brands.com in 2021.
In Q1, we leveraged increased digital marketing investments to drive more traffic, richer digital content and storytelling to engage consumers, better merchandising to optimize conversion and additional testing and learning to improve site user experiences.
These assets and investments are also helping drive the online business of our global distribution partners and wholesale customers.
In the coming months, we anticipate integrating and launching several new innovations and technologies including a Merrell mobile app.
We are excited about the substantial runway that remains for our digital business.
Finally, our international business has recovered quickly from last year's shutdown with every region delivering very strong Q1 growth.
As Blake mentioned, our Saucony Italy business and its product design and marketing hub are helping drive upper tier distribution for our fastest growing brands.
Overall, EMEA continues to outperform and the investments in our Merrell and Saucony JV targeting a significant opportunity for our two biggest brands are beginning to pay dividends.
Our brands are well aligned with today's marketplace and consumer trends and our global growth agenda is fueling our biggest and most profitable growth opportunities.
I could not be more excited about 2021 and the future beyond.
Our strong start to the year is reflective of our intense focus on the consumer and our continued investments in talent, product design and innovation, digital and consumer research and insights.
The Company drove meaningful growth in Q1, despite the impact from short-term industry logistic headwinds and we are increasingly optimistic about the year ahead.
Vaccination rollouts appeared to be tracking well, consumer confidence continues to improve and our demand outlook remains very strong.
Our DTC business is performing well and our wholesale order book continues to provide good visibility to accelerated growth for the year ahead.
We are clear on our strategic priorities and enthused about the opportunities in front of us.
The Company's strong position is a testament to our team's tremendous vigilance, focus and hard work over the last 15 months.
Throughout this period, we focused on managing our brands for the post COVID world and continued to invest. | wolverine worldwide raises full-year outlook.
sees fy adjusted earnings per share $1.95 to $2.10.
sees fy earnings per share $1.70 to $1.85.
q1 adjusted earnings per share $0.40.
q1 earnings per share $0.45.
sees fy revenue up 25 to 28 percent.
sees fy revenue $2.24 billion to $2.3 billion. | 1 |
Erik Gershwind, our chief executive officer; and Kristen Actis-Grande, our chief financial officer, are both on the call with me.
As on our last call, we are all remote, so bear with us if we encounter any technical difficulties.
These risk factors include our comments on the potential impact of COVID-19.
I'll begin by wishing each of you a happy, a healthy, and especially a safe new year.
I'll then review first-quarter results and take a deeper dive into our growth initiatives.
From there, Kristen will review the financials in more detail and provide color on our structural cost program.
As we enter the middle of fiscal 2021, momentum on our initiative is building.
This is evidenced in part by improving numbers.
More importantly, by progress against our key initiatives and by the increasing pace with which we're operating the business.
As a reminder, several years ago, we decided to reposition MSC from a spot-buy a supplier to a mission-critical partner.
We capture this in our new brand promise built to make you better.
And we did so in order to secure the next decade-plus of MSC's success and to deepen the mode around our business.
Since that time, we have recreated MSC's value proposition, remodeled our supply chain with an elevated presence on the plant floor, reshaped MSC's sales force, built new platforms for growth such as CCSG, and we've accelerated the pace of innovation with advancements like MSC MillMax.
We've built new digital capabilities like e-commerce to improve customer retention and loyalty and a new pricing function to improve price execution and realization.
And finally, we've taken steps to create a more agile culture in order to drive change faster.
On our last call, we outlined mission critical or our pathway to translate these changes into improved performance.
We share two three-year targets: and those were accelerated market share capture, and improving ROIC.
We shared five growth levers that will deliver at least 400 basis points of outgrowth above IP by our fiscal 2023.
We also shared a structural cost initiative that we yield at least 200 basis points in operating expense to sales ratio improvements by fiscal 2023 powering ROIC back into the high teens during that time.
While we're encouraged by progress, we have our sights set high and we're just getting started.
We're making inroads on the five growth levers and we're moving aggressively on the structural cost front to achieve our one-year and three-year targets with a robust project pipeline and a steady drumbeat of changes being implemented across the company.
Looking outside of our company, all of this is happening against the backdrop that remains challenging but is showing some positive indicators.
The good news on the vaccine front and the recently passed stimulus package will likely improve the outlook over the coming quarters.
I'll now turn to our fiscal first-quarter financial results which you can see on Slide 4.
Overall sales were down 6.3%, and gross margin was down 30 basis points versus the prior-year period.
Our operating margin on a GAAP basis was 7% and was significantly influenced by a nonrecurring asset impairment charge which I'll describe in greater detail shortly.
As you can see on Slide 5, excluding this impairment charge and adjustments related to severance and cost associated with mission critical, our adjusted operating margin was 11%, down 30 basis points from the prior year despite lower sales and supported by mission critical.
All of this resulted in earnings per share of $0.69 for the quarter, or $1.10 on an adjusted basis.
We're seeing continued sequential improvement in our sales levels.
Most notably, our nonsafety and nonjanitorial product lines improved through the quarter and declined low double digits.
Tales of safety and janitorial products anchored by our PPE program continued growing at over 20% for the quarter.
The improving trends extended into December with total company sales growth estimated at 2.4%.
While aided by some large PPE orders, December is nonetheless encouraging as the rest of the business excluding safety and janitorial was down in the low single digits year over year.
Looking at our performance by customer type, government sales continue to grow significantly year over year due to the surge in large safety and janitorial orders.
National accounts declined in the low teens while our core customers declined low double digits, and CCSG was down mid-single digits.
As you can see on Slide 6, industrial production remained in the negative single digits range but did improve over the prior quarter.
Most manufacturing end markets behaved consistent with this trend.
Although metalworking-centric end markets did continue to lag the broader IP index.
More importantly, we have seen the GAAP between IP in our growth rate begin to compress as expected.
We plan to build on that momentum and as a reminder, we target exiting fiscal 2021 with at least the 200-basis-point positive GAAP above IP for our fourth quarter.
I'll now turn to our growth initiatives.
On the last call, I outlined five levers that will drive our improved growth over the next three years.
And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets.
Today I'll discuss and focus on a couple of them.
We're investing heavily in our core business in order to widen our lead.
One way we do so is by capturing new customers from local distributors who are under tremendous pressure in the current environment.
We track our funnel of opportunities and win rate by market, and both are progressing according to plan.
We expect that price to progress to build as the locals come under more and more pressure with each passing month.
MSC MillMax is aiding our efforts to capture market share.
Milling is one of the most significant cutting tool applications.
Cutting tools represent roughly 30% to 40% of the $12 billion to $15 billion metalworking market.
MSC MillMax not only provides opportunities to capture share within cutting tools but it opens up access to our customers broader MRO purchases which are multiple times the size of their cutting tool spent.
We're seeing strong early reception to the new technology.
Our funnel of opportunities is building quickly and is starting to produce new wins.
As we do with vending, we're offering MSC MillMax as a service in exchange for incremental share of wallet.
The second initiative I'll feature is government, which is right now our largest diversification play.
We've been working hard over the past two years to turn our government business from an underperformer to an outperformer.
And while we're benefiting from a PPE tailwind, we are nonetheless pleased with our progress in the fiscal first quarter as the business grew over 35%.
Beyond the current momentum, we're investing in this area to build for the future including adding hunter roles dedicated to creating new opportunities for us.
Third, I'll highlight our sales force build-out.
Growing and reshaping our sales force is an important enabler that powers each of the five initiatives.
In recent years, we've taken sales headcount down in order to reshape the sales force consistent with our new strategy.
For the first time in several years, we're now poised to expand the sales force.
We had a delay due to the pandemic but we've now restarted those efforts.
In our fiscal first quarter, we increased our sales headcount by 50, including roles such as business development or hunting, metalworking specialists, and government.
This effort has been aided by the redesign and outsourcing of our talent acquisition function which was one of the mission critical projects that Kristen mentioned on the last call.
We are hiring faster and at a lower cost.
Before turning things over to Kristen, I'll now discuss our PPE program and the related impairment charge for the nitrile gloves.
From the outset of the pandemic, we have worked hard to source critical PPE supplies to support our customers in need and to keep the front lines of industry and government workers safe.
Despite the widespread scarcity of certain products and well-documented supply chain issues, we've been successful in this effort across a wide range of items.
Nitrile gloves have proven to be more challenging.
Over the past several months, a number of our large customers approached us in dire need of the scarce product.
Our normal channels of supply could not produce sufficient quantities as the nitrile glove global supply chain is under extreme pressure right now.
As a result, in September, our team turned to new sources of supply.
We used prepayments to secure priority status which has been a standard market practice through the pandemic and has been an effective tool for us in securing scarce products during this time.
As of today, we've not yet received the gloves.
And in light of the growing uncertainty over our ability to secure deliveries, we recorded an impairment charge for the full amount of the prepayments.
We are of course pursuing all possible paths to either secure the gloves or a refund of our prepayments.
Pulling back from this specific issue, we're quite pleased with our PPE program which has consisted of hundreds of global supply transactions leading to substantial revenues and most importantly the ability to keep our customers safe.
I'll now pass it over to Kristen.
Let me start with the review of our fiscal first quarter and then I'll update you on the progress of our mission critical initiatives.
Our first-quarter sales were $772 million, or $12.5 million on an average daily sales basis.
Both a decline of 6.3% versus the same quarter last year.
Moving to gross margins, our first-quarter gross margin was 41.9%, a decline of 30 basis points compared to the first quarter of last year.
Sequentially, gross margin improved 30 basis points, compared to the fourth quarter 2020.
Despite the headwind from some large PPE sales that we mentioned on our last call, we continue to see solid performance due to the traction of our initiatives.
Our execution on both the pricing and purchasing fronts has been strong with solid realization from our annual price increase as well as improvements to our supplier programs.
December gross margins continued the trend of solid execution on the price and cost fronts.
We could, however, see increased headwinds in gross margins due to PPE-related SKUs over the next couple of quarters.
Total operating expenses in the first quarter were $243 million, or 31.4% of sales, versus $257 million, or 31.2% of sales in the prior year.
This includes about $4 million of costs related to severance and the review of our operating model both related to mission critical.
The severance made up about one-third of that amount.
Excluding these costs, operating expenses as a percent of sales were 30.9% in the prior year, excluding $2.6 million of costs related to severance.
Operating expenses were also 30.9% of sales.
We were able to keep the adjusted opex to sales ratio flat despite the decline in sales as our mission critical initiatives continued to deliver savings.
I'll go into more details on the progress of our mission critical initiatives in a minute.
Including the asset impairment charge that Erik mentioned earlier, all of this resulted in GAAP operating margin of 7%, compared to 11% in the same period last year.
Excluding the impairment charge, severance, and other related costs, our adjusted margin was 11%, versus an adjusted 11.3% in the prior year.
GAAP earnings per share were $0.69 adjusted for the impairment charge as well as severance and other related costs.
Adjusted earnings per share were $1.10.
Turning to the balance sheet and moving ahead to Slide 7.
We achieve a free cash flow of $95 million in the first quarter, as compared to $72 million in the prior year.
This improvement was driven by our accounts payable management and the deferral of payroll taxes under the CARES Act.
As of the end of fiscal Q1, we were carrying $521 million of inventory down $22 million from last quarter.
Roughly $60 million of that is related to PPE products and over half of that is specific to disposable masks.
This is ample supply should the virus surge continue.
During the quarter, we continued to manage our liquidity very closely and we paid down $130 million of our revolving credit facility in Q1.
Our total debt as of the end of the first quarter was $490 million, comprised primarily of $120 million balance on our revolving credit facility; $20 million of short-term, fixed-rate borrowings; and $345 million of long-term, fixed-rate borrowings.
Cash and cash equivalents were $53 million resulting in net debt of $437 million at the end of the quarter.
Since then in December, we paid a special dividend of approximately $195 million which we funded primarily from our revolver.
The special dividend reflects our long-standing commitment to returning capital to our shareholders as part of our balanced capital allocation philosophy while maintaining a conservative balance sheet.
On Slide 8, you can see our original program goals of $90 million to $100 million of cost takeout through fiscal 2023 and as versus fiscal 2019.
On our last call, we shared that we had taken out $20 million of cost in fiscal 2020 and that our goal for fiscal '21 was to take out another $25 million to achieve cumulative savings of $45 million by the end of fiscal '21.
I'm pleased to report that we achieved an additional $8 million of savings in the first quarter, bringing our cumulative savings to $28 million against our goal of $45 million by the end of this year.
This is growth savings and does not reflect investments of roughly $2 million to $3 million in the first quarter, and $15 million expected in fiscal '21.
While one quarter does not make a year, and we did capitalize on some low hanging fruit, I'm encouraged by our fast start to the year and our continued momentum in executing our mission critical productivity programs.
In addition to some of the initiatives I mentioned last quarter, which are proceeding as planned, we also have signed an agreement to sell our Melville, New York facility.
This 170,000-square-foot facility on 17 acres served as one of our co-headquarters.
We will be relocating late this spring to a smaller 26,000-square-foot space nearby, which will accommodate our new hybrid working model.
Once the sale of our current location is complete, we will save roughly $3 million annually in operating expenses.
We will continue to review our real estate footprint for additional opportunities.
Last quarter, we outlined our mission critical initiative that aimed at turning the hard work we've performed over the past several years into improved financial performance.
Our company's sights are firmly set on two goals referenced on Slide 12 to be achieved by the end of our fiscal '23: first, growing at least 400 basis points above IP, and second, returning ROIC back into the high teens.
We have five growth initiatives powering our market share aspirations and we are executing significant structural cost reductions that we expect to improve operating expenses as a percentage of sales by at least 200 basis points.
As we move into the middle of our fiscal year, we're encouraged by the momentum that is building inside the company.
This is evidenced by improving numbers and by improving the execution of the projects behind them.
Most significantly, there is an energy building inside the four walls of MSC and with each passing quarter, we expect that energy to grow.
We will not rest until we've achieved our mission of being the best industrial distributor in the world as measured by all four of our stakeholders. | motorola solutions sees fy revenue up 9.5 to 10 percent.
sees q3 non-gaap earnings per share $2.09 to $2.14.
sees fy revenue up 9.5 to 10 percent.
sees q3 revenue up about 10 percent.
company raises full-year revenue and earnings per share guidance again following record q2 revenue and earnings.
qtrly gaap earnings per share (eps) of $1.69.
qtrly non-gaap earnings per share of $2.07.
quarter-end backlog of $11.2 billion, up 7% versus a year ago.
motorola solutions - although covid-19 pandemic continued to influence activities in q2, negative impacts on business from covid-19 have begun to ease. | 0 |
We'll begin with a brief strategic overview from Randy.
Mike will review the Title business.
Chris will review F&G.
And Tony will finish the review of the financial highlights.
There is significant uncertainty about the duration and extent of the impact of this pandemic.
Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 p.m. Eastern Time today through Wednesday, November 10.
We are very pleased with our record-setting third quarter results as we increased revenues 31% to $3.9 billion, which resulted in adjusted net earnings growth of 39% to $604 million, both as compared with the 2020 third quarter.
Our Title business continued to deliver record results, while F&G expanded into new institutional channels, which position us well for strong asset growth.
Importantly, we grew our holding company cash balance by 25% to $1.5 billion as compared to $1.2 billion at the end of the second quarter of 2021.
Cash on our balance sheet grew despite our continued activity, returning capital to our shareholders through share buybacks and our quarterly dividend.
As Tony will discuss in more detail, the cash growth was delivered primarily through our organic business results.
During the quarter, we took advantage of exceptional interest rates and issued $450 million of 3.2% senior notes with a 30-year maturity.
We also funded a $400 million intercompany loan with F&G to fund their growth.
Overall, our results this quarter speaks to the dynamic business model that we have created and which we believe positions us for success through varying market cycles.
Turning to our Title results.
We delivered adjusted pre-tax title earnings of $669 million, with an adjusted pre-tax title margin of 21.7% in the 2021 third quarter compared with adjusted pre-tax title earnings of $528 million and an adjusted pre-tax title margin of 21.2% in the 2020 comparable quarter.
Our third quarter margins and earnings were the strongest third quarter results in our company's history, which speaks to our market-leading position combined with outstanding execution by our entire team.
We continue to be very pleased with the results this quarter as we open new channels of distribution and accelerate our sales growth, driving assets under management at the end of the third quarter to nearly $35 billion, an increase of 9% in the quarter.
This growth was driven by strong retail annuity sales and F&G's interest into institutional markets.
Total assets under management have grown 31% since we closed the acquisition, and we are well on our way toward our goal of more than doubling assets under management in five years.
As F&G's assets continue to grow, they provide an increasingly important component of our overall earnings.
Looking forward, we will continue to evaluate our capital allocation strategy as we remain committed to long-term value creation for our shareholders while also focusing on supporting the future growth of our businesses.
Share buybacks are an important component of our strategy, and we were active once again, having purchased 1.3 million shares for $61 million at an average price of $46.29 per share through the third quarter.
In the first week of October, we reached our $500 million share buyback target, which we announced in the fourth quarter of 2020.
Lastly, we announced yesterday a quarterly cash dividend of $0.44 per share, an increase of 10% from our previous quarterly dividend.
This is the second consecutive quarter that we have increased our dividend, given our strong earnings and cash flows through the first three quarters of the year.
As Randy highlighted, our third quarter results were the best third quarter in the company's history.
For the third quarter, we had generated adjusted pre-tax title earnings of $669 million, a 27% increase over the third quarter of 2020.
Our adjusted pre-tax title margin was 21.7%, a 50 basis point increase over the prior year quarter.
The results were driven by a 25% increase in average fee per file, a 9% increase in daily purchase orders closed and a 31% increase in total commercial orders closed, partially offset by a 21% decrease in daily refinance orders closed.
Total commercial revenue was a record $366 million compared with the year-ago quarter of $216 million due to the 31% increase in closed orders and a 28% increase in total commercial fee per file.
For the third quarter, total orders opened averaged 10,800 per day, with July at 11,000, August at 11,000 and September at 10,300.
For October, total orders opened were 9,300 per day, as we saw solid demand and purchase activity, while the refinance market continues to moderate as compared with last year's robust levels.
Daily purchase orders opened were up 1% in the quarter versus the prior year.
And for October, daily purchase orders opened were up 4% versus the prior year.
Refinance orders opened decreased by 33% on a daily basis versus the third quarter of 2020.
For October, daily refinance orders opened were down 38% versus the prior year.
Lastly, total commercial orders opened per day increased by 15% over the third quarter of 2020.
Commercial opened orders per day were just under the record levels we saw in the second quarter.
For October, total commercial opened orders per day were up 15% over October of 2020.
Importantly, commercial opened orders per day have exceeded 1,000 orders each of the last nine months, having consistently been in record territory and will provide momentum as we close out 2021 and begin 2022, given the longer tail for closings in commercial as compared with residential.
Our Title business has performed very well through the third quarter with commercial and purchase volumes more than offsetting the decline in refinance activity.
Looking forward, while refinance volumes may continue to moderate, it is important to note that direct refinance revenue only contributed approximately 19% of total direct revenue in the third quarter compared with 27% in the third quarter of last year.
On a sequential basis, refinance revenue contributed 21% of total direct revenue in the second quarter and 33% in the first quarter of this year.
Additionally, refinance fee per file in the third quarter was approximately $1,000 as compared with nearly $3,400 for purchase, providing a strong counterbalance to declines in refinance revenue.
We will also continue to watch our expenses closely and react to changes in our opened and closed order volumes.
Another critical aspect of our business has been our longer-term focus on integrating and leveraging automation, which has significantly improved our performance, as can be seen by our profitability this cycle.
During the quarter, we reached a significant milestone as more than two million consumers have now been invited to begin their transactions on our digital inHere Experience Platform through Start inHere, and more than 1.3 million have chosen to do so.
As we have discussed, inHere transforms the real estate transaction by improving the safety and simplicity needed to start, track, notarize and close real estate transactions.
We are very pleased with our customers' adoption of our digital platform, as we believe it will not only improve their satisfaction with our service and product, but also improve our efficiency.
Ultimately, we believe the inHere Experience Platform, combined with our scale and our history and expertise in building market-leading technology solutions, positions FNF to grow market share.
At F&G, we're fully executing on our product and channel diversification strategy while leveraging our core capabilities and modernizing our operating platform.
This year has demonstrated our transformation from a previously monoline business into a well-diversified and leading provider of solutions in both retail and institutional markets.
We achieved record sales in the third quarter, surpassing $3 billion in total sales for the quarter and $7 billion in total sales for the first nine months of the year, which in turn have boosted ending assets under management to nearly $35 billion as of September 30, as Randy mentioned previously.
In the third quarter, annuity sales in our retail channel were $1.5 billion, up 43% from the third quarter of 2020 and down slightly from the record sequential quarter.
We see ongoing success with our independent agent distribution and continue to expand our bank and broker-dealer channels.
We are now distributing through a dozen active bank and broker-dealer distribution partners.
We are very pleased that our recent expansion into institutional markets has been exceptionally strong.
Let me provide a few brief details.
F&G has issued $1.2 billion of funding agreement-backed notes in September, following our inaugural $750 million issuance in June.
Both issuances saw extremely strong market demand and attractive pricing.
F&G has also successfully entered the pension risk transfer market, closing $371 million of transactions in the third quarter and securing an additional $564 million of transactions in the fourth quarter.
Based on transactions secured to date, F&G will assume approximately $900 million in pension liabilities and provide annuity benefits to over 22,000 retirees.
Overall, institutional sales were $2.6 billion for the first nine-month period.
And with the additional $500 million pension risk transfer volume secured in the fourth quarter, we're on track to achieve $3 billion of institutional sales in 2021.
With these strong top line results, average assets under management, or AAUM, has reached $32.7 billion, driven by approximately $2.3 billion of net new business flows in the third quarter.
We are focused on generating scale benefits by increasing assets under management while continuing to leverage Blackstone's unique investment management capabilities to deliver consistent spread.
Our results continue to be strong.
Total product net investment spread was 285 basis points in the third quarter and FIA net investment spread was 335 basis points.
Adjusting for favorable notable items, total product spread was 248 basis points and FIA spread was 293 basis points, both in line with our historical trends and consistent with our disciplined approach to pricing.
Let me wrap up with a few thoughts on earnings.
First, F&G's net earnings attributable to common shareholders of $373 million for the third quarter included a $224 million onetime favorable adjustment from an actuarial system conversion, reflecting modeling enhancements and other refinements and represents less than 1% of reserves.
This conversion was a significant milestone in our multiyear effort to deliver a modern, scalable platform, which will provide operating leverage with scale over time.
This onetime favorable adjustment was excluded from adjusted net earnings along with other standard items.
Next, F&G's adjusted net earnings for the third quarter were $101 million.
Strong earnings were driven by record AAUM and strong spread results from disciplined pricing actions on both new business as well as our in-force book.
Net favorable items in the period were $27 million.
Adjusted net earnings, excluding notable items, were $74 million, up from $70 million in the second quarter.
In summary, during the third quarter, we've delivered record sales and strong earnings for F&G.
Our profitable growth strategy is firing on all cylinders, and we have successfully diversified our sources of premiums.
We remain excited about the opportunity to further contribute to the overall FNF strategy in the years ahead.
We generated $3.9 billion in total revenue in the third quarter, with the Title segment producing $2.9 billion, F&G producing $927 million and the Corporate segment generating $44 million.
Third quarter net earnings were $732 million, which includes net recognized losses of $154 million versus net recognized gains of $73 million in the third quarter of 2020.
The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continue to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $4 billion as compared with $2.9 billion in the third quarter of 2020.
Adjusted net earnings from continuing operations were $604 million or $2.12 per diluted share.
The Title segment contributed $521 million.
F&G contributed $101 million.
And the Corporate segment had an adjusted net loss of $18 million.
Excluding net recognized losses of $169 million, our Title segment generated $3.1 billion in total revenue for the third quarter compared with $2.5 billion in the third quarter of 2020.
Direct premiums increased by 22% versus the third quarter of 2020.
Agency premiums grew by 34%.
And escrow title-related and other fees increased by 14% versus the prior year.
Personnel costs increased by 15%.
And other operating expenses increased by 17%.
All in, the Title business generated a 21.7% adjusted pre-tax title margin, representing a 50 basis point increase versus the third quarter of 2020.
Interest and investment income in the Title and Corporate segments of $27 million declined $4 million as compared with the prior year quarter due to decreases in bond interest, dividends received on preferred stock and a slight decrease in income from our 1031 Exchange business.
In September, we closed an issuance of $450 million of 3.2% senior notes due September of 2051.
We're very pleased with the market's receptivity to our issuance as well as the very attractive rate that we were able to secure.
We also put in place a $400 million intercompany loan to fund F&G's growth and to better optimize their capital structure.
FNF debt outstanding was $3.1 billion on September 30 for a debt-to-total capital ratio of 24.9%.
Our title claims paid of $55 million, were $45 million lower than our provision of $100 million for the third quarter.
The carried reserve for title claim losses is currently $95 million or 5.9% above the actuary's central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Our title and corporate investment portfolio totaled $6.7 billion at September 30.
Included in the $6.7 billion are fixed maturity and preferred securities of $2.2 billion with an average duration of 2.8 years and an average rating of A2, equity securities of $1.2 billion, short-term and other investments of $500 million and cash of $2.8 billion.
We ended the quarter with $1.5 billion in cash and short-term liquid investments at the holding company level.
Let me end with a few thoughts on capital allocation.
Our capital allocation strategy remains a key focus of the Board.
We're focused on returning capital to shareholders while making strategic investments in our businesses.
Our current level of cash generation supports the following: first, FNF's $500 million annual common dividend; next, our $100 million annual interest expense on F&F debt; third, our $400 million 5.5% senior notes, which are due in September of 2022; and finally, our share repurchases.
We've continued to make share repurchases throughout the third quarter and into the fourth.
During the quarter, we purchased 1.3 million shares at an average purchase price of $46.29 per share.
And in the first week of October, we completed our previously announced $500 million share repurchase plan.
In total, we repurchased 12 million shares at an average price of $41.62 since announcing the plan in October of last year.
With regard to F&G, at the time of the merger last year, we stated that we expected F&G to double assets and earnings over five years through organic growth.
Given current momentum, we foresee that F&G's growth is running about one year ahead of schedule.
For 2021, F&G is on a trajectory to double its annual sales and has materially diversified its business with channel expansion in new retail and institutional markets.
Capital funding for this growth includes $400 million in debt capital from FNF in the third quarter as well as third-party financial reinsurance with an existing partner in the fourth quarter.
Based on current forecasts, we expect to contribute $200 million to $300 million of new equity capital in 2022.
And with F&G's 25% debt-to-capital target, we believe F&G has ample financial flexibility to execute on our growth strategy and capture market opportunities.
Beyond that horizon and subject to ongoing sales momentum, there may be an additional capital investment required in 2023, which could take the form of converting our existing $400 million term loan to equity capital.
But we believe at that point, we will be reaching a level where F&G is self-funding.
Given the compelling growth prospects, it is more attractive to defer any immediate return of capital from F&G in order to support its growing and stable source of earnings and target a return of capital a few years down the line.
FNF has enough capital generation to do all of the above, and we view the marginal return on capital into F&G as attractive and strategically important to our dynamic business model to achieve long-term value creation and attractive shareholder returns. | compname reports first quarter 2021 diluted earnings per share from continuing operations of $2.06 and adjusted diluted earnings per share from continuing operations of $1.56.
compname reports first quarter 2021 pre-tax title margin of 17.4% and adjusted pre-tax title margin of 19.9%.
q1 adjusted earnings per share $1.56 from continuing operations.
q1 revenue $3.1 billion versus $1.6 billion. | 0 |
With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer.
Actual results may differ materially.
At this time last year, we were seeing only the very beginning of what we all hoped would be a sustained recovery from the worst of the COVID pandemic.
At the same time, here at 3D Systems, we were in the midst of executing our four phased transformation journey.
We reorganized our company into two segments, Healthcare and Industrial Solutions.
We have restructured our organization to gain efficiencies.
And we had announced the first of our divestitures of non-core assets.
As we speak to you today, a year later, these first three phases are complete.
We are now a company that's singularly focused on additive manufacturing with a lean nimble operating structure, global reach and breadth of metal, polymer and biological technologies that's unparalleled in the industry.
These attributes brought together through an intense focus on our customers' most demanding applications has proven to be a powerful driver of value creation as reflected clearly in our organic growth rates, our profitability and our operating cash performance, all of which we will recap for you in a few moments.
While we're pleased with this performance, even more exciting is that we're now in the fourth and final stage of our transformation, namely, investing for growth.
Since last quarter, we completed the last of our divestitures, retiring our debt and stockpiling over $500 million of cash on the balance sheet.
We subsequently announced two acquisitions that embody our strategic focus on growth, which is to invest in businesses that drive the adoption of additive manufacturing, solve customers' most complex application needs and generate high margin recurring revenue streams that are critical to sustain value creation.
The first of these acquisitions was Oqton, a unique software company that's emerged as a recognized leader in the creation of a new breed of intelligent, cloud-based manufacturing operating system.
The driver for this acquisition is very simple; customers across our Industrial and Healthcare segments are now anxious to accelerate their adoption of additive manufacturing in full scale production environments.
But in doing so, they're facing significant challenges and how to incorporate these technologies into their existing enterprise systems.
To-date, they relied heavily on spreadsheets and highly skilled engineers to run production applications.
This is obviously too slow, too inefficient and too expensive to scale as production volumes ramp up.
While we and others have made strides in optimizing and to some extent automating the performance of single printer or even a collection of like-kind printers working in parallel, our customers' challenges extend well beyond this.
What they need is a manufacturing system that can easily and intelligently incorporate a mixed fleet of printers, often from a variety of manufacturers, and in addition, one that will incorporate all of the surrounding digital production systems on the shop floor such as post-print thermal and mechanical processing, robotic motion systems and automated inspection systems.
Oqton not only provides this linkage, it goes a step further in applying cloud-based AI to optimize the entire workflow then links this workflow to the customers' existing enterprise software such as those provided by Salesforce, Oracle, Microsoft or SAP.
The end result is that Oqton not only links, optimizes and tracks the customers' unique operational workflow at an individual component level from raw material to finished in respected parts, but it also builds in future flexibility to substitute new printing, finishing and automation technologies that will undoubtedly be introduced in the years ahead.
These attributes which are unique to the Oqton platform will remove a significant barrier to the large-scale adoption of additive manufacturing and production environments.
And for that reason, we've opened the system to the entire industry, which we hope will accelerate market growth for everyone.
In addition, for the first time in our history, we will now make available our full complement of market-leading metal and polymer printing software platforms to all others in the industry, which we hope will accelerate the introduction of new printing technologies to customers around the world.
Importantly, as with all software platforms, the span in entire industry, we are committed to Oqton continuing to operate in this model of independence with a supreme commitment to customer data protection and confidentiality.
I'm happy to tell you that we closed the Oqton acquisition on November 1, and the reception by our customers and partners alike has been very positive.
Before I move to our most recent and incredibly exciting acquisition, let me step back and explain how we look at our company holistically, which I believe is much different than others in this industry.
In the decade since 3D printing was invented, we and our competitors have routinely defined ourselves as hardware and material developers, with our products sold broadly to customers around the world.
While this is natural when any industry is young and when the product is mainly consumed in small quantities by labs or prototype facilities, as the industry now matures and production environments are targeted, successful companies will need to adapt their entire operating model to reflect their deepening integration with specific markets and customers.
If you don't, you will remain simply a vendor and not a true partner to your customers, which will ultimately be reflected in your organic growth rate and profit margins.
So with this in mind, at 3D Systems, beginning a year ago, we changed the way we defined ourselves by reorganizing our entire company around key markets, and within those markets, key vertical segments that we believe will drive the most value from their adoption of additive manufacturing.
We began with the creation of two business segments, Healthcare and Industrial Solutions.
Using a strong application focus, these two businesses each integrate our printer, material and software technologies in unique combinations to solve the customers' product need.
Once complete, our customers can then ask us to scale the process for them to a certain production level.
And then with increasing demand, they can elect to have us enable a manufacturer of their choosing to continue scaling to high volumes.
This transfer of the workflow involves providing printing systems, materials and software along with the process definition.
It results in a seamless transfer of capability to the chosen manufacturer whether it's the OEM themselves or a contract manufacturer of their choosing.
So fast forwarding to this year, with the acquisition of Oqton, we expanded our software capabilities into what we call broadly digital manufacturing software, which as we described earlier, enables a rapid and efficient adoption of additive manufacturing in high volume production environments.
This operating model has been very well received by our customer base and we expect it to fuel exciting organic growth in the years ahead.
Most recently, we've added a strong biotech organizational focus and invested significantly to bring our emerging biological technologies to laboratory and human applications, details of which we'll cover in a few moments.
So in short, these are our five core market segments that you'll hear us talk about moving forward.
While each of the five will adapt to the needs of their customers, each will also leverage our core technologies of hardware, software and materials in the unique manner needed to fulfill their customer application needs.
Let me illustrate this approach using our Healthcare business as an example.
In the mid-1990s, 3D Systems pioneered Medical Modeling, which is the printing of highly detailed anatomical models from digital images.
These models have proven instrumental in support of complex surgical procedures.
In a highly publicized application of our modeling technology, which was beautifully documented by CNN's Dr. Sanjay Gupta, we created a number of medical models to assist in the separation of conjoined twins, Jadon and Anias McDonald who were born with the extremely rare craniopagus condition, in which twins are joined at the head, sharing not only the skull and vasculature, but portions of the brain itself.
The modeling used for the surgical planning was vital to the success of Dr. James Goodrich and his team that they had in separating the twins, both of which are alive and living independently today many years later.
To date, our medical modeling technology has supported dozens of similarly complex operations around the world, along with hundreds of others, and it continues to expand each year.
Building upon this foundation and investing in point-of-care infrastructure that accompany this growth, we deepened our surgical support over the next decade.
And by 2005, we were working with surgeons to design and manufacture customized patient-specific surgical guides and instruments using 3D printing.
As this portion of the business in turn grew, we expanded our scope once again, this time to include actual patient-specific implants, which offered an even larger market opportunity.
Fast forwarding today, we offer the broadest range of FDA-cleared capabilities for modeling surgical planning and patient-specific medical implants, which inspires our customers to continue expanding their partnership with us year-after-year.
While we're very proud of our progress by now redefining ourselves as a healthcare business in this example and leveraging both our critical infrastructure and channel partner relationships, we can broaden our scope more aggressively to now include other parts of the human skeleton structure, and importantly, to advance these applications in parallel instead of in series as we have in the past.
This provides us the opportunity to bring benefits to a much larger patient population and at a much higher rate than ever before.
This is the power of redefining ourselves as a healthcare business and not simply a provider of printing technology to healthcare customers in the market.
Of note, our Healthcare business grew over 28% in our most recent quarter and over 44% on an organic basis, which is where we disregard the businesses that we have divested.
This remarkable growth rate is a testament to our increasing momentum in this exciting market.
So building upon this discussion of our Healthcare business, I would like to end my commentary for today on the remarkable emerging market of bioprinting in our announcement last week of our acquisition of Volumetric Biotechnologies.
This company, under the inspired leadership of Dr. Jordan Miller, brings specific expertise and biomaterials and regenerative medicine that combine synthetic chemistry, 3D printing, microfabrication and molecular imaging to direct culture human cells to form more organized complex organizations of living vessels and tissues.
3D Systems has been a pioneer in our industry by focusing resources on regenerative medicine since 2017.
And we began a joint development program with United Therapeutics Corporation to develop the capability to print scaffolds for human lungs using a process we call printer profusion.
Once developed, this bioprinting technology can be applied to other major organs in the human body as well as a wide range of other human and laboratory applications.
We've made significant strides in this unique technology.
And as a result, we recently announced an expansion of our development program with United Therapeutics, an expansion that includes increased funding and an extension to two additional organs.
This program expansion reflects the progress that our joint team has made in this groundbreaking endeavor.
By acquiring Volumetric, we're adding critical skill sets to our 3D Systems' team, which we feel are a perfect complement to ours, bringing strong biological expertise and cellular engineering skills along with highly creative bioprinting systems to our development group.
As I realize this is an entirely new area for many that have followed our company for some time, let me quickly recap our regenerative medicine strategy and the market opportunities that we're addressing through our unique bioprinting technology.
The first opportunity is the printing of human organs, beginning with the lung and expanding from there to two additional organs.
We're pursuing this as a joint program with our partner United Therapeutics.
The ambitious goals that we've set for this program are driving quantum advances in our technology and laying the foundation for the rest of our regenerative medicine efforts.
In our second regenerative medicine market opportunity, we're taking the core unique disruptive technologies developed for the bioprinting of human organs and applying it to other parts of the human body.
There are tremendous number of these applications ranging from the printing of human skin for burn victims to soft tissue for breast reconstruction and repair to critical blood vessel and bone replacements and many, many more.
We're now forming partnerships focused on each application area where we can combine our bioprinting expertise with the appropriate application experts to provide unique and highly impactful solutions for people in need.
We refer to this second market vertical within regenerative medicine as human non-organ bioprinting.
Our last but certainly not least market opportunity is to extend our bioprinting technologies into research labs, providing advanced printing systems and unique biological materials to those that study the basic science of regenerative medicine and in the pharmaceutical laboratories where the ability to print high precision, three dimensional vascularize cell structures can be used for the development of new, more effective drug therapies.
Our acquisition of Volumetric and their unique capabilities in combination with our own will allow us to expand the pace of our efforts in all three of our regenerative medicine markets.
It amazes me to think of these revolutionary applications enabled by our 3D printing technologies; applications that we are uniquely positioned to deliver with our extensive history in advanced 3D printing technologies, our material expertise, our application development expertise, our deep understanding of FDA and other regulatory processes and now our biological and cellular engineering capabilities.
We believe that in the years to come, bioprinting will take its place as a very significant business for our company, bringing critical relief to patients in need of life-saving procedures and great value to our company's employees and our shareholders alike.
Moving from our strategic growth investments to our most recent quarterly performance, I'm very pleased to say that we've continued to execute well on our core business.
With continuing strong demand, our operational challenges have largely centered around global supply chain and logistics issues, which are unfortunately continuing to plague most companies around the world.
Our solid execution in the face of these challenges in the third quarter resulted in strong double-digit growth with revenues increasing by 15% before adjusting for divestitures.
When these adjustments are made, which is a much better reflection of our core business performance, revenues were up over 36% versus 2020 and up over 20% versus our pre-pandemic 2019 third quarter, a benchmark we consider very important.
Looking at our major business segments, our Industrial Solutions segment is continuing its rebound, seeing strong performance particularly in jewelry, automotive and transportation and general manufacturing.
In Healthcare, we see continuing strong demand for personalized health services as well as solid performance in dental.
As Jagtar will discuss shortly, in addition to the strong revenue performance, our EBITDA climbed by over 125%.
We generated positive cash from operations for the fourth consecutive quarter, the first time this has happened in four years.
With our cash generation in addition with the proceeds from divestitures, we built a sizable cash balance by the end of Q3.
A portion of these funds will be used to fund the strategic growth initiatives I mentioned earlier, but we will still have be left with a significant amount of liquidity to pursue additional opportunities.
As I'm sure is clear to everyone, I am very excited not only about what we've accomplished this last year, but even more so about the future as our focus on growth in this final stage of our transformation has only just begun.
For the third quarter, we reported revenue of $156.1 million, an increase of 14.6% compared to the third quarter of 2020.
Our organic revenue growth, which excludes divestitures completed in 2020 and 2021, was 35.9% in Q3 2021 versus Q3 2020.
Since the third quarter of 2020 was beginning of the economic reopening from the COVID-related shutdowns, we think it is valuable to compare our results to Q3 2019, which was untainted by the pandemic.
Again, excluding divested businesses, we are comparing on an apples-to-apples basis.
Our revenue in the third quarter 2021 was 21.2% higher than pre-pandemic Q3 2019.
As we have discussed previously, with the completion of our Simbionix and on-demand manufacturing divestitures in Q3 2021, we have completed our planned divestitures and are now focused on the performance, growth and investment of our core additive manufacturing business.
I would like to note that our -- at post-divestitures, we continue to generate nearly two-thirds of our revenue from our recurring revenue streams.
These high margin lines of business highlight the strength and diversity of our core business, our ability to weather various economic cycles and around which we will continue to make strategic investments.
We reported GAAP net income of $2.34 per share in the third quarter of 2021 compared to a GAAP loss of $0.61 in the third quarter of 2020.
The year-over-year improvement was driven by gains on divested businesses as well as the goodwill impairment charge we took in the third quarter of 2020.
For our non-GAAP results, we reported non-GAAP income of $0.08 per share in the third quarter of 2021 compared to a non-GAAP loss of $0.03 per share in the third quarter of 2020.
The year-over-year improvement reflects higher revenue with lower non-GAAP operating expense as a result of the cost actions we took last year.
Now I will discuss revenue by market.
Healthcare grew 28.3% year-over-year and decreased 7.8% compared to the last quarter.
The decrease was primarily a result of the divestiture of the Simbionix medical simulation business during the quarter.
Adjusted for divestitures, Healthcare revenue increased 44.5% year-over-year as a result of strong demand for dental applications in both printers and materials.
In fact, the last four quarters have seen the highest level ever of dental material sales as compared to any prior four quarter period.
Our Industrial segment generated revenue growth of 4% to $79.7 million compared to the same period last year and was flat to last quarter, reflecting the divestiture of the on-demand manufacturing parts business during the quarter.
Adjusted for divestitures, Industrial revenue increased 28.1% year-over-year and 2.1% over the last quarter.
The increase was driven by higher demand in both printers and materials in a variety of sub-segments, most notably, jewelry, automotive and transportation and general manufacturing.
Now we turn to gross margin.
We reported gross profit margin of 41.2% in the third quarter of 2021 compared to 43.1% in the third quarter of 2020.
Non-GAAP gross profit margin was 41.5% compared to 43.2% in the same period last year.
Gross profit margin decreased primarily as a result of businesses divested in 2020 and 2021.
If we exclude the impact of those divestitures, gross profit -- gross margins increased 80 basis points in the third quarter of 2021 compared to the same period last year, driven by 2020 cost actions and the higher revenue, which resulted in better capacity utilization.
As evidenced by our strong performance this year, demand continues to be strong for both our -- for our products in both business segments.
The biggest challenge we've faced isn't unique to 3D Systems.
We are all aware of the supply chain issues that are affecting everyone, from multinational corporations to small businesses to individuals on Main Street.
In fact, our Q3 revenue, while strong, was impacted by supply limitations of certain products.
Consistent with last quarter, we continue to see a tightening of cost and availability for certain components that go into our product.
Our team is doing a heroic job as it manages through these challenges.
Supply chain and not end customer demand remains the key headwind in our business and is our strong focus as we finish out the year.
We have taken steps to mitigate the economic impact, such as adding alternative sources for key components where possible.
We have seen some cost impacts from the supply chain constraints, especially in increased freight charges and have instituted a temporary surcharge for our customers on certain types of purchases effective in the fourth quarter.
Year-to-date, our non-GAAP gross profit margin was 42.6% and we expect full year gross profit margins to be between 41% and 43%.
Operating expenses for the quarter were $81.5 million on a GAAP basis, a decrease of 35.4% compared to the third quarter of 2020.
This year-over-year decrease reflects a goodwill impairment booked in Q3 2020.
Our non-GAAP operating expenses in the third quarter were $54.1 million, a decrease -- an 8% decrease from the third quarter of the prior year.
Compared to the second quarter of 2021, non-GAAP operating expenses decreased 2%, primarily driven by lower R&D spend.
Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $16.3 million or 10.5% of revenue compared to $7.2 million or 5.3% of revenue in the third quarter 2020.
Our disciplined approach to growth, cost management and focus on our core business is resulting in continued strong adjusted EBITDA.
Turning to the cash flow statement and balance sheet.
We are pleased to show $502.8 million of cash on the balance sheet, an increase of $418.4 million since the beginning of the year.
The increase was primarily driven by proceeds from the divestitures of the on-demand parts business and our medical simulation business, but supported in no small part by our extremely strong cash generation from operations.
During the quarter, we generated $20.7 million of cash from operations, marking the fourth straight quarter of positive cash from operations.
This is the first time in four years the company has achieved four straight quarters of positive operating cash flow and reflects a strong transformation of our business.
Now that we have demonstrated consistent profitability and cash generation and post-divestiture $0.5 billion of cash on hand, we are in a prime position to continue growing the company by taking a disciplined approach to invest organic and inorganic solutions that will solve customers' complex needs, drive adoption of additive manufacturing and generate high margin recurring revenue streams.
We have previously announced some of those growth opportunities, namely our acquisitions of Oqton, which closed November 1 and Volumetric Biotechnologies, which is expected to close in the fourth quarter.
The cash considerations for these will total approximately $130 million, leaving roughly $370 million of cash.
These acquisitions will position the company for strong growth and are core to our strategies in both high margin software to enable the adoption of additive manufacturing as well as adoption of advanced 3D printing technologies in the field of regenerative medicine where we believe we will be a leader in the market.
As I conclude my remarks, I want to reflect on the past year.
I joined the company at the beginning of the third quarter of 2020.
At that time, the company was just beginning its transformation.
We had just announced results for the second quarter of 2020 that included negative operating cash flow of $21 million for the first half of that year, cash and cash equivalents on the balance sheet of only $64 million and $22 million of debt.
Now fast forward to this year and the transformation we've been through.
We have generated over $60 million of operating cash this year for the third quarter and ended the quarter with over $500 million of cash and cash equivalents with no debt.
We are 100% focused on additive manufacturing and growing strongly in our core markets.
We are able to make smart and strategic investments to support our core business and are rapidly advancing our key technologies into new segments such as regenerative medicine.
I continue to believe that we are uniquely positioned in our industry with a strong balance sheet growth, cash generation and a suite of technologies that continue to be in demand by our customers.
Finally, we wanted to provide an update at our Investor Day event.
You may recall that we had scheduled an event for September 9 in the Denver, Colorado area.
Out of the abundance of caution for the safety of our investors, analysts and employees, we postponed the planned Investor Day as COVID infection rates increased this past summer due to the Delta variant.
We are now seeing the hopeful signs of progress, with once again declining infection rate, rollout of booster shots and a newly announced pill that seems to offer promise of dramatically cutting the hospitalization rates from this infection.
As a result, we are in the early stages of planning an updated Investor Day with an aim for the first half of 2022.
We will provide an update as soon as possible and look forward to sharing our long-term growth strategy in more detail with the investment community.
Well, Jagtar and I have covered the remarkable progress that we've made over the last year.
We've created value for our investors, our customers and our employees by remaking the business.
Our growth and profitability distinguishes us in the industry and has made us a key partner for a growing number of organizations that are considering additive manufacturing.
At the same time, our transformation has also made us a more exceptional place to work to drive the future of additive manufacturing, and as a result, more talented individuals are becoming a part of the new 3D Systems each day.
However, as much as we've accomplished this last year, it's more about the future.
We will continue to be a valuable solutions partner with customers and deeply integrate with them as they adopt our solutions and technologies.
We will also invest in our business and drive our solutions capabilities in the five key areas I spoke about earlier.
I'm truly excited about the depth and breadth of technology we bring to our markets and application expertise. | 3d systems q1 non-gaap earnings per share $0.17.
q1 non-gaap earnings per share $0.17.
q1 gaap earnings per share $0.36.
q1 revenue $146.1 million versus refinitiv ibes estimate of $136.6 million. | 0 |
Dave Lesar, our CEO; Jason Wells, our CFO; and Tom Webb, our Senior Adviser, will discuss the company's second quarter 2021 results.
Actual results could differ materially based upon various factors as noted in our Form 10-Q, other SEC filings and our earnings materials.
We will also discuss non-GAAP EPS, referred to as Utility EPS, earnings guidance and our utility earnings growth target.
In providing these financial performance metrics and guidance, we use a non-GAAP measure of adjusted diluted earnings per share.
As a reminder, we may use our website to announce material information.
Information on how to access the replay can be found on our website.
Now I'd like to turn the discussion over to Dave.
Now while we are always keen to discuss our great future, we are planning to discuss our exciting longer-term strategy updates at our Analyst Day, which will take place on September 23 here in Houston.
Though this is our second Analyst Day in less than 12 months, we feel that it is warranted as we are now well into our strategic transition and we want to use that forum to update our investors on our longer-term business plan, earnings capacity, financial metrics and the net zero emissions target that we will be sharing with you.
We are also excited for the opportunity to spend more time with you in our hometown here in Houston and to see you in person.
Let me quickly remind you of just how far we have come in the last year.
A year ago, CenterPoint was going through a strategic review at the direction of our Business Review and Evaluation Committee or BREC.
The goal of the review was to optimize shareholder value and address specific shareholder concerns.
Initially, in my role as Chairman of the BREC, and then later when I became CEO, it was crystal clear to me that while the company had a great asset base and talented employees, we have not unlocked all of our potential, and certainly had not taken full advantage of all of our inherent opportunities.
Before the BREC process, CenterPoint was targeting modest earnings per share growth and had reduced capital spending in our regulated businesses.
We had work to do to strengthen our regulatory relationships.
The company had previously announced a strategic review of Enable, but had not found an executable opportunity to actually reduce exposure to its midstream investments.
Our O&M expenses were historically growing, and we needed a stronger balance sheet.
We had minimal renewables opportunities on our radar screen, and we were in search of a permanent CFO.
So yes, the list of challenges was long.
I mentioned these not to revisit the adversities our investors and company we're experiencing, but to highlight for you the aggressive speed and approach used by our new team to attack and resolve the challenges and headwinds we faced.
Let me quickly recap our progress.
I substantially refreshed and diversified our Executive Committee, and we now have what I believe is a best-in-class management team.
We announced an updated five-year strategy that prioritizes investment in our regulated businesses and boosted our planned capital spending by about 25% to $16 billion.
We instituted a 10% utility rate base CAGR, well above our peer group average of 8%.
That rate base growth then supported an increased long-term utility earnings per share target growth rate of 6% to 8%, which is also above the consensus peer average of 6%.
To efficiently fund our growth, while repairing our balance sheet, we announced the sale of our Arkansas and Oklahoma gas LDCs at a landmark earnings multiple of 2.5 times rate base.
We were instrumental in the Enable and Energy Transfer merger which, once closed, will provide us a pathway to eliminate our exposure to midstream.
And we announced a commitment to a 1% to 2% annual reduction in O&M over the five years to keep our customer rate growth manageable.
We recently announced changes to our Board leadership to bring our governance structure in line with best practices and shareholder expectations, and we will be announcing a commitment to an industry-leading net zero carbon commitment at our Analyst Day.
So in my view, we certainly have walked the talk, and through timely and aggressive actions overcome many of the headwinds we faced.
Now it's time for CenterPoint to switch gears.
We are going to use the same aggressive approach and organizational speed to take advantage of the tailwinds we have today.
Our strong execution, coupled with a privilege to serve some of the fastest-growing regions in our country, have created the foundation for CenterPoint to trade as one of the premium utilities in the U.S. Believe me, we are just getting started.
Our six-month financial performance in 2021 has been strong.
Today, we are raising our 2021 Utility earnings per share guidance range to $1.25 to $1.27.
This 8% growth projection in '21 puts us at the high end of our 6% to 8% Utility earnings per share annual growth target.
And as a reminder, this increase in guidance is after the dilution impact of the 18% increase in our share count that we experienced in 2020.
When we compare our Utility earnings per share growth to analysts' long-term consensus growth for our peers, we are now in the top decile.
And as you would expect, we are also reaffirming both our long-term 6% to 8% Utility earnings per share annual growth target and 10% rate base compound annual growth rate target.
This 10% rate base growth also exceeds the average 8% rate base growth of our peer group.
For the second quarter of 2021, we reported strong results, including $0.28 of Utility earnings per share compared to $0.18 for the second quarter of 2020.
The comparison to Q2 2020 is a bit noisy, and I believe essentially irrelevant as both quarters included a number of one-off items.
Q2 2020 results also reflected the impact of COVID on our business.
The bottom line for me is to focus on the reality that our Utility earnings per share is expected to grow 8% this year over last year, and then target 6% to 8% growth from there.
Our O&M continuous improvement programs have strengthened our results for the first six months of 2021.
We are already on track to save over $40 million in total O&M costs this year alone, while maintaining our focus on safety.
This is almost 3% of our annual O&M cost.
However, when compared to last year's second quarter, our O&M costs are actually up a bit.
Again, this is just more noise that I don't worry about as last year's second quarter O&M costs were artificially depressed by the impact of COVID and disconnect moratoriums.
We are still absolutely committed to our continuous improvement cost management efforts in our target of 1% to 2% annual reductions in O&M.
In fact, as a result of our excellent 2021 results to date, we were in the fortunate place to be able to already make a management decision and begin pulling recurring O&M work forward from 2022 into the last six months of this year and still be able to hit the 8% Utility earnings per share growth for this year.
This allows us the luxury of reducing near-term run rate O&M costs today, and immediately reinvesting them for the future long-term benefit of our customers and investors.
We continue to see industry-leading organic customer growth rates.
Despite COVID, our Houston service territory continues its 30-plus years of consistent growth.
Overall, we saw about 2% customer growth for electric and 1% for natural gas for the first six months of the year when compared to the prior year.
The growth is supported by the highest level of new home starts in Houston since 2005.
This continued and consistent growth reinforces the value of the fast-growing markets that we serve.
This organic growth plays a key role in keeping our service costs reasonable for our customers.
Moving to capital investments.
We have invested approximately $1.5 billion for the first six months of this year and are still on track to invest approximately $3.4 billion for the full year 2021.
More importantly, we now have better line of sight to additional capital investment opportunities beyond the five-year $16 billion investment plan we outlined on our Analyst Day.
New Texas legislation provides more tools to transmission and distribution utilities to improve the resiliency of the electric grid and helps minimize the risk of prolonged outages and allows us to put all of this into rate base.
Some of these laws include the ability to lease and put into rate base, backup battery storage capacity for resiliency and to assist with restoring power.
Next, the ability to lease and put into rate base emergency generation, which may include mobile generation capabilities.
The ability to immediately procure, store and put into rate base long lead time items related to restoring power, and the allowing of economic versus resiliency justifications for new transmission projects.
Based on initial analysis, these legislative changes provide support to increase our five-year capital investment plan by at least $500 million.
Now this is on top of the $1 billion in reserve capital investment opportunities we previously identified during our last Analyst Day, but were not incorporated into that plan.
Just as important, we will have the ability to efficiently fund $1.1 billion of these incremental opportunities.
This is primarily due to the incremental proceeds expected from the sale of our gas LDCs and the execution of tax mitigation strategies, which Jason will discuss shortly as well as additional debt, assuming a roughly 50-50 cap structure.
Even better, all of this is before the additional proceeds we anticipate from the sale of Energy Transfer units given the significant appreciation in value since the Enable and Energy Transfer merger was announced.
We are in the midst of quantifying what the whole new slate of organic opportunities will look like, and we'll be in a position to provide more detail at our Analyst Day in September.
However, just as a teaser, we are confident that we will be in a position to announce an increase to our previous five-year investment plan, fund that increase with no incremental equity and execute on projects that will continue to improve the resiliency and safety of our systems for the benefit of our customers, a very nice trifecta.
Now I will briefly touch on strategic initiatives, which we have announced over the recent months, including our gas LDC sale and our planned exit of our midstream investment.
We know that investors are highly focused on the ultimate completion of these initiatives, and we believe we will achieve our timing expectations.
We continue to make progress on the gas LDC sale and still anticipate closing by the end of the year.
We are working closely each day with Summit to secure regulatory approvals for the sale and to successfully transition that business.
Turning to the Enable transaction.
We still anticipate the transaction between Enable and Energy Transfer to close in the second half of the year.
We remain absolutely focused on reducing and then eliminating our midstream exposure through a disciplined approach.
Now to be clear, it would be very unlikely for either of these transactions to close prior to our September Analyst Day.
And finally, to reiterate what we said when we announced the news of these two transactions in our last quarterly call, completing these transactions will not change our industry-leading 6% to 8% Utility earnings per share growth target or 10% rate base compound annual growth rate target.
Finally, I want to highlight the Natural Gas Innovation Act that recently passed in Minnesota.
This is a landmark law that establishes a new state regulatory policy that creates additional opportunities for a natural gas utility to invest in innovative, clean energy resources and technologies, including renewable natural gas, green hydrogen and carbon capture and further demonstrates the forward-thinking mindset of the jurisdictions that we serve.
This is a successful outcome for all stakeholders as we work to collectively achieve lower greenhouse gas emission reduction goals.
With the approval from the Minnesota Public Utility Commission, a utility can invest up to 1.75% of our gross operating revenue in the state annually.
This opportunity increases up to 4% of gross operating revenues by 2033.
Under the new law, we expect to submit our first innovation plan to the PUC next year.
This law aligns with our steadfast commitment to environmental stewardship and more specifically, our carbon reduction goals.
Our customers are asking for ways in which we can deliver not only safe and reliable, but cleaner electricity and gas, and we are working to achieve that.
Across jurisdictions, we are collaborating to find ways to introduce more renewable fuels into our systems as we firm up our goal to achieve a net zero target.
We look forward to unveiling this in September during our Analyst Day.
For now, I'll just remind everyone how thrilled I am to be able to deliver these messages.
As I've said, this marks one year for me as CEO, and a lot has changed.
I look forward to the calls every quarter, so I can proudly share our team's accomplishments with you.
I strongly believe the strategy we have laid out and the progress we have made so far more than demonstrates what a unique value proposition CenterPoint offers.
While I don't quite have a full year with CenterPoint under my belt, I am just as energized as Dave by our recent execution and more importantly, about the path we are on to becoming a premium utility.
Let me get started by discussing our earnings for the second quarter of 2021.
On a GAAP earnings per share basis, we reported $0.37 for the second quarter of 2021 compared to $0.11 for the second quarter of 2020.
Looking at slide four, we reported $0.36 of non-GAAP earnings per share for the second quarter of 2021 compared to $0.21 for the second quarter of 2020.
Our Utility earnings per share was $0.28 for the second quarter of 2021, while Midstream investments contributed another $0.08.
As Dave mentioned, there were a few onetime items for both quarters that made the comparison a bit noisy.
This included favorable impacts for the second quarter of 2021, inclusive of $0.05 attributable to deferred state tax benefits.
Of this $0.05 in total, $0.03 of the benefit was related to legislation in Louisiana that eliminated the NOL carryforward limitation period.
This amount is included in our Utility earnings per share results.
The remaining $0.02 of benefit was due to Oklahoma's revision of the corporate tax rate, which is a favorable driver in our midstream segment.
Our 2020 Utility earnings per share included a negative $0.06 impact due to COVID.
Beyond those onetime items, other notable drivers for the second quarter of 2021 include customer growth and rate recovery, which contributed about $0.04 of favorable impacts as well as miscellaneous revenue contributing another $0.02 of favorable impacts.
These were partially offset by a negative $0.02 impact from the share dilution resulting from the May 2020 issuance and a negative $0.03 for unfavorable O&M variance.
So there's a lot of noise when comparing to second quarter of 2020 as that was the quarter that most impacted by COVID worldwide.
I look through that noise, and I think you should, too.
The bottom line is we expect to grow our Utility earnings per share 8% this year and target 6% to 8% thereafter.
And that's what we should all focus on.
As Dave mentioned, O&M is a bit noisy this quarter as well.
The key takeaway is we are delivering on our planned efficiencies of over $40 million in cost reductions for the year, and are now beginning to accelerate O&M work from 2022.
This will help improve reliability of our service for our customers while sustaining growth for our shareholders.
With two quarters of financial results behind us, we have good line of sight to our full year 2021 earnings per share outperformance.
Our disciplined execution and tailwinds led us to raise our Utility earnings per share guidance range to $1.25 to $1.27 per share for the full year, which is at the high end of our 6% to 8% annual Utility earnings per share growth target.
Beyond 2021, I want to reiterate, we are focused on growing Utility earnings per share at 6% to 8% each and every year.
And we look forward to discussing incremental drivers over a longer-term horizon during our September Analyst Day.
Moving to a discussion of future capital opportunities as shown on page five.
We are currently developing our full analysis of additional capital opportunities resulting from bill signed into effect in Texas during the last legislative session.
There will be some shorter-dated opportunities that develop such as the ability to procure long lead time items or to lease a portion of battery storage or backup generation across our footprint, and then some longer-dated projects such as transmission opportunities through economic justification.
Based on our first look, we have confidence that new Texas legislation will support at least $500 million of incremental capital investment opportunities over just our current five-year plan.
This number will likely increase as we work with stakeholders to refine the implementation of this new legislation and develop the longer-dated plan to incorporate some of these opportunities.
We are confident the new tools we have been providing will help create a more resilient electric grid and help reduce the risk of prolonged outages.
Regarding the previously identified incremental $1 billion, we may be able to deploy above our 2020 Analyst Day plan of $16 billion.
This incremental capital spending is likely to be allocated toward recurring system improvements to accelerate the improvement in resiliency, reliability and safety of our services.
We will provide a more comprehensive update on this additional capital spend in our upcoming Analyst Day, but it is important to highlight any incremental capital we include in this plan won't begin contributing to earnings until 2023 at the earliest, as we will begin recovering incremental spend the year following the investment.
As far as the funding sources for these incremental capital opportunities, we continue to take advantage of a number of tailwinds that will allow us to incorporate additional capital spend.
As we reported last quarter, and Dave reinforced, we will receive an incremental $300 million of proceeds above our original plan once the gas LDC sale closes.
Additionally, we have continued to refine the estimate of the incremental benefit for the method we use to determine the amount of repairs expense that can be deducted for tax purposes.
While we are still refining this study, we have confidence that the benefit will generate at least $1 billion in incremental tax deductions, resulting in at least $250 million in additional cash to us and likely more.
This enhanced method for determining repairs expense is an efficient way for us to fund these capital investment opportunities, which improve the resiliency and safety of our systems for the benefits of our customers.
The combination of these improved sources of funding, coupled with debt, that will be authorized under our regulatory capital structure, supports incremental investments of at least $1.1 billion.
And importantly, this amount is before we consider any additional proceeds due to the unit appreciation of Energy Transfer.
Moving to the financing updates.
We closed our $1.7 billion debt issuance in May, which was comprised of $700 million of three-year floating rate notes, $500 million of five-year fixed rate notes at 1.45% and $500 million of 10-year fixed rate notes at 2.65%.
The proceeds was to refinance $1.2 billion of near-term maturities at the parent as well as to pay down commercial paper.
Based on our current financing plans, we have no further issuance needs for 2021.
Our current liquidity remains strong at $2.2 billion, including available borrowings under our short-term credit facilities and unrestricted cash.
Our long-term FFO to debt objective is between 14% and 15%, aligning with the Moody's methodology and is consistent with the expectations of the rating agencies.
We continue to actively engage with them and they have informed us that they are comfortable with the outlook and thresholds we've indicated.
Based on our current financing plans, we will not issue any incremental equity through an aftermarket equity program in 2022, as previously discussed, and are evaluating if or when we would initiate it beyond that.
As we've said in the past, we take our commitment to be good stewards of your investment very seriously and realize our obligation to optimize stakeholder value.
I am energized with our execution over the last year, and I am confident we are positioning CenterPoint to be a premium utility moving forward.
Those are the updates for the quarter.
As mentioned, we'll be hosting an Analyst Day here in Houston on September 23.
We look forward to the opportunity to engage and introduce you to the depth of the CenterPoint team then.
This will be Tom's last call with us, as Tom's work here at CenterPoint is winding down.
I want to extend our sincerest appreciation to Tom for his counsel and support over the past year.
I have, and I know we all have benefited greatly from his time here.
I finally remember your visit to Kalamazoo a year ago, went over Dana's cooking in a bottle of nicely aged Bordeaux wine, I explained how I was busy and retired.
I was humbled to be asked and honored to help in a very small way on your extensive checklist.
Top of your list was identifying and attracting one of the very best CFOs in the business.
You already have made immediate critical improvements that will be lasting.
CenterPoint has transformed in less than a year, selling noncore, nonutility businesses, think Enable securing more efficient financing, think LDC sales, driving clean energy, think coal closures, renewable growth and a lot more to come, and accelerating performance, think continuous improvement.
We are witnessing the emergence of a premium utility with sustainable, predictable earnings per share growth every year.
I trust you see it, feel it.
We truly do sweat the details so you don't have to.
You'll see bumps in the road, serious challenges like the winter storm that impacted many utilities.
I bet you had doubts.
But watch CenterPoint, this team promptly addresses challenges to protect our customers and deliver for you, our investors.
With important capital investment to deliver needed improvements for our customers, our rate base growth target at 10% substantially outstrips the peer average at about 8%.
Our resulting annual Utility earnings per share growth target of 6% to 8% is strong.
We expect it to be at the high end of the range this year.
And as Dave mentioned, that's top decile.
Customer growth of 2% is just the level our peers would celebrate.
Coupled with O&M reduction of 1% to 2% a year, this creates a lot of headroom for needed capital investment.
Our five-year plan includes 1% to 2% cost reduction every year.
Our plan for this year is for a fast start, down more than $40 million or 3%.
And with a fast start, we already are pulling work ahead from 2022.
The cost reductions, favorable tax changes, lower financing cost, economic recovery and more allow us to reinvest $20 million for our customers now and possibly more later.
This performance reflects good business decisions and continuous improvement.
It comes from management commitment, experienced teams and ground-up process improvements that enhance safety every day; quality, doing things right the first time; delivery, doing things on time; cost, we see; and eliminate waste and morale higher every day.
This continuous improvement process is powerful.
It's just dependence from heroic individual work to better processes that are repeatable; as we eliminate human struggle, the cost fall out.
And one of my favorite charts is on the right.
As Dave often observes, we take on the headwinds, we take advantage of the tailwinds.
We deliver our earnings per share commitment consistently every year.
We deploy surplus resources to our customers.
It is all about our customers and our investors.
We did this last year.
We're doing it again now.
No ors, just ands here.
It's fun to be part of a premium winning utility.
CenterPoint is a great company with wonderful people and a huge investment opportunity.
As Jason said, you've been a valuable part of our team, and we're grateful for the time you have shared with us.
This has been one exciting year for CenterPoint.
I could not be more pleased by the momentum we have, what we've accomplished and the bright future that we see for ourselves.
We have truly been sweating the details so you don't have to.
And I believe our effort is evident in our consistent and more predictable earnings and rate base growth in our world-class operations in growing service territories.
I hope you now have the trust that we will continue our commitment to deliver on our promises to you, our investors.
I believe the best is yet to come.
I'd also like to remind everyone to register for our upcoming Analyst Day on September 23 here in Houston.
We will now take a few questions. | centerpoint energy - qtrly earnings per share $0.56.
q1 non-gaap earnings per share $0.59.
q1 earnings per share $0.56.
reaffirming 2021 utility earnings per share guidance range of $1.24 - $1.26 and reiterating 6% - 8% utility earnings per share annual growth rate target.
on path to deliver 10% compound annual rate base growth through $16 billion 5-year capital plan. | 0 |
Undoubtedly these are unprecedented times.
With safety and well-being of our employees as the highest priority I am extremely proud of our entire team supporting our customers with the central water heating and water treatment products to combat this virus.
As a result of the COVID-19 pandemic and in support of continuing our manufacturing efforts during this time we have undertaken numerous meaningful in some cases extraordinary steps at our manufacturing plants to protect our employees.
These steps include plant accommodations and reconfigurations to maintain social distancing mask availability to all employees deep cleaning quarantining individuals with positive tests or potential exposure to the virus for 14 days and restricting access to facilities among others.
While these steps result in lower manufacturing efficiencies in some cases our focus is on safety first.
The majority of our office personnel have been working from home and have done a great job in maintaining productivity and support of the business.
As offices have reopened in China and will soon in other countries and in the U.S. we have implemented return to office protocols which include bringing back office staff in waves over a two month period making maks available more frequent cleaning of common areas sanitizing stations throughout the office areas and limiting use of conference rooms for small group meetings to maintain social distancing.
Our long-term relationships in many cases decades-long and strength of our partners within various channels including wholesale distributors DIY retail hardware stores plumbing supply and independent reps are particularly important as we provide the essential water heating and water treatment products critical to uninterrupted operations of hospitals clinics grocery stores food service companies and many more including the households that many are now using to conduct business and education.
Our global supply chain management team proactively monitors and manages the ability to operate effectively and identify bottlenecks.
To date we have not seen any meaningful disruption in our supply chain.
We engaged in ongoing communication with our supply chain partners to identify and mitigate risk including multi-sourcing and managing inventory at higher levels.
Our recent implementation of SAP has provided improved management tools and visibility into our supply chain.
Additionally we have improved our manufacturing flexibility as a result of water heater tank standardization projects over the last five years.
Standardization greatly improves our ability to shift manufacturing from one plant to another should the need arise.
The stability afforded by the replacement component in residential and commercial water heater and boiler demand which we estimate at 85% of the U.S. unit volume puts us in a position of strength as we navigate through this pandemic.
We estimate replacement demand is 40% to 50% in China.
While we are in a position of strength similar to 2008 and 2009 time frame we expect to see lower demand for the majority of our products and have been proactive in managing costs.
We have increased our cost-reduction programs in China and we continue to monitor the North American environment and customer demand to potentially take further actions such as furlough programs and other restructuring.
A. O. Smith is in a solid financial position with positive cash flow and a strong balance sheet.
While A. O. Smith has a strong balance sheet and capital position we are proactively managing our discretionary spend and cash position.
To that end we suspended our share repurchase program in mid-March in addition while we continue to focus on strategic investments including new products and production efficiency.
We have reprioritized and reduced our capital spend plans for 2020 by approximately 20%.
Through April we have completed $200 million of dividends out of China and we have repatriated $125 million to the U.S. As of April 30 2020 we had approximately $850 million in liquidity consisting of cash cash equivalents marketable securities and borrowing capacity on our credit facility which remains in place throughout 2020 and 2021 expiring in December 2021.
We continue to focus on rightsizing the cost structure of our China business.
We have achieved a 20% headcount reduction compared with December 2018 and we will continue to assess the need for additional workforce reduction.
We are targeting 1000 net store closures this year in China along with further cuts in advertising and other costs.
Total savings are expected to total $55 million an increase of $10 million from our estimate in January of which $30 million was achieved in 2019.
Our debt maturity schedule is shown on slide five.
The next major maturity date is at the end of next year in December 2021 when our revolving credit facility expires.
We are in compliance with all covenants in our credit facility.
Our leverage ratio is 17.5% gross debt to total capital at the end of March was significantly below the 60% maximum dictated by our credit and various long-term facilities.
I will begin comments about the first quarter on slide six.
First quarter 2020 sales of $637 million declined 15% compared with the first quarter of 2019.
The decline in sales was largely due to a 56% decline in China local currency sales driven by the COVID-19 pandemic.
As a result of lower sales in China first quarter 2020 net earnings of $52 million and earnings per share of $0.32 declined significantly compared to the same period in 2019.
Sales in our North America segment of $533 million increased 2% compared with the first quarter of 2019.
Incremental sales of $16 million from the Water-Right acquisition purchased in April 2019 organic growth of 17% in North America water treatment products and higher water heater volumes drove sales higher.
These factors were partially offset by water heater sales mix composed of more electric models which have a lower selling price and lower contractual formula pricing associated with a portion of water heater sales based on lower steel costs.
Rest of the World segment sales of $110 million declined 53% with the same quarter in 2019.
China sales declined 56% in local currency related to weak consumer demand driven by the pandemic.
China channel inventories declined slightly from the levels at the end of 2019 and remained in the normal range of two to three months.
On slide eight North America segment earnings of $127 million were 10% higher than segment earnings in the same quarter in 2019.
The improvement in earnings were driven by lower steel costs incremental profit from Water-Right and improvement in the profitability of the organic water treatment sales which were partially offset by the mix skew to electric water heaters and lower contractual pricing.
As a result first quarter 2020 segment margin of 23.9% improved from 22.2% achieved in the same period last year.
Rest of the World loss of $42 million declined significantly compared with 2019 first quarter segment earnings of $12 million.
The unfavorable impact to profits from lower China sales and a higher mix of mid-price products which have lower margins more than offset the benefit to profits from lower SG&A expense.
As a result of these factors the segment margin was negative with compared with 5.3% in the same quarter in 2019.
Our corporate expenses of $15 million and interest expense of $2 million were essentially flat as last year.
Our effective tax rate of 23.6% in the first quarter of 2020 was higher than the 20% tax rate in the first quarter of 2019 primarily due to geographical differences in pre-tax income.
Cash provided by operations of $54 million during the first quarter of 2020 was higher than $22 million in the same period of 2019 as a result of lower investment in working capital including timing of certain volume incentive payments which was partially offset by lower earnings compared with the year ago period.
Our liquidity and balance sheet remained strong.
We had cash balances totaling $552 million and our net cash position was $209 million at the end of March.
During the first quarter of 2020 we repurchased approximately 1.4 million shares of common stock for a total of $57 million.
During April we saw differing levels of impact from the pandemic across our major product lines and geographies.
In North America our average daily orders for residential water heaters declined low single digits compared with the first quarter pace.
Commercial average order rates in April were down 30% to 35%.
It is difficult to interpret order rates in April as customers are likely adjusting inventory levels as they manage their inventory investment dollars.
In China the pandemic had a significant impact on our volume in the first quarter.
50% of our sales volume occurred before the Chinese New Year shutdown on January 24.
With manufacturing government offices restaurants and schools now largely reopened and the majority of installers able to access apartments in China we have seen sequential improvement in sellout and orders in April compared with February and March.
Consumers remain cautious and it's too early to determine when consumers will return to normal levels in retail environments.
A portion of the improvement could be pent-up demand.
In North America demand for residential boilers has remained soft following a warm winter.
And we have delayed our early buy incentive program in this environment.
Our commercial condensing boiler backlog has doubled from levels at this time last year but some orders have extended delivery dates.
With construction sites closed in some states timing of delivery is difficult to project.
Safety and security of drinking water is a high priority for consumers during this time.
The North America water treatment end market strength we saw in the first quarter continued in our direct-to-consumer product portfolio which skews to lower price easier-to-install products.
In April we experienced some challenges in parts of the country with installed in-home products.
In India our water treatment products are considered essential.
But our manufacturing plant is closed as worker transportation is difficult in this environment.
We believe the current environment does not allow for the forecast of performance with reasonable precision.
And as a result we continue to suspend our 2020 full year guidance.
As the depth of the disruption and pace of recovery in our end markets become clearer we look to return to our practice of providing a current year outlook.
In Mexico similar to other companies we temporarily suspended operations as governmental agencies continue to sort through the industries designated as essential and allow to continue operate as well as the conditions and safety measures under which businesses deem essential are allowed to operate.
We temporarily shifted manufacturing from Mexico to the U.S. to minimize disruption of our customers.
Each day we move closer to an understanding of when we'll resume production and believe that we will be in a week or two and at a reduced manning and capacity.
These lower rates coupled with the U.S. output are expected to support demand for customers over the coming months.
Our global supply chain team has been proactive from early in the first quarter and continues to monitor and manage availability of components.
Again to date we have experienced minimal disruptions in our global supply chain.
Our largest suppliers in Mexico which are in different states than our boilers plant are now reopened but at reduced capacity.
While the disruption has been minimal we have experienced reduced safety stock levels on certain items and our supply team is in ongoing communication with our suppliers to mitigate operational risk and manage inventory levels.
We believe replacement demand for water heaters and boilers in the U.S. is approximately 85%.
In 2006 through 2009 which captured the Great Recession peak to trough industry shipments of residential water heater volumes declined 18%.
The decline was primarily driven by a $1.5 million decline in new homes constructed.
During that period we were able to flex our operations to maintain margins.
At 1.3 million new homes in 2019 we do not anticipate the new home construction impact will be as great as the Great Recession.
The replacement base of our core U.S. products provides a stabilizing buffer to the economic downturn expected in the remaining three quarters of 2020.
After being closed for several weeks in February in compliance with local orders our three plants in China are open and operating.
Foot traffic in our retail network in China remains low and we are building to order at lower-than-normal operating capacities.
Our suppliers are open and we are now and we are not experiencing disruptions.
Customers continue to prefer products with fewer features continuing the trend we saw last year as you would expect in this environment.
Our mid-price products are positioned for this trend.
Despite reduced headcount retail footprint and advertising costs we continue to invest in R&D in the region.
Product development continues with a focus on taking costs out of our most popular new products to improve contribution margins.
Product development has been one of the pillars to our success in China and we are committed to our investment in engineering resources in China and around the world.
After a hard closure of the economy in the first quarter China is slowly returning to business.
While we have seen April orders and -- incrementally improve from February and March it's too early to predict if the recent improvement is the result of pent-up demand or by consumers slowly returning to the market.
In North America we have previously experienced in weathering through difficult economic conditions most recently in the 2008 recession.
However with the massive and abrupt impact to jobs and end markets like restaurants hotels and hospitals it is difficult to predict this current state of shelter-at-home and state-by-state closures will play out similarly to the 2008 recession.
While we would expect that our replacement business in both water heating and boilers will provide a buffer in the same manner as we have seen before the impact to construction and discretionary spend and closure of certain job site activity is difficult to predict for the remainder of 2020.
In India it is clear that our targets breakeven in 2020 will be pushed out as the country battles COVID-19.
We believe that particularly in these uncertain times A. O. Smith is a compelling investment for a number of reasons.
We have leading market share in our major product categories.
We estimate replacement demand represents approximately 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China a broad product offering in our key product categories broad distribution and a reputation for quality and innovation in that region.
Over time we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long term with investments in automation innovation and new products as well as acquisition and return to cash and returning cash to shareholders.
We will continue to proactively manage our business in this uncertain environment as we've seen consumer demand trends emerge in China where we were first impacted by the pandemic and now in North America as the current economy begins to reemerge after the economic shutdown.
We have a strong team which has navigated successfully through prior downturns.
I'm confident in our ability to execute through COVID-19. | a. o. smith suspends 2020 outlook.
q1 earnings per share $0.32.
sales in quarter ended march 31 were approximately 15 percent lower.
2020 outlook suspended.
company suspended its 2020 full year outlook.
believes it is in a solid financial position with sufficient liquidity to navigate through today's challenging business environment. | 1 |
Total revenues for the second quarter of fiscal 2021 of $143.6 million increased $29.8 million or 26% compared to $113.8 million in the same quarter last year.
Net earnings for the quarter were $11.9 million or $1.08 per diluted share compared to net earnings of $5.5 million or $0.51 per diluted share in the prior year.
Irrigation segment revenues for the second quarter of $118.6 million increased $25.1 million or 27% compared to the same quarter last year.
North America irrigation revenues of $80.2 million, increased $13.1 million or 19% compared to last year.
The increase resulted primarily from higher irrigation equipment sales volume and higher average selling prices.
This increase was partially offset by lower engineering services revenue of approximately $10.5 million related to a project in the prior year that did not repeat.
In the International Irrigation markets, revenues of $38.4 million increased $12 million or 45% compared to the same quarter last year.
The increase resulted from higher irrigation equipment sales volumes in several international markets.
The overall impact of foreign currency translation differences was insignificant for the quarter.
Total Irrigation segment operating income for the second quarter was $18 million, an increase of $7.9 million or 79% compared to the same quarter last year and operating margin improved to 15.2% of sales compared to 10.8% of sales in the prior year.
Improved margins were supported by higher irrigation equipment sales volume.
However, this improvement was tempered somewhat by the impact of higher raw material and freight costs.
As Randy mentioned in his comments, we have implemented multiple price increases to pass along the escalating costs.
However, we have experienced margin compression as we work through the backlog of orders received prior to the effective dates of our pricing actions.
We expect this margin pressure to continue into the third quarter, until increased cost pass-throughs are fully realized.
Feedback received from our dealers, indicates that Lindsay has consistently led the industry in proactively implementing price increases and other than timing differences, the pricing environment has remained rational.
Infrastructure segment revenues for the second quarter of $25 million, increased $4.7 million or 23% compared to the same quarter last year.
The increase resulted primarily from higher Road Zipper System sales and lease revenue, while global sales of road safety products were relatively flat compared to the prior year.
Infrastructure segment operating income for the second quarter was $6.3 million, an increase of $400,000 or 8% compared to the same quarter last year.
Infrastructure operating margin for the quarter was 25.4% of sales compared to 29% of sales in the prior year.
Positive margin mix from higher Road Zipper sales and lease revenue was partially offset by the negative impact of higher raw material and other costs.
In addition, the prior year included a gain of $1.2 million sale of a building that had been held for sale.
Turning to the balance sheet performance and liquidity.
During the quarter, we had capital expenditures of $11 million which included $8.5 million to exercise a purchase option for the land and buildings related to our manufacturing operation in Turkey.
This facility is well positioned strategically and geographically and the purchase provides us greater flexibility to take advantage of future growth opportunities in the EMEA region.
Our total available liquidity at the end of the second quarter was $180.3 million, with $130.3 million in cash and marketable securities and $50 million available under our revolving credit facility.
Our total debt was $116.3 million at the end of the second quarter, almost all of which matures in 2030.
Additionally, at the end of the quarter, we were well within the financial covenants of our borrowing facilities, including a gross debt-to-EBITDA leverage ratio of 1.4 compared to a covenant limit of 3.0. | compname reports q1 earnings per share $0.65.
q1 earnings per share $0.65.
q1 revenue $108.5 million versus refinitiv ibes estimate of $113.1 million.
expect improved activity levels to continue in international irrigation markets.
seeing rapid and significant increases in steel and freight costs that will pressure margins in short term. | 0 |
These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from those anticipated, and we undertake no obligation to update these statements.
He will provide an update on our strategy and highlights from the last quarter.
And Karen Holcom, senior vice president and chief financial officer, who will walk us through our earnings performance.
There will be an opportunity for Q&A at the end of the call.
For those participating, please limit your remarks to one question and one follow-up, if necessary.
Our team delivered another strong performance in the second quarter of fiscal 2022.
For the second consecutive quarter, we delivered net sales growth of 17%, and we maintained our gross profit margin at 41.7%, consistent with the first quarter.
And compared to last year, we increased diluted earnings per share by 22%.
Despite the cost challenges, we were able to convert our sales growth into operating profit and net income by effectively leveraging operating expenses.
The world remains complicated.
Although our demand environment is strong, costs continue to be volatile, and we are continuously dealing with the ongoing pressures resulting from the global component shortages.
In spite of this, our team continues to execute well, and this is reflected in our performance.
Both ABL and Spaces are performing admirably.
Our decisions to prioritize shipments by investing in electrical components and transportation are resulting in higher sales and operating profits, albeit at slightly lower margins.
Now, I want to move to talk to our progress at both ABL and Spaces.
First, in ABL, I'm happy to report that some things are returning to the way they used to be.
In March, we hosted our first in-person sales conference in three years, NEXT '22.
It was great to be back together with our independent sales network, who have performed exceptionally through the ups and downs of the last two years.
We have the best agents in the industry, and it was a great opportunity to talk about our strategic vision for Acuity Brands Lighting, share many new products, and engage our agency partners around our EarthLIGHT initiative.
This was the first time that many of our associates and agents had seen each other in person since the pandemic started.
While we have been incredibly productive working virtually with our channel, it was great to spend some quality time together in person.
It was hard not to be struck by the levels of energy and enthusiasm throughout the event and the consistency of the feedback from our agents.
They said, "Acuity is delivering".
Our investments in service have allowed us to prioritize delivering for our customers when others have been unable to.
At the same time, our investments in product vitality have allowed us to continue to create compelling new products that are both innovative and market-moving.
As I said last quarter, we have done this by focusing on three main areas.
First, by focusing on strategic supplier relationships, the current environment has reminded us all that it really matters who you do business with.
Because we are the largest lighting company, we have certain advantages over our direct competitors.
But those same components are also used by larger industries.
Consequently, we are making investments in people, time, and resources.
We have recruited a new head of strategic sourcing for ABL.
We are working with our key suppliers on effective planning and allocation management, and we are investing in inventory.
Second, by empowering our teams to prioritize access and speed over cost on available components, we have been able to ensure continuity of supply across many of our existing product lines, while also supporting our ongoing product vitality efforts across our product portfolio.
Finally, as I said last quarter, our engineering teams continue their Herculean efforts to redesign products to the available components.
At the same time, these teams have also managed to introduce around 220 new, or significantly upgraded, lighting and lighting control products over the last two years.
We expect the challenges around access to and costs of components to continue into the foreseeable future.
Our strategy around product vitality and the dexterity of our engineering teams inflecting to the changing requirements of the component shortages have been a significant part of why we are leading in this market, and we expect to continue these efforts.
Another highlight of the NEXT conference was our focus on EarthLIGHT.
EarthLIGHT is an important part of our strategy.
Our product vitality efforts are not just about improving the functionality of our products.
It is also about redesigning products to reduce customer energy consumption, reducing packaging and waste, and improving transportation efficiency.
This quarter, we announced a new initiative that brings together both technology and sustainability to significantly reduce paper use by introducing scannable QR code instructions across our products.
At NEXT, we also expanded our community outreach by packing a thousand bags of food for a local Atlanta organization together with our agents.
It was one of the highlights of the event.
Now, moving to the Intelligence Spaces Group, Spaces had another solid quarter of growth.
In both Distech and Atrius, we have a strong product roadmap to make Spaces smarter, safer, and greener.
Distech continues to win in the building controls market against significant competition.
Through the ECLYPSE Controller products, Distech is at the forefront of the technology curve with a presence in key markets and recognized leadership built on open-protocol technology.
In the last quarter, Distech won projects across North America and Canada and saw significant project wins in key verticals, including in education, commercial infrastructure, and in data centers.
Distech is now a key supplier to two of the largest cloud providers.
We also continue to develop the Atrius platform, including progress on Atrius Building Insights, and we expect to expand the portfolio over time.
We continue to add talent to this team.
Finally, I want to update you on our capital allocation.
Our capital allocation priorities remain the same.
We expect to continue to prioritize investments for growth in our current businesses, to invest in acquisitions, to maintain our dividend, and to allocate capital to share repurchases when there is an opportunity to create permanent value for our shareholders.
This quarter, the board of directors authorized additional capacity for share repurchases to increase our remaining authorization from 3 million to 5 million shares.
Since May of 2020, we have repurchased approximately 13% of our shares outstanding.
I would also like to announce the appointment of Sachin Sankpal, our senior vice president of growth and transformation.
Sach joins us to manage our technology organization, to deploy our better, smarter, faster company operating system, and to lead the integration efforts for future acquisitions.
Sach comes to us with distinguished experience at leading companies, including Trimble and Honeywell.
We're excited to have Sach on our team.
Each quarter, we are faced with new challenges, and our team continues to deliver.
Our continued focus on service and product vitality is allowing us to take advantage of the strong demand environment.
I am so impressed by their flexibility and ability to drive results.
We delivered strong performance in the second quarter of 2022.
We grew net sales.
We managed margins effectively despite a volatile cost environment.
And we leveraged our operating expenses.
Net sales were $909 million, an increase of 17% compared to the prior year.
This performance was driven by our focus on service levels and product vitality, a continued recovery in the end markets of both of our business segments, and the benefits of recent price increases and acquisitions.
Gross profit was $379 million, an increase of $43 million or 13% over the prior year.
This improvement was driven by revenue growth and by offsetting the significant increase in input costs through price increases and product and productivity improvements.
Gross profit as a percent of sales was 41.7%, a decrease of 170 basis points from 43.4% in the prior year, but flat sequentially from the first quarter of 2022.
I will talk more about the current cost environment later on in the call.
Reported operating profit was $102 million, an increase of $11 million or 12% over the prior year.
Reported operating profit margin was 11.3% of net sales for the second quarter of fiscal 2022, a decrease of 40 basis points over the prior year.
Adjusted operating profit was $123 million, an increase of $14 million or 13% over the prior year.
Adjusted operating profit margin was 13.5% of net sales, a decrease of 50 basis points against the prior year.
Adjusted operating profit margin was lower than the prior year, as the decline in gross profit margins was partially offset by leveraging operating expenses.
Finally, we saw continued improvement in diluted earnings per share for the second quarter of fiscal 2022.
Diluted earnings per share of $2.13 increased $0.39 or 22% over the prior year.
And adjusted diluted earnings per share of $2.57 increased $0.45 or 21% over the prior year.
Our share repurchase program favorably impacted adjusted diluted earnings per share by $0.06.
Now, moving on to our segments.
During the quarter, our Lighting and Lighting Controls segment saw sales increase, 17% to $863 million over the prior year.
This was driven by the improvements within our independent sales network, which grew approximately 12%, and an increase of 5% in our direct sales network.
Additionally, sales in the corporate account channel increased approximately 105% over the prior year.
Recall that last year, customers had paused their renovations due to the pandemic.
That activity has now restarted as you can see from the growth this quarter.
We also had growth in our other channel of 83% over the prior year, due primarily to the acquisition of OSRAM.
Sales in the retail channel declined approximately 2% in the current quarter.
This was due to some of our inventory being delayed in transit or held up in the ports, resulting in longer lead times than we anticipated.
We should start to see growth in this channel in the upcoming quarters.
ABL's operating profit for the second quarter of 2022 was $117 million, an increase of 14% versus the prior year, with operating margin declining 30 basis points to 13.5%.
Adjusted operating profit of $127 million improved 13% versus the prior year, with adjusted operating profit margin declining 50 basis points to 14.7%.
ABL has demonstrated the ability to grow sales while leveraging our operating expenses.
Moving on to the results for our Intelligent Spaces Group.
For the second quarter of 2022, sales in Spaces increased approximately 16% to $50 million, reflecting growth in both the Distech and Atrius.
Spaces operating profit in the second quarter of 2022 increased approximately $400,000 to $1.2 million.
Adjusted operating profit of $6 million increased approximately $1 million versus the prior year as a result of the strong sales growth and continued investment in the business.
Our business model continues to be highly productive, generating $127 million of net cash flow from operating activities in the first half of fiscal 2022.
This was a decrease of $85 million compared to the prior year due primarily to an increased investment in working capital primarily related to inventory.
Inventory days are up over the end of our fiscal year, with approximately half of the increase due to increased lead times on source finished goods and, to a slightly lesser extent, increased purchases of electronic components.
We are managing our inventory levels to support our growth, as well as insulate our production facilities from inconsistent supply availability.
We also invested $24 million or 1.3% of net sales and capital expenditures during the first six months of fiscal 2022.
Finally, we have continued to repurchase shares in the second quarter.
As a result, since May of 2020, we have bought back approximately 13% of our company shares at an average price of approximately $120 per share.
I would now like to spend a few minutes focusing on the remainder of the year.
As Neil stated, we expect the current environment to continue for the foreseeable future with strong demand, while access and cost of components will remain a challenge.
Our focus throughout will continue to be on growing sales and leveraging our operating expenses.
In relation to the recent instability in Europe, we have no direct sales exposure either to Russia or Ukraine.
However, the conflict does add to the existing supply chain pressures.
Additionally, we are experiencing increases in transportation costs, driven by expected increases in oil prices.
In the last 15 months, we have strategically introduced six price increases in addition to driving product and productivity improvements.
Before I hand you over to the operator, I want to leave you with our key takeaways.
We have continued to demonstrate strong sales growth and effective management of gross margins in a volatile cost environment.
We've leveraged our operating expenses.
And finally, we have continued to allocate capital effectively. | q2 earnings per share $2.13.
q2 adjusted earnings per share $2.57. | 1 |
For today's call, Jeff will begin by covering a summary of our second quarter results, including new program wins.
Roop will then discuss our detailed second quarter results, including a cash and balance sheet summary and third quarter 2021 guidance.
Jeff will wrap up with an outlook by market sector, a progress update on our strategic initiatives for the year and second half outlook before we conclude the call with Q&A.
Throughout the past 18 months, we've rallied through the uncertainty surrounding the pandemic and made decisions to increase our investments in new opportunities, which we believe are starting to bear fruit.
We've had to make difficult trade-offs during this unprecedented time, but we never lost focus on prioritizing the safety and well-being of our employees and meeting the growing needs of our customers.
This approach has served us well as we progressed our strategy in a volatile operating environment.
Revenues benefited from the continued momentum in the semi cap market as well as stronger demand from customers deploying broadband infrastructure solutions in our Telco sector.
Additionally, we are seeing early signs of recovery in some subsectors of the industrial markets.
Roop will provide more specific color on the constrained component situation, but our teams are facing a heavy workload and significant disruptions in manufacturing planning based on the continued volatility of extended lead times, tight supply and allocations that are limiting the ability to meet customer demand.
In the second quarter, we estimate that we left approximately $50 million of demand on the table and most of this demand is rolled into future quarters.
Given component constraints, we estimate we may leave $100 million of unfulfilled demand in this quarter, demonstrating the strength of end customer orders.
We continue to work closely with our customers to optimize output based on component availability.
During the quarter, we also faced disruptions in our Malaysian operations from the ongoing COVID pandemic where government regulations reduced staffing levels to 60% and required our team to replan our workforce and shift patterns through most of the second quarter.
Even with these challenges, I'm proud to report our teams in Penang delivered on their customer demand and achieved their targets for the quarter.
Government restrictions have recently eased, now allowing 80% of the workforce capacity and our leadership team continues to do a phenomenal job managing through reduced staffing and intermittent work stoppages to keep our employees healthy and maximize production.
Now turning to profits.
With improving revenue, our non-GAAP gross margins improved 50 basis points to 8.8%, and non-GAAP operating margins improved 20 basis points to 2.5%.
As a reminder, our non-GAAP operating margins include stock compensation expenses, which were approximately 70 basis points in the second quarter.
Earnings per share of $0.27 was above the midpoint of our guidance, and we had another solid quarter of cash conversion cycle results at 64 days.
Our team continues to pull together, execute with excellence and deliver on our growth strategy through the first half of 2021.
We believe this momentum will continue through the rest of the year and demonstrate the benefits of scale in our model.
In addition to strong sequential and year-over-year revenue growth, we had another strong quarter of bookings, where the outsourcing and new deal opportunity environment remains strong.
Now I'd like to highlight a few key wins in the quarter.
In the medical sector, we were awarded new manufacturing programs for cardiac monitoring, blood transfusion and an in vitro diagnostics.
Our winning value proposition in this sector resonates with customers and is supported by our 30-year quality track record of building Class III life-sustaining devices by FDA standards.
In Semi-Cap, we continue to win new programs, which are additive to our already strong demand in this sector.
In Q2, we added a new Semi-Cap customer to our portfolio where we will be building process controllers for coding equipment.
With existing customers, we were awarded new design and manufacturing projects for work cell handlers and power rack electronics.
This quarter, we had great wins in semi cap across precision machining, engineering services and electronics manufacturing.
In the A&D sector, we were awarded new manufacturing programs for electronic warfare and defense satellites as well as a design program for ruggedized electronics for land-based combat vehicles.
In industrials, we are very excited about a major new customer win to manufacture solar battery storage solutions, which could provide meaningful growth to our industrial sector.
And finally, in Computing & Telco, we continue to win new high-performance computing programs where we have unparalleled manufacturing expertise for large form factor, high-density electronics manufacturing.
High-performance computing will be a key contributor to our growth over the next 12 months.
Our new business pipeline remains strong across all of our sectors, and we expect these bookings to fuel growth in support of our midterm model and longer-term growth plans.
All in all, I'm very excited about the meaningful opportunities we are winning, the increased attach rate of engineering services and the level of new prospective wins that our business development teams are engaging in.
Roop, over to you.
Total Benchmark revenue was $545 million in Q2, which was at the higher end of our guidance driven by continued strong performance in Semi-Cap and improving revenue in Industrials and Telco.
Medical revenues for the second quarter were relatively flat sequentially as expected.
We expect Medical revenues to be higher for the second half of 2021 as compared to the first half of 2021 due to new program ramps and improving demand.
Semi-cap revenues were up 23% in the second quarter and up 60% year-over-year from continued demand strength from our front-end wafer fab equipment customers where we saw increased demand from each of our top customers.
Our revenue in this sector is primarily precision machining and large electromechanical assembly which are less impacted from the global component shortages.
A&D revenues for the second quarter increased 8% sequentially and 9% year-over-year from continued strong demand in our Defense programs for surveillance vehicles, secure communications and computing and military satellite programs.
Our commercial aerospace revenue was flat sequentially.
Industrial revenues for the second quarter were slightly better than expected from slight improvements from building infrastructure and commercial construction programs.
Overall, the higher-value markets represented 82% of our second quarter revenue.
Revenues from computing and Telco sectors, our traditional markets, were flat quarter-over-quarter.
We saw strong demand in Telco from new and existing programs in commercial broadband and commercial satellites but a high-performance computing program that was expected to ramp in Q2 was pushed to the second half of 2021.
Our traditional markets represented 18% of second quarter revenues.
Our top 10 customers represented 46% of sales in the second quarter.
Our GAAP earnings per share for the quarter was $0.20.
Our GAAP results included restructuring and other onetime costs totaling $1.6 million related to restructuring activities.
In Q2, we completed the closure of our Angleton, Texas site as planned.
For Q2, our non-GAAP gross margin was 8.8%.
This is 20 basis points better than the midpoint of our second quarter guidance, driven by higher revenues and a better mix.
On a sequential basis, we were up 50 basis points as a result of our higher revenue, improved productivity and utilization, somewhat offset by higher variable compensation expenses and higher-than-expected U.S. medical costs.
Our SG&A was $34 million, an increase of $3.5 million sequentially due to higher variable compensation expenses and higher U.S. medical costs.
Non-GAAP operating margin was 2.5%.
In Q2 2021, our non-GAAP effective tax rate was 20.3% as a result of the mix of profits between the U.S. and foreign jurisdictions.
Non-GAAP earnings per share was $0.27 for the quarter, which is $0.01 higher than the midpoint of our Q2 guidance and $0.06 sequential improvement.
Non-GAAP ROIC was 7.5%, a 110 basis point increase sequentially and 160 basis point improvement year-over-year.
Our cash conversion cycle days were 64 in the second quarter, an improvement of one day from Q1.
Turning to slide nine for an update on liquidity and capital resources.
The cash balance was $370 million at June 30, with $135 million available in the U.S.
Our cash balances decreased $30 million sequentially.
The decrease in cash is primarily the result of procuring a higher level of inventory to support future revenue growth and to better manage the increasing lead times for components and current broad supply chain constraints in the marketplace.
We generated $4 million in cash flow from operations in Q2, and our free cash flow was a use of $9 million of cash after capital expenditures.
As of June 30, we had $133 million outstanding on our term loan with no borrowings outstanding on our available revolver.
Turning to slide 10 to review our capital allocation activity.
In Q2, we paid cash dividends of $5.8 million and used $17 million to repurchase 566,600 shares.
As of June 30, we had approximately $174 million remaining in our existing share repurchase authorization.
In Q3, we expect to repurchase shares opportunistically while considering market conditions.
We expect revenue to range from $555 million to $595 million, which at the midpoint represents a 9% year-over-year improvement.
We expect that our gross margins will be 9% to 9.4% for Q3, and SG&A will range between $34 million and $35 million.
The sequential increase in gross margins is expected due to higher revenues and improved absorption.
We are still targeting gross margins for the full year to be 9%.
Implied in our guidance is a 3.1% to 3.4% non-GAAP operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other nonrecurring costs in Q3 of approximately $800,000 to $1.2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of $0.33 to $0.41 or a midpoint of $0.37.
We expect our capex plans for the year to be between $50 million and $60 million.
We expect -- we estimate that we will generate approximately $80 million to $100 million of cash flow from operations for fiscal year 2021.
This range contemplates the higher inventory levels to support growth for our customers through the year.
Other expenses net is expected to be $2.1 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q3, our non-GAAP effective tax rate will be between 19% and 21% because of the distribution of income around our global network.
The expected weighted average shares for Q3 are approximately $35.7 million.
As you're aware, end market demand continues to be strong.
However, we continue to see component supply chain constraints across all commodity categories.
Overall, lead times continue to extend and more components are being placed on allocation by suppliers.
Several commodities are impacted yet semiconductors remain the most constrained.
We are maintaining close alignment with our suppliers and distributors to minimize disruptions to existing orders and to secure supply in support of customer demand increases.
We are actively working with customers to replan mix and redesign some products to enable alternate component sourcing.
In general, our ability to fulfill upside demand is challenging due to component constraints but we do believe these actions still give us confidence that we will grow revenue in 2021 in the high single digits.
In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base, operations or customers.
Guidance also assumes no material changes to end market conditions in our operations due to COVID.
Following Roop's comments on our third quarter guidance, I wanted to provide some additional details on our view of demand by sector.
for the quarter and the remainder of 2021.
This is shown on slide 13.
For the second quarter, we expect revenue to be up sequentially by about $30 million.
This strength is led by expected sequential growth in computing and A&D with continued strong demand in semi cap.
After 60% year-over-year growth in Q2, we expect our Semi-Cap sector will remain at Q2 revenue levels as demand still remains robust, but we are constrained in the near term by mechanical sub-tier suppliers.
Based on signals from our customers in the front-end wafer fab processing space, demand will remain at high levels for the balance of 2021 and through next year, supported by increasing demand for semiconductor capital equipment.
With this ongoing demand strength and signals from our customers, we are revising our outlook for this sector upward from 20% to greater than 30% revenue growth over 2020 levels.
This sector is clearly outperforming our expectations for this year.
In A&D, where we grew 8% in Q2, we expect continued growth in third quarter led by increased demand for ruggedized electronics for ground-based military vehicles and secure communication devices.
While commercial Aero demand in the second half is stabilizing, we still expect the A&D sector to remain flat for 2021 as defense strength does not offset aero weakness for the full year.
In the computing sector, we expect strong revenue growth in 2021 from high-performance computing projects with the largest revenue growth in the second half of 2021.
If there are no further component decommits or design delays, computing could be up over 50% sequentially in the third quarter.
As we continue to win new projects in this targeted subsector, we expect continued strength in high-performance computing revenues in 2022.
In the Medical sector, we're expecting revenue to grow sequentially in Q3 and Q4.
For our portfolio, we see revenue growth across our base business in the second half.
Additionally, we have new program ramps contributing to second half growth.
We still expect Medical to have a growth year, but as always, new medical program revenue is subject to the timing of product qualifications.
In the Telco market, where we had good growth in the second quarter, we expect stable demand in the second half of '21, which will lead to 2021 being a solid growth year from strong performance in broadband communication products.
In Industrials, we are pleased to see the order book increasing for our customers supporting the oil and gas market, transportation infrastructure and Building Systems.
With this demand improvement forecasted in the second half and a tremendous number of new program ramps in Q4, this sector has the potential to achieve greater than 10% growth for this year.
We remain focused on our longer-term strategic initiatives and progress against these even as we deal with short-term challenges created by the pandemic and this constrained supply environment.
Growing revenue remains a top priority at Benchmark.
Our go-to-market team is doing a great job executing our sector development strategies with wins in our targeted subsectors where we have an advantaged position based on our technology and the track record of success with complex programs.
Our booking levels for both manufacturing and engineering services remain strong.
We'll continue to invest in a sustainable infrastructure and our talent for sustainable growth.
We are in data collection mode to support our intended reporting against the global reporting initiative, which will increase our transparency and further support our stand-alone sustainability report, which we plan to publish next year.
We are also expanding our diversity and inclusion efforts by developing a multiyear continuous improvement road map, supported by robust plans and actions with accountability held by the entire senior leadership team.
This road map includes increased training, some enhanced policies and recruiting strategies for our internal organization as well as the ongoing commitment to Board diversification.
You may have seen our recent announcement where one of our Board members, Merilee Raines left our board.
We have certainly appreciated her service and wish her well.
Lynn is an outstanding director and sits on three public companies where she currently holds two board chairs and one audit share position.
Her vast experience and history of operational execution will provide additional capabilities and insight to our already talented slate of directors.
Lastly, we are laser-focused on growing earnings.
From our second quarter results to the midpoint of our Q3 guide, we're expecting a greater than 30% sequential earnings improvement.
These expected results are enabled by our continued revenue growth trajectory.
Our target to sustain gross margins at 9% for the full year and our commitment to control our expenses.
In summary, on slide 15, I'm very excited about our progress in the first half and remain optimistic about our second half outlook.
Given the continuing strong demand outlook in Semi-Cap, improving demand in industrials and expected second half ramps in high-performance computing.
We are revising our full year growth outlook to high single digits for 2021.
Of course, this assumes no worsening component supply constraints or broader pandemic impacts.
With this revenue growth and mix, we're expecting sequential quarterly improvement in both gross and operating margins in both three and 4Q.
On the gross margin line, we are still targeting to achieve 9% for the full year 2021.
With these results, we are still expecting operating cash flows between $80 million and $100 million.
Through the first half of 2021, we repurchased $30 million of stock and may continue to purchase the stock opportunistically as well as continue our recurring quarterly dividend which we raised last quarter as part of our capital allocation plan.
In closing, I remain excited about the overwhelming positive indicators that we are seeing from our teams and our customers.
I'm excited about how 2021 is shaping up and look forward to providing you an update in our October earnings call. | q2 non-gaap earnings per share $0.27.
q2 gaap earnings per share $0.20.
sees q3 non-gaap earnings per share $0.33 to $0.41 excluding items.
sees q3 gaap earnings per share $0.27 to $0.35.
sees q3 revenue $555 million to $595 million.
q2 revenue $545 million versus refinitiv ibes estimate of $531.7 million. | 1 |